Barron's Streetwise - Visa CEO Al Kelly On the Future of Payments

Episode Date: November 13, 2020

Also, Jack has thoughts on stocks, vaccines, tech antitrust, leaf blowers, and Smurfs. Learn more about your ad choices. Visit megaphone.fm/adchoices

With record levels of dry powder available for investment, find out what's in store for private markets in 2025 and beyond. Listen to Crafting Capital in partnership with UBS at partners.wsj.com slash UBS, Spotify and Apple Podcasts. 65% of the face-to-face transactions in the world today are tap-to-pay. The country that is the furthest behind by a lot, interestingly enough, is the United States. It's probably, Jack, about 6% of the U.S. volume, but I think it's going to grow by a lot over the next two or three years.

Welcome to the Barron Streetwise podcast. I'm Jack Howe. The voice you just heard is Al Kelly. He's the CEO of Visa, the payment technology company whose shares have returned more than a thousand percent over the past decade. Al joined us earlier this week for a live event for this podcast. And if you missed it, dry those tears. We'll hear some of Al's comments in just a moment. We'll also say a few words about COVID-19 vaccines, the recent U.S. elections, and why my short-term fears for the stock market have not played out. Why it's almost time for me

to do a walk of shame back to a more appropriate asset allocation. I'm not that upset about it. I might do a cartwheel of shame. Listening in is our audio producer, Metta. Hi, Metta. Hey, Jack. You live in a city in Brooklyn. What's the leaf situation like over where you are? Did every tree just simultaneously drop its leaves over the past week? And are there teams of men wearing giant gas-powered backpack leaf blowers who are roaming from yard to yard like preposterously loud ghostbusters? There's a lot in that question to unpack.

There's a lot to unpack. There are no such men, but yes, we do have leaves that have turned yellow within the last couple of days. Alright. Leaves are very couple of days. All right. Leaves are very front of mind for me right now. I live in the suburbs north of New York City in Westchester County, and leaf politics are really heating up over here.

The issue is the gas-powered leaf blowers. They use what are called two-stroke engines, which produce this loud, annoying whine and a lot of pollution. I've read that one gas-powered leaf blower can produce the pollution of 17 cars. And the reason I read that is because there's a lot of anti-leaf blower facts floating around. Last year, an article in The Atlantic discussed how a small group of activists got gas-powered leaf blowers banned in Washington, D.C. And now there are hearings on the subject everywhere. This year, a little village in my county called Larchmont issued the first complete ban on gas leaf blowers in the U.S. Northeast.

And in my town, my town's technically a village, but when I say the word village, it sounds like I live with Smurfs. In my town, there's a program called Love Em and Leaf Em, which encourages people to mow over leaves, to chop them up, but not to blow them away, so you keep that topsoil in place. It's an optional program, but we had hearings on leaf blowers this past year because with so many people stuck at home during the pandemic, a lot of people are bothered by the noise. I wouldn't be surprised to see gas powered leaf blowers banned here soon, and electric ones might not be strong enough for commercial use, which means the professional yard crews might have to use rakes, which would make their work more expensive. Meta, it's a pivotal moment for leaves. I mean, I'm a love them and leave them guy myself, but I'm watching the situation with interest. Wow. Small town smurf politics. You've got to love it. All right. I could do another 45 minutes on leaves, but let's

say a few quick words about the stock market. Some weeks ago, I told listeners that I was reducing my stock allocation because I was worried about a disputed presidential election in the U.S., and I wasn't sure how our institutions would handle that, and I was worried about how the stock market would respond. But I said at the time that trying to predict short-term market movements is generally foolhardy, and that I would never sell out of stocks altogether, and that I would never sell out of stocks altogether and then I'd be happy to be proved wrong on my hunch. Well, I've been wrong. The election went pretty smoothly all things considered. The stock market has done just fine. Technically the dispute I was worried about is happening. President

Trump is claiming, without evidence, widespread election fraud. If you count the legal votes, I easily win. If you count the illegal votes, they can try to steal the election from us. If you count the votes that came in late, we're looking at them very strongly. But a lot of votes came in late. Few Republicans in the Senate have acknowledged Joe Biden as the winner, and I find things like that deeply worrisome. But investors don't seem as concerned. A new Reuters-Ipsos poll shows that 79% of Americans, including most Republicans,

recognize Joe Biden as the election winner. Only 3% say Trump won. I suspect that helps explain why stock investors aren't panicking. Most seem to believe that the will of voters will be carried out, perhaps awkwardly, but on time. That means it's nearly time for me to concede that I was wrong in my stock market prediction and to move back to my

regular stock allocation. I'm delighted to be wrong, to be honest. One more thing. This past week, Pfizer said its experimental COVID-19 vaccine appears to be highly effective, and the stock market jumped in response. This is excellent news. It means a vaccine took less than a year. The record until now was four years for a mumps vaccine developed in the 1960s. Goldman Sachs calls the vaccine breakthrough at least as important for the economy and stock market as any prospective policy changes that a Biden administration will bring. Its analysts expect the Pfizer vaccine and perhaps others to receive emergency use authorization by January and to be broadly administered during the first half of next year. Goldman raised its earnings estimates and price targets for the S&P 500. It expects

roaring gains for the rest of this year and next year. Valuations for stocks look a bit high compared with their history, but Goldman expects them to stay that way. It recommends a barbell approach to stock selection, with one end of the barbell featuring beaten down value stocks that stand to benefit from a vaccine. Think of how airline stocks soared this past week. The other end of the barbell is for growth companies like some of the big tech names that have performed well right through the pandemic. Please don't pop the cork on the champagne just yet because COVID cases are raging right now. Let's not get complacent.

Let's keep distance from others. And if we have to be near people, wear masks. We can save thousands of lives over the next six months by just following those simple instructions. And the end is now in sight. Meta, even though it's not time for champagne yet, maybe you could crack us open a beer. Meta, even though it's not time for champagne yet, maybe you could crack us open a beer. Hang on, slow down. We got a podcast to do here. Meta, when's the last time you used cash for something? That was when I bought candy at the deli around the corner. 75 cents. What kind of candy are we talking about like a little roll of like gummies okay 75 cents yeah but then i went for a walk around the block

to get exercise and then on the way home i bought another one all right so you're in for a dollar fifty yes i think of a bagel indicator is informing me about my own cash usage because I had already used credit cards for a lot. I like when I get the rewards, you know, you get 2% or so cash back. But if I went for a bagel, I would have never used a credit card before. That was a small cash purchase. But during the pandemic, forget about it. I didn't want to touch cash. So I've been using the card when I get bagels for myself or my family. So that's my main behavioral change. But I think a lot of people are doing something similar. I read that credit card usage recently topped 82% of in-store transactions, and that's up a little over three percentage points from before the pandemic. Now, we're not up to 95%, so it's a significant boost, but it also suggests

a lot more room for credit card growth ahead. And I recently spoke about that and more with a big player in payments. Thanks for making a few minutes to chat with us. Jack, it's a pleasure to be with you and your audience. So thank you. That's Al Kelly. He became CEO of Visa in December 2016, and Visa shares since then have returned 169%. That means they've beaten the S&P 500 by almost 100 percentage points. That means they've beaten the S&P 500 by almost 100 percentage points. And everyone knows who Visa is, but not everyone knows precisely what they do. Credit cards date back to the 1950s, but here's a fun fact. I mean, I think it's fun. If you don't think it's fun, it'll just be a fact.

But it's from more than half a century earlier. In 1888, not long after the invention of the telephone, a Massachusetts writer named Edward Bellamy published a novel called Looking Backward, and it's about a young man who falls asleep for 113 years and wakes up in Boston in the year 2000. in the year 2000. And he marvels about how society has changed while he was asleep. Here's the thing. The book uses the term credit card 11 times.

Now, technically what it was describing functioned more like a debit card. But it would be more than 60 years after the book's publication that Diners Club and Carte Blanche and American Express would roll out the first general purpose charge cards. Those were where customers paid their bills in full right away. Visa's story begins in 1958 when Bank of America launched something called Bank AmeriCard. That was the first card with a revolving credit feature and thus the first true credit card. It was a paper card with a $300 limit. Bank AmeriCard evolved into a centralized payment system that was licensed to other banks. And in 1970, Bank of America passed U.S. control of this system to an association of banks that used it.

In 1976, the name of this now electronic system for payment authorization, clearing, and settlement was changed to Visa. Why? Because Visa is easy to pronounce in a lot of languages, and because it doesn't have America in the name, and it was thought at the time that that would make the system an easier sell for overseas bank customers. I'm leaving a lot out. The rise in the 1960s of a competitor called Interbank Card Association and its MasterCharge brand, now called MasterCard, and the spread of debit cards and automated teller machines. Anyone else remember drive-through banking with pneumatic tubes?

Here's fun fact number two. Pneumatic tube banking actually made a comeback this year because some people still prefer to deal with tellers, but the pandemic made them not want to get too close. The Wall Street Journal reported earlier this year that sales of those cylinders that whoosh cash and forms through the tubes, they jumped 300%. Anyhow, MasterCard went public in 2006 under the ticker MA, and Visa went public two years later under the ticker V. Both stocks have soared since then. Visa's the bigger company, and it's particularly dominant in debit cards, but MasterCard has been growing faster, especially in Europe.

Visa has nothing to do, of course, with the interest customers pay on their credit cards or the annual fees. Al Kelly says to think of it as a highway connecting three and a half billion buyer credentials issued by 13,000 banks with about 700 million sellers. Like a lot of highways, Visa charges a toll for its traffic, in this case transactions. In return, it authorizes transactions and makes sure the funds get to where they're supposed to go. Visa also sells extra services like tools to prevent fraud and to increase customer loyalty. And that brings us from 1888 to now. This year, the pandemic has reduced shopping, which temporarily cuts into Visa's transaction revenue. But it has also increased card usage because some people have become reluctant to touch cash if they don't have to.

Here's Al. First, I will tell you that in many ways, cash is our biggest competitor. Last year, about $18 trillion was spent by consumers using cash and checks. So pre-COVID, it was a big competitor. We have seen without question in the face-to-face world, an increase in adoption of using credit and debit cards. And that combines particularly with tap-to-pay, which if people in your audience are from the United States might still not be terribly familiar with tap-to-pay, but tap-to-pay is technology where you just put the card in the proximity of the point-of-sale device and it reads the information on the card. So the card doesn't even have to leave your hands.

I think some of my credit cards have tap-to-pay capability, but I haven't done any tapping yet. but I haven't done any tapping yet. To Al's point, it's common outside the U.S. Some 65% of face-to-face transactions worldwide use tap to pay. Here in the birthplace of credit cards, we're a little behind. But Al says 55 million of the roughly 900 million cards in the U.S. are capable of tap to pay, and so are 80 of the top 100 sellers. That's an important growth opportunity. Based on what has happened with tap-to-pay in other developed markets, Michael DelGrasso, an analyst at Compass Point Research and Trading, estimates that a U.S. rollout could raise transaction volumes here as much as 40%. I asked Al what kind of data he has on shopping habits. Can he tell how much I've been spending at the McDonald's one town over from me?

Does he know that I recently switched from Big Macs to double cheeseburgers? I know that you went to McDonald's and what McDonald's you went to and how much you purchased, but I'm buying for a family of four. Just remember, it's not all for me. So what you exactly purchased, we don't know. And we don't judge you, Jack, or anybody else. Al says he can tell from conversations with retailers about well-known trends like a rise in sales of things like toilet paper.

But his data points to another big trend that hasn't gotten quite as much attention. One of the categories that is hugely up during the last six months is online gambling. I haven't looked at it in the last couple of weeks, but at one point it was up over 250 percent versus pre-COVID levels. I asked Al about where he sees opportunities for growth, and he said as many transactions and relationships as Visa handles today, he's not satisfied with the numbers. He says there's opportunity to grow market share for smaller transactions like My Bagels and maybe one day Meta's Gummy Rings and in developing markets. He also mentioned that Visa, for nearly all of its history, has focused on what the

industry calls pull transactions, like when you use a credit card and Visa pulls the money from the bank to the merchant. But it's just getting started with what are called push transactions, like when an insurance company pushes money for a claim into a customer's account. As an example, Al mentioned that Visa is working with Uber and Lyft to push pay into drivers' accounts at the end of each shift. Push payments are another enormous growth opportunity, estimated at $7 trillion in yearly transactions worldwide. Here's Al. We've made a lot of progress in categories like education and rent, but still, a majority of people still write a check for their rent

and write a check to the school that their children attend for high school, if it's private or college. And so there's plenty of opportunity at the ends of the curve, the high ticket transactions and the low ticket transactions is still a place where there's cash on the low end, check on the high end, where we still have a lot of opportunity to grow, mostly the acceptance side of the network to enable people to use their Visa cards in those circumstances. The digital payment landscape

can seem cluttered and complicated. I'm sure you've heard of PayPal, maybe Square, but how about players like Circle and Remitly and Stripe and Brainty and Aeropay and DailyPay and Bolt and Ripple and Affirm? All of those are fintech or financial technology companies, and more specifically, they're payments players. Some analysts use the term rails to help make sense of the landscape. There are payment services that use card rails. In other words, the networks operated by companies like Visa.

And there are services that use bank rails, which is what you use when you transfer money between bank accounts. Many other services like PayPal and Apple Pay are what are called mobile wallets, which work using card and bank rails and more. Al says the industry is filled with frenemies, part friends, part enemies, companies that partner together to make transactions work, but also view each other as competition. So we have global deals with PayPal, and PayPal is a great partner of ours. PayPal is also a company that we compete against at the point of sale in online transactions

where people have the choice of using PayPal or potentially using Visa or Visa card within PayPal. So there's numbers of options. So my philosophy, Jack, is that I want to look to work with all of these players, the traditional players, the fintechs, the rising neobanks, I think all of them can be additive to the ecosystem. And I think many of them value the scale and the reach of Visa. Visa is in the process of trying to buy a company called Plaid. It acts as an intermediary between banks and fintech apps or software applications built by financial technology companies. If you've heard of the money transfer service Venmo, it uses Plaid. Earlier this month, the U.S. Justice Department sued to block Visa's acquisition of Plaid.

It views Plaid as a potential competitor and alleges that the deal might deprive consumers and merchants of an innovative alternative to Visa. Al is restricted for now in what he can say about the lawsuit. We don't agree with the decision that was made, and we will fight vigorously to convince the courts that this union is pro-consumer, and we feel very, very good about that. One more question, and it's about China. China has its own version of Visa and MasterCard called UnionPay, which is, as you might imagine, humongous. And China has its own fintech players like Alipay, a payment service from Alibaba.

Visa has relationships with 55 banks in China, which have issued over 300 million Visa cards, but those are mostly for business people who travel outside of China. Visa doesn't have a license to operate inside of China. But the phase one trade deal with the U.S. that was signed before the pandemic calls for China to open its market to electronic payment systems like Visa. I asked Al about the company's future there. He says China's complicated, but that the outlook for Visa there is hopeful. Our hope is that sometime over the next couple of years,

we will fulfill all the requirements that the government would have for us, and we'd be able to operate there domestically. government would have for us and we'd be able to operate there domestically. Meta, do we have time for one quick, super speedy, lickety split listener question? I think we have time for just that. We have a question from Jake from New York City. Jake, lay it on me. I'm curious what lessons the past can teach us about companies facing antitrust pressure from the U.S. government. I'm curious from the perspectives of consumers, shareholders, and of course, those of us who

are both. Thank you, Jake. I'm assuming you mean the antitrust pressure facing big tech companies, which might not be a lickety split issue, but here goes. Two cases come to mind. There used to be a company called AT&T, and you might be thinking there still is a company called AT&T, but no, that's different. The original AT&T, sometimes called Ma Bell, was a highly profitable and legal telephone monopoly that was broken up in 1984 into seven regional operators called Baby Bells. In hindsight, the breakup likely lowered prices for phone service, but some people argue it later

delayed investment in high-speed broadband service. Also, it didn't totally stick. Remember Terminator 2 when Arnold Schwarzenegger was no longer a bad guy cyborg, he was a good guy cyborg, and the bad guy one had this technology where if you shot him with a shotgun, parts of him would turn into a splash of silvery liquid, which would then gradually pool together and reform. That's kind of what happened with the Ma Bell breakup. The AT&T you know today is the result of decades of Terminator 2 type reassembly and a lot of extra deal making along the way. But there's also Verizon which traces its roots to one of the Baby Bells and there's surely more competition today in wireless service than there was back in, let's say, 1982, when my family's phone was

attached to the wall in our kitchen, and it had a rotary dial and actual bells inside. I explained to my kids that it couldn't even play video games, and they feel bad for me. How investors made out on AT&T over the years depends greatly on which pieces they held and when. Microsoft might be a clearer case. It faced U.S. antitrust action just over two decades ago, and a court ruled that the company should be broken up. But instead, Microsoft later settled and changed some of its business practices. Microsoft's stock market value has increased enormously since then, and its big moneymaker today is cloud computing, where it has a strong competitor in Amazon. Since the Microsoft case wasn't a true breakup, it's difficult to say how much it tells us about the other big tech

giants today. And when I hear people discuss potential antitrust action today and potential remedies, they often talk about breakups. Splitting YouTube from Alphabet, for example, or Amazon's cloud computing business from the rest of the company. It's far from certain that any such breakups will happen, but if they did, they might not hurt the overall value of these companies. In fact, they might even help. At the end of October, Needham analyst Laura Martin wrote that Alphabet might be worth 20% to 30% more if it's broken up, because investors prefer pure play assets like YouTube to conglomerates like today's Alphabet.

As for how it would affect consumers, in an earlier episode of this podcast, NYU professor Scott Galloway told us that if such a breakup happened, YouTube might go into search and Google might go into video, resulting in more competition and maybe more innovation. Thanks Jake for sending in your question and everyone please keep the questions coming. Just tape on your phone. Use the voice memo app.

Send an email to jack.how, that's H-O-U-G-H, at barons.com. Thank you for listening. Metalootsoft is our producer. Subscribe to the podcast on Apple Podcasts, Spotify, or wherever you listen to podcasts. And if you listen on Apple, please write us a review. If you want to find out about new stories and new podcast episodes, you can follow me on Twitter. That's at Jack Howe, H-O-U-G-H. See you next week.