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Morningstar | Visa Is an Entrenched Tollbooth Business Enjoying a Long-Term Secular Tailwind

Visa dominates the global market for electronic payments, accounting for about half of all credit card transactions and an even higher percentage of debit card transactions, according to the Nilson Report. As consumer spending around the world grows and digital methods continue to take share from cash, this wide-moat company should continue to see healthy growth for years to come as an effective toll booth on global spending. Visa has been coordinating the interaction of banks, consumers, and merchants for decades. Its effective network consists of 16,800 financial institutions, 44 million merchants, and billions of cards issued to customers around the world. This creates a formidable barrier to entry. While many potential competitors have close connections to consumers, the global financial institutions that rely on Visa are harder to penetrate. Indeed, firms like Apple and Alphabet have chosen to use existing networks to process payments in the digital environment, and even successful competitors like PayPal are choosing to partner with--rather than attempt to disrupt--incumbents. Just as Visa set the standard for card payments in the past, it is determining the course of future digital payments.Of course, the company's position is not completely unassailable. Its market power regularly grabs the attentions of regulators. Visa's ability to set high interchange fees as incentives for issuing banks is eroding around the world. In Europe, regulators are attempting to allow upstarts to access existing bank accounts, and the United States is set to issue bank charters to technology firms. Merchants are also clamoring for lower-cost payments. However, we see few rivals able to match the scope of the global Visa network, its brand strength, and its technology and security offerings. In fact, Visa's competitive position could conceivably be strengthened by the proliferation of digital payment options as technology standards expands in importance and the ability to analyze large amounts of transaction data grows. If competitors fail to take share during the transition from cards to mobile payments, Visa could be entrenched for decades to come.