Card sharp

Damian Reilly talks credit, good and bad, with Hans Morris, President of Visa Inc.

Polonius, the pompous fool of Shakespeare's Hamlet, gravely and famously advises his son: "Neither a borrower nor a lender be." Shortly after doing so, he is stabbed to death. And quite right, too.

You won't catch Hans Morris, global president of Visa talking like that. He is all for borrowing and lending - the more the better. Moreover, he would have you believe that credit cards - and debit cards, for that matter - are a better way of spending money than humble cash is. As Morris has it, these cards are a "superior form of money."

We'll come back to that. But first, let's clear up a common misconception about Visa. Visa is not a credit card supplier. It does not stump up cash for payments. Nor do card users make repayments to Visa. Rather, Visa is a brand and a network: a brand that institutions such as banks slap on cards they issue, and an international network that ensures money is transferred from, say, a bank to a supermarket, in 1.4 seconds.

Let Morris explain: "A lot of people don't understand what we do and what we don't do. We are really just a network, so what we do is we process transactions, we set up rules for institutions to issue cards, and we have other institutions which support retailers and other merchants for the processing of transactions at the point of sale. So those two very different businesses are supported by our network in between. And we have a brand, and the brand gives consumers and merchants the confidence to go ahead and use their card wherever they want.

We don't issue any credit cards, we don't issue any debit cards. Our clients, banks and other financial institutions do that. And they are the ones that set the terms of that credit, they are the ones that set the fraud risk, and they are the ones which decide which consumers get cards and which don't."

Morris calls this "a terrific business model," and after an hour spent chatting to him, so would you. There are about two billion Visa cards in circulation around the planet today, fourteen billion transactions took place with them in the last quarter alone, and last year a cool $3 trillion was spent using them. On all of that money, of course, Visa took a percentage. And Visa is the biggest fish in the pond, with over twice the market share (60 percent) of nearest rival Mastercard.

Privy to what is going on across the Visa network long before the rest of the world is, Morris is in a great position to see economic trends and changes in consumer spending patterns long before the rest of the market does. In these times of global financial uncertainty, a lot of people would like to know what Morris knows. Will he give it up to CEO Middle East? Is spending just stopping? Are we going off the edge of a cliff?

Visa is a listed company, of course, so he is cagey: "We can't talk about the second quarter. We have talked quite a bit about trends in our last earnings report. What we were seeing was still very good growth in transactions, and volume and revenues grew. What we said is that the way we report is subject to a one quarter lag on our volume report.

If you look at the volume trends during that first fiscal quarter, you saw them dropping quite significantly, dropping particularly in the US, and also cross border transactions. And those were dropping off very strong recent growth rates. We saw the biggest change really take place in October ‘08. Over the last couple of years we have had strong double digit growth. Some markets, like this region, have had very strong growth over the last couple of years, and are still growing, but not at the same torrid pace."

So we are going off a cliff?

"I have to be careful. What we said is that in January the pattern, well we haven't seen any bottoming out of the trend yet. We saw declines, particularly in the US. But let's put that into context: in the US, a little over half of our business is debit transactions, and we see the debit side of the business continuing to grow, while the credit side has definitely shrunk. It is down about ten percent versus the prior year. That is the trend. But we still see growth outside the US, both debit and credit."

Alright then, but is that growth a sort of nightmarish growth scenario in which the great mass of newly unemployed people are now living on credit cards, spending until they reach their credit limits? Will this growth suddenly stop? Morris surely looks bemused.

"Actually, I think that people are really quite careful about their finances. Again, each part of the world is different, and different parts of the US, for example, are different. So some households there, say ten to twelve percent of the households, have severe problems with their mortgages, delinquency is rising, delinquency with their mortgages, and often they have credit card balances that are very, very high.

But you still have all the other households. And most of those are using their debit cards, they're using available cash, and even those that are using credit cards, they are not revolving big balances, they are using it as a means of payment.

"Our most important message and the most important driver of our business, is that the credit card is a borrowing tool, but mainly it is a substitute for cash and cheques. The majority of our growth comes from that."

And how, in the new and gloomy economic landscape, does Morris see banks' appetite for lending changing?

"Banks are, for good reason, being much more cautious about their underwriting decisions, and in some cases regulators are forcing them to do that. In some cases they are doing it to protect their own credit and capital. The fact is that in many markets credit cards have become the most efficient and primary way that people borrow day to day.

"Many households are using them in a very careful and constructive way. But in the US you are still going to see charge offs of maybe $90bn this year. That's bad debt written off. Those are industry estimates. Just in the US.

"I don't mean to be glib about it - it is a difficult time. Credit markets are strained, and many households are too, and that is what everyone is writing about, but the fact is that the use of a Visa card is in many ways exactly the right thing for households to do from a financial management point of view.

You have records of your transactions, you know exactly where all the money is spent. You can use it to teach your children how to use money wisely, with the debit or credit card. I think it is easier than cash."

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