Direct Equity Team: A Note from Bishopsgate
VISA INC
"It's far better to buy a wonderful company at a fair price, than a fair company at a wonderful price." – Warren Buffett
We seek businesses protected by durable competitive advantages. Few companies embody these qualities as completely as Visa, which we have added to portfolios during the recent quality sell-off. Visa's moat rests on the network effect: as more merchants accept its cards and more consumers carry them, the service becomes ever more valuable to both side. This creates a virtuous circle that is exceptionally difficult to break. Visa’s competitive advantages is reinforced by economies of scale: the capital required to replicate Visa's global reach, speed, and security represents a daunting barrier for any would-be competitor, For Visa it amounts to a small fraction of sales. With a long structural growth runway in digital payments and a valuation now at more reasonable levels, we believe Visa is a natural fit for the portfolio.
We view Visa as an exceptionally high-quality business. It is difficult to find many established companies with such high industry growth rates and dominant market position. Historically, Visa’s shares have always traded at a high valuation which has prevented us from owning them. While paying up for quality can work fine, and it has done for shareholders of Visa, we tend to be sceptical when assessing the growth prospects of our companies. Therefore we prefer lower valuations. In the recent quality sell-off, we had the opportunity to add Visa to our portfolios.
Visa is 50 years old. It has grown to a market value of circa $675 billion, yet analysts expect Visa’s per share earnings to grow 14% per year over the next 5 years. There are few large businesses with a structural growth runway as attractive as Visa’s. Additionally, over the last decade, Visa has achieved an average operating profit margin of 66%. This makes it the fourth most profitable business in the S&P 500 by this metric.
The global digital payments network is vast and growing. In its fiscal year 2025, Visa processed $17 trillion of transactions across 160 currencies. According to Grand View Research the global digital payments market is expected to grow from $165 billion by revenue in 2026 to $683 billion by 2033. This represents an annual growth rate of 22.5%. According to Kepios Ltd (a digital trends research company), by 2024 66% of the world’s population were using the internet and 84% of mobile phones in use were smartphones. The continued growth of e-commerce is significantly driving demand for digital payment solutions.
Visa believes they hold a leading 40% share in the commercial card payments market and approximately 35% of the consumer card payments market by transaction volume. Its closest competitor, Mastercard, processed approximately half as many transactions as Visa. If Visa were to consistently lose market share over the next five to ten years, it could still deliver attractive returns to shareholders given its profitability and the broader industry growth rates.
Barriers to entry come in different forms. They are often characterised by steady market share levels in an industry and companies earning high returns on their invested capital. Visa generates a return on invested capital of 33% and, while it has steadily lost market share over time, it has remained the leading business in its sector since inception. Bruce Greenwald, author and professor at Columbia Business School, suggests that one of the greatest barriers to entry stems from when an industry benefits from economies of scale. In this case, the barrier to entry is derived from what is known as the ‘Network Effect’.
Visa is one of the greatest examples of a network effect producing a competitive advantage. Its technology is essentially a communicator between the merchant’s bank and the purchaser’s bank to facilitate card payments.
If I want to set up (yet another) coffee shop on Bishopsgate, a high and increasing proportion of my customers’ payments will be made by card/Apple Pay etc. I need to select a payments network provider that can handle these transactions. I do not want lots of providers with different fee structures that I need to keep on top of, I want a small number with wide outreach where I can plan appropriately through pricing and minimum spends. A short Google search tells me I can reach almost all my customers by accepting Visa and Mastercard. I would probably exclude Amex because I am selling low ticket items and their higher flat fees would eat into my profits. If I can include Mastercard and Visa and reach almost my entire customer base, then I only have two providers to deal with and two pricing structures to navigate. When a customer purchases my famous iced caramel macchiato, VisaNet checks the customer’s Lloyds bank balance and deducts £3.80 from that balance, it then credits my HSBC business account by that amount, less the processing fee. The transaction is processed in seconds, with the network also performing security checks such as fraud and location checks.
This example illustrates the network effect, once a business reaches scale and reach, its products and services become more appealing to customers. This creates a virtuous circle of profitability and growth and is a rare and powerful advantage. Visa cannot be complacent; it must ensure its products and services remain relevant in an ever-changing technological world so there is some capital spending to be done. The good news for Visa is it had the first-mover advantage and therefore the greatest scale. Visa spent $1.5 billion last year on capital expenditure (according to Alpha Terminal), to ensure its products remain up to date. For a start-up business wanting to compete with Visa, this is a daunting amount of capital to need to attain the same quality of product. For Visa, the annual capital expenditure is a mere 4% of its sales, and it has 50 years of experience. Visa’s network can handle 65,000 transactions per second, and does so across millions of merchants and more than 200 countries. It is well equipped to handle fraud detection and is powered by high-security data centres designed to stay active 100% of the time. If you think of examples of Facebook downtime, or mobile network downtime events, Visa has never recorded any downtime. It is a formidable opponent. This is economies of scale in action, which makes it exceptionally difficult for new entrants to compete with the top industry participants.
If you have any questions, please get in touch.
This article was prepared by Tom Waters, one of our Investment Managers.
