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Visa, Inc: "Chase"ing Volumes With JPMorgan

 February 28, 2013 02:16 PM

(By Mani) Visa, Inc. (NYSE: V) announced a letter of intent for a ten-year contract renewal with JPMorgan Chase & Co. (NYSE: JPM), a deal that should boost Visa's transaction volumes.

As part of the agreement, JPMorgan will launch Chase Merchant Services, a new payments platform powered by Visa that will process transactions initiated with JPMorgan-issued Visa cards at merchants that the bank enrolls in Chase Merchant Services.

Chase Merchant Services combines the capabilities of JPMorgan Chase's acquiring business, support functions and extensive card portfolio with a customized processing solution that Visa and JPMorgan Chase will create using Visa's network, VisaNet.

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As part of the agreement, JPMorgan Chase also will shift additional credit and debit card volume to Visa, driving more transactions on the Visa network. JPMorgan will shift additional credit and debit volume to Visa (likely at a lower yield), over time.

"While we suspect V will provide JPM a certain level of discounting upon the renewal, V anticipates incremental volume gains from JPM over time," Oppenheimer analyst Glenn Greene said in a client note.

This agreement is most noteworthy due to Chase's direct card processing relationship with merchants, which allows lower rates via Chase's on-us transactions. Visa previously did not allow on-us transaction processing while accepting their brand.

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However, there are some big industry wide questions that arise from this deal, including will other large banks follow suit and how will this effect merchant acquirer and network economics in a more merchant friendly payment scheme.

"We estimate that a 5% volume share shift could approximate $19B (~90bps of US volume) in incremental annual volume, over time," Greene noted.

The deal has been said to be negotiated for some time. That said, the structure of the agreement and creation of Chase Merchant Services perhaps suggests increased flexibility by Visa to work/partner with its largest issuer and acquirer customers.

Chase Merchant Services is anticipated to reach the market by year-end. Chase will likely offer customized discounts at the point-of-sale and other incentives to drive incremental volume and solidifies Visa's recent outsized US credit volume growth.

In fiscal 2012, Visa's payment volume rose 7.4 percent to $3.94 trillion. It processed 53.32 billion transactions, a 4.7 percent growth from last year and generated transaction processing fee revenue of about $3.98 billion.

For JPMorgan, the deal allows it to reach processing agreements directly with merchants, and the deal provides JPMorgan options before the implementation of potential pricing changes in the payments space, and could help them strengthen relationships with merchants.

California-based Visa is a global payments technology company having 1 billion cards outstanding and is accepted at more than 29 million merchant outlets, in more than 200 countries around the world.

Visa does not issue cards or extend credit, and its primary customers are card issuers such as financial institutions and merchant acquirers. It has a strong business model and is well positioned to tap the long-term secular shift from paper to electronic payments, consumer spending growth and increased globalization.

The company has a strong debit franchise in the US and garners an increasing proportion of growth from international markets. All these should help Visa in delivering mid-to high teens EPS growth for the foreseeable future.

Shares of Visa trade at 21.5 times its 2013 consensus earnings estimate, while rival Mastercard, Inc. (NYSE:MA) trade at 20 times. Visa stock gained 119 percent in the past two years.

V is trading 43 percent above its 52-week low and 1.8 percent below its 52-week high. Of late, shares are hovering around Visa's 50-day moving average of $156.33.

"Given its increasing skew of volume toward faster growing emerging markets, its strong global share, and a likely continued gradual lift of the Durbin and merchant litigation overhangs, we believe Visa remains attractive at current levels," Greene said.



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