Shares digital

Call it ironic, call it a queer state of affairs, but there is seemingly something odd going on when Visa is able to raise almost $20 billion during the worst credit crisis in decades.

Shares in the credit card firm started trading on Wall Street last week, the same week that stock markets around the world were thrown into turmoil yet again by more worries over credit markets and their squeeze on the global banking machine. Yet in spite of this apparent ill timing, Visa’s shares closed up 28% on their opening day, having been something like 40% to the good at one point.

Now, I may not be the sharpest tool in the box but my initial reaction to this was one of sheer befuddlement. How was it, I wondered, that the US’s biggest public offering ever (between $17.9 billion and $19.6 billion, depending on over allotments) had been pulled off at a time when the world’s major stock markets are being pitched about like a pedal-o in a typhoon? That this was a credit card company coming to the market amid the early stages of a likely recession, it’s a wonder the float got off the ground at all. Wasn’t it?

Well, actually, no because believe it or not, Visa is really quite well insulated from falls in consumer spending, something that is likely to prove a considerable plus as the recessionary pinch gets tighter and tighter. This may appear counter-intuitive at first glance. However, Visa draws most of its profits from fees on each transaction, not on the total amount a shopper might spend. So, even if the weekly shopping bill falls from £80 a week to £60, the transaction fee is still the same.

There are also other factors that have got investors salivating over Visa’s shares, and the rise of fantastic, debit card, plastic is chief among them. Statistics from the US show that shoppers are increasingly turning to debit cards for even everyday purchases. For one, debit cards are a lot easier to get hold of than credit cards. People who have never qualified for a credit card account in their lives are still managing to get debit cards because it’s only their own cash they can spend – a factor that has opened the door for thousands of consumers to go cash-free for the first time.

In 2006, more transactions were made by US shoppers on debit cards than on credit cards. This has nothing to do with the value of those transactions you understand, merely the pure volume of transactions themselves, yet this was still a first. Many will have been on pre-paid cards while others would have directly tapped checking accounts, but with many of those debit cards Visa-branded, the transactions fees continue to roll in. Ker-ching! This also explains why transaction volumes remain high even when overall consumer spending falls.

Of course, in most Western nations – here in the UK, in Europe and, of course, America – you can use plastic pretty much everywhere. Maybe not down the local farmers market, but for meals and drinks in restaurants and bars, filling up the car in the local petrol station, or updating your travel pass, plastic is just the job, thank you very much. I myself use cards often for all of the above, then there’s all the books I buy online, holidays, CDs... the list goes on, and you’re probably the same.

Yet this is simply not the case in many places overseas. Across large parts of Asia, Africa and Latin America, outside of big hotels and multi-national business chains, plastic is about as useful as those chocolate coins you hang on the Christmas tree, only less tasty.

This won’t remain the case in future though as largely cash-based economies such as China, India and Brazil embrace new electronic payment methods, particularly for ‘card-not-present’ transactions, which in plain English means buying stuff over the phone or online.

The numbers are already starting to add up. In 2006 Visa saw its US-based profits jump 23%, yet its international revenue, excluding Europe, shot-up 57%. I suspect that this is where those Visa investors really see the long-term opportunities.

Then, I suppose those investors may have also latched on to something altogether more simple. It’s interesting to note that Visa’s chief rival, Mastercard, floated in 2006 at $39 a share, yet Mastercard stock is now worth roughly five-times as much. The likelihood of Visa’s stock rising from the $44 IPO rate to $220 by the end of 2010 is slim, but if they rise only half as high, well, that will do nicely.