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Visa Inc. executives say the pandemic has accelerated the speed at which people are moving traditional cash spending over to credit and debit cards, but one analyst sees a flip side to that trend.
Mizuho’s Dan Dolev agrees that COVID-19 has sped up the move away from cash, but he also says it has “dramatically and likely permanently shortened the cash-to-card conversion runway.” With some of the accelerated transition away from cash now in the past, Visa
V,
may have fewer opportunities for revenue growth going forward, in his view.
Dolev downgraded Visa shares to neutral from buy Friday, writing that the company’s growth rates could be challenged once it becomes harder for Visa to convert cash spending over to cards. In addition, Dolev is concerned about competitive pressures from areas like real-time payments and buy-now-pay-later services.
Shares of Visa are off 0.5% in Friday morning trading.
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In the U.S., “COVID accelerated the step-down in cash usage from 1-2% per year to 3-4%, doubling the rate of decline, [and] ‘saving the day’ in terms of card volume growth in 2020,” Dolev wrote. But even if the decline returns to its prior pace, “cash-to-card as a growth driver may fade well before the decade is over.”
Such a dynamic may not impact Visa’s growth in the medium term, but Dolev sees it as “likely to have a meaningful impact on Visa’s terminal growth rate, which typically drives the lion’s share of the company’s valuation.” The conversion of spending over to cards has driven about 45% of Visa’s revenue growth on a historical basis, he continued.
Dolev also worries about various competitive risks for Visa, such as the potential for growth in account-to-account payments that could decrease the importance of Visa’s debit infrastructure. Visa and Plaid called off their plans to merge a year ago following Justice Department objections, and now Plaid represents a threat to Visa, in Dolev’s view, as the company could ultimately help facilitate payments by debiting money directly from bank accounts.
The FedNow real-time payments service being developed by Federal Reserve Banks poses an additional risk to Visa, Dolev wrote, as it could compete with the card network’s Visa Direct service.
Dolev continues to rate Mastercard Inc. shares
MA,
a buy, writing that while the company faces similar “secular concerns” to Visa, it also could be more resilient, in part because it has less relative debit exposure and more international exposure. Many international markets have less card penetration than the U.S., creating greater opportunities for conversion.
Dolev is one of just four analysts tracked by FactSet who have a neutral rating on Visa’s stock. The other 33 rate the stock a buy. As for Mastercard, 31 analysts surveyed by FactSet have buy ratings and six have hold ratings.
Visa’s stock has edged up 2.3% over the past 12 months and Mastercard shares have gained 4.9%, while the S&P 500 index
SPX,
has advanced 22.8%.
