Jitender Miglani
jitender@revenuesandprofits.com
Abstract
This report discusses
How Visa credit card
payment processing
works
Key elements of Visa
business model
How Visa business
model is different from
American Express
Visa FY 2015 revenues,
profits, and profit margins
Dow Companies 101
This report is a part of a
series on how U.S. Dow
Jones Industrial Average
(DJIA) Index companies
make money. The
complete series include
reports on the business
fundamentals of the
following companies:
3M, American Express,
Apple, Boeing, Caterpillar,
Chevron, Cisco Systems,
Coca-Cola, E.I. DuPont de
Nemours, ExxonMobil,
General Electric (GE),
Goldman Sachs, Home
Depot, Intel, IBM,
JPMorgan Chase, Johnson
& Johnson (J&J),
McDonald's, Merck,
Microsoft, NIKE, Pfizer,
Procter & Gamble (P&G),
Travelers, United
Technologies, UnitedHealth
Group, Verizon
Communications, Visa,
Wal-Mart, Walt Disney
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How Visa Makes Money?
FY 2015 Update
Visa is a global payments technology company. It connects
consumers, businesses, financial institutions, and governments in
over 200 countries. It operates the worlds largest retail electronic
payments network. It is the worlds most recognized global
financial services brand.
How Visa Credit Card Payment Processing Works?
Visa serves a two-sided market. It serves cardholders, issuers,
and issuer processors on one side. On the other side, it serves
merchants, acquirers, and acquirer processors. Visa neither
issues cards to the cardholders nor solicit merchants to accept its
cards. These are the responsibilities of the issuers and the
acquirers respectively.
Cardholders are the individuals that possess a Visa payment
card.
Issuers are the financial institutions that issue Visa cards to the
cardholders, extend the credit to them, and determine the
interest rates or the other fees charged to them.
Issuer Processors are the third-party institutions with proprietary
technology platforms to handle the transaction processing for
those issuers that do not have in-house capabilities. Issuers
often outsource the transaction processing to the issuer
processors.
Merchants are the businesses that accept Visa cards as a
payment mechanism for their goods and services.
Acquirers are the financial institutions that solicit merchants to
accept Visa cards. They offer Visa network connectivity and
payments acceptance services to the merchants. They
establish the merchant discount rates for card acceptance.
Acquirer Processors are the third party institutions with
proprietary technology platforms to handle the transaction
processing for those acquirers that do not have in-house
capabilities. Acquirers often outsource the transaction
processing to the acquirer processors.
A typical Visa transaction begins when the cardholder presents
Visa-branded card to a merchant for the payment of goods or
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Jitender Miglani
jitender@revenuesandprofits.com R&P Research
services. The first step of the transaction is the authorization. It is
the process of approving or declining a transaction before a
purchase is finalized. The following diagram illustrates the steps
involved in the authorization process.

1. The cardholder provides a Visa card to the merchant for the

payment. The merchant point of sale (pos) terminal reads the
account number and other data encoded on the cards
magnetic stripe or electronic chip.
2. The merchant terminal transmits the card information and
transaction amount to the acquirer or the acquirer processor.
3. The acquirer or acquirer processor combines the transaction
information into an authorization request message and
transmits it to Visa.

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4. Visa identifies the appropriate card issuing bank and routes
routes the authorization request to the issuer or the issuer
processor for review.
5. The issuer or the issuer processor receives the request and
then executes a series of inquiries into its account systems to:
assess the potential risk of fraud for the transaction; establish
that the account is in good standing; and verify that the
cardholder has sufficient credit to cover the amount of the
transaction. Then it approves or denies the transaction and
returns an authorization response message to Visa.
6. Visa routes the authorization response to the acquirer or the
acquirer processor.
7. The acquirer or the acquirer processor transmits the result of
the authorization request to the merchant terminal.

If the transaction is approved, the merchant delivers the goods or

services to the cardholder. Now, the money needs to be
transferred to the merchant account with the acquirer. This is part
of the clearing and settlement process.

In the clearing process,

The merchant transmits sales draft information for the

transaction, including account numbers and transaction
amounts, to the acquirer or acquirer processor.
The acquirer or acquirer processor format this information into a
clearing message and transmit it to Visa.
Visa routes the clearing message to the card issuer and
calculates the settlement obligation of the issuer and the
amount due to the acquirer, net of certain applicable fees and
charges.

In the settlement process,

The issuer sends funds to Visas designated settlement bank in

the amount of its settlement obligation.
The settlement bank, at the direction of Visa, transfers funds
due to the acquirer.

Now, what do issuers, acquirers, and Visa get out of this

transaction. If the cardholder makes a $100 payment, it is not
completely transferred to the merchant account. The merchant
gets the amount net of the merchant discount fee. If the merchant

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Jitender Miglani
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discount fee is 2.4%, then the merchant would receive $97.60
from the transaction. The rest of $2.40 is split unevenly between
the issuer and the acquirer, depending upon the interchange
rate. In case of an interchange rate of 1.8%, the issuer will keep
$1.80 and the acquirer will keep $0.60. Issuer gets to keep more
of the merchant discount fee because of a higher risk of payment
default from the cardholder. Visa does not make money from the
individual transactions. Instead, it earns revenues from the issuers
and acquirers based upon the overall payment volumes and
number of transactions processed.

Key Elements Of Visa Business Model

The primary customers of Visa are issuers and acquirers. Visa

offers a wide range of branded payments product platforms to the
issuers, which they use to develop and offer credit, debit, prepaid,
and cash access programs for the cardholders (individuals,
businesses and government entities). In addition, Visa provides
transaction processing services (primarily authorization, clearing,
and settlement) and various other value-added services such as
risk management, debit issuer processing, loyalty services,
dispute management, and value-added information services.

The primary customers of issuers are cardholders. Issuers issue

cards to the cardholders and establish and maintain their
accounts. Issuers establish applicable cardholder terms, including
fees, interest rates and payment schedules for cardholders.
During the payments transactions, issuers authorize cardholder
transactions and fund settlement obligations for the cardholders
purchases. Issuers collect the payments from cardholder and
assume risk of non-payments or late payments from them.

The primary customers of acquirers are merchants. Acquirers

provide the payments network connectivity to the merchants and
establish and maintain their accounts. Acquirers establish any
applicable merchant fees and/or discount rates. During the
payment transactions, acquirers receive settlement funds from
issuers and credit merchant for the value of payment transactions.
Acquirers assume the risk of merchant non-fulfillment of
transaction obligation. Acquirers assume the responsibility for
merchant compliance with network security and other rules.

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Jitender Miglani
jitender@revenuesandprofits.com R&P Research
Visa generates revenues primarily from fees paid by the financial
institutions based on payments volume (total monetary value of
transactions for goods and services that are purchased with Visa-
branded cards), transactions processed, and certain other related
services.

Visa does not earn revenues from any of the following:

Interest or fees paid by cardholders on Visa-branded cards. The

issuers earn that.
Discount fees paid by merchants for the payments acceptance.
The acquirers earn that.
Interchange fees. On purchase transactions, the acquirers pay
an interchange reimbursement fee to the issuers. Although Visa
administers the collection and remittance of interchange fees
through the settlement process, Visa generally does not receive
any portion of the interchange fees.

VISA operating revenues are principally comprised of service

revenues, data processing revenues, and international revenues.
These are reduced by costs incurred under client incentive
arrangements.

Service revenues. These are earned for providing financial

institution clients with the support services for the delivery of
Visa-branded payment products and solutions. These are
generated from the payments volume on Visa-branded cards
and payment products for purchased goods and services.
Data processing revenues. These consist of revenues earned
for authorization, clearing, settlement, network access, and
other maintenance and support services that facilitate
transaction and information processing. These are generated
from the number of transactions processed.
International transaction revenues. These consist of
revenues earned for cross-border transaction processing and
currency conversion activities. These are primarily generated
from cross-border payments and cash volume.
Client incentives. These consist of long-term contracts with
financial institution clients for various programs designed to
build payments volume, increase Visa-branded card
acceptance, and win merchant routing transactions. These
incentives are accounted for as reductions to operating
revenues.

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Jitender Miglani
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The following diagram shows the key elements of Visa business
model. It shows how the money flows-in from the different
customer segments and the key operating expenses where the
money flows-out to.

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How Visa Business Model Is Different From American

Express?

Visa and American Express both offer payment cards. But, their
approach to making money is different. Visa operates an open-
loop network and has a transaction-centric business model.
American Express operates a closed-loop network and has a
spend-centric business model.

In a closed-loop network, payment services are provided directly

to the cardholders and merchants by the owner of the network.
American express acts as both the issuer and the acquirer.
American Express makes money primarily from the merchant
discount fees. It focuses on generating revenues primarily by
driving spending on its cards through attractive reward programs
for card members. This helps them earn more discount revenue
from merchants. Hence, they have a spend-centric business
model.

Open-loop networks are multi-party and operate through a system

that connects issuers and acquirers. The network owner manages
the information and flow of value between them. Visa operates an
open-loop network. Visa does not makes money from the
merchant discount fees or cardholder membership fees. Merchant
discount fees is split unevenly between the issuers and acquirers
depending upon the interchange rate. VISA earns revenue
primarily on the payments volume and the transactions volume
carried out through their cards. Hence, Visa has a transaction-
centric business model.

VISA FY 2015 Revenues, Profits, And Profit Margins

Visa generated a total of $13.9 billion operating revenues in FY15

(fiscal year ending September15). The operating revenues are
comprised of:

Service revenues of $6.3 billion

Data processing revenues of $5.6 billion
International transaction revenues of $4.1 billion
Other revenues of $823 million

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Jitender Miglani
jitender@revenuesandprofits.com R&P Research
Client incentives of -$2.9 billion. Client incentives is a contra-
revenue account and consists of long term contracts that Visa
has made with their clients to increase payments volume and
Visa brand acceptance. They are not realized as an expense,
but are instead directly subtracted out of the total revenues.

Of the $13.9 billion of Visa operating revenues in FY'15, $4.8

billion were the operating expenses. The operating expenses are
comprised of personnel expenses, marketing expenses, network
and processing expenses, professional fees, depreciation and
amortization, and general and administrative expenses. This
resulted in $9.1 billion of operating profit and an operating margin
of 65.3%. Operating margin is calculated as operating income
divided by total operating revenues. After income taxes and other,
Visa had a net profit of $6.3 billion and a net margin of 45.6%.

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