Visa Inc

NYSE:V

Earnings Call Transcript 2021-Q2

[Operator]

Welcome to Visa's Fiscal Second Quarter 2021 Earnings Conference Call. All participants are in a listen-only mode until the question-and-answer session. Today's conference is being recorded. If you have any objections, you may disconnect at this time.

I would now like to turn the conference over to your host from Investor Relations, Ms. Jennifer Como and Mr. Mike Milotich. Ms. Como, you may now begin.

[Jennifer Como, Vice President-Investor Relations]

Thanks, Jordan. Good afternoon, everyone, and welcome to Visa's fiscal second quarter 2021 earnings call. Joining us today are Al Kelly, Visa's Chairman and Chief Executive Officer; and Vasant Prabhu, Visa's Vice Chairman and Chief Financial Officer. This call is being webcast on the Investor Relations section of our website at www.investor.visa.com.

A replay will be archived on our site for 30 days. A slide deck containing financial and statistical highlights has been posted on our IR website. Let me also remind you that this presentation includes forward-looking statements. These statements are not guarantees of future performance, and our actual results could differ materially as a result of many factors. Additional information concerning those factors is available in our most recent reports on Forms 10-K and 10-Q, which you can find on the SEC's website and the Investor Relations section of our website. For non-GAAP financial information disclosed in this call, the related GAAP measures and reconciliation are available in today's earnings release.

And with that, let me turn the call over to Al.

[Al Kelly, Chairman and Chief Executive Officer]

Jennifer, thank you and congratulations on your second anniversary with Visa. Good afternoon, everyone. And thanks for joining us today. I'm going to provide a few quick stats on the quarter and then share my thoughts on what's ahead as the world continues to recover. The recovery is going to take many different shapes and the timing will differ around the world based on vaccination rollouts and the easing of restrictions.

But we believe we're at the beginning of the end of the pandemic. And the recovery is well underway, at least in a number of markets. First, Q2 results, revenue declined 2% year-over-year, but would be slightly positive at 20 basis points if service revenues were recognized on current quarter payments volume. Non-GAAP EPS was $1.38, a decrease of 1%. When looking at volumes and transactions growth, keep in mind that we're now lapping the start of the pandemic as growth rates are now less indicative of performance and the business trajectory.

We're going to also provide some metrics compared to 2019 on a constant dollar basis. So payments volume grew 11%, improving seven points from Q1 and reached 116% of 2019, which is up three points from Q1. Cross-border volume excluding inter-Europe declined 21%, but improved 12 points from Q1 and it's 75% of 2019 levels, three points better than Q1. Process transactions growth of 8% improved four points from Q1 and represented 116% of 2019, which is consistent with the first quarter.

This quarter, we continue to make progress across our three growth levers. First, consumer payments, in Asia-Pacific, we renewed our partnership with Rakuten Card, a subsidiary of Rakuten Group, the largest e-commerce marketplace in Japan. In Korea, Visa won the first hotel chain co-brand in the country with Marriott and Shinhan Card, Korea's largest issuer. In China, we renewed our credit portfolios with CITIC Bank and Agricultural Bank of China, two of the top 10 largest banks in the country.

Also on the co-brand front in Brazil, Samsung in partnership with Banco Itaú, we will issue their inaugural co-brand in Latin America with Visa targeting Samsung's 57 million Brazilian users. In Europe, Visa won incremental business with BNP Paribas Fortis in Belgium. This expands our relationship to include four million debit cards, in addition to our existing credit relationship. In Switzerland, we gained significant traction in growing Visa Debit.

Since this January of 2019, we have signed 13 new debit deals, representing an incremental 2.6 million cards. In new flows, Visa Direct transactions grew almost 60% in the second quarter. We're pleased to have clients going live now with Visa Direct payouts which offers a flexible set of API for Visa partners globally to use a single point of connection for push payments to cards and accounts.

MoneyGram, Goldman Sachs' Transaction Banking, Standard Chartered Bank Hong Kong and KyckGlobal are among the first to start utilizing Visa Direct payouts for B2C, cross-border P2P and B2b payouts. A few additional highlights on specific Visa Direct use cases include that in the marketplace payouts, Airbnb, which now has four million hosts globally will offer host payouts using Visa Direct in select markets. In cross-border P2P, Remitly, a top digital remittance FinTech has renewed its Visa Direct relationship building upon the past two years of partnership. And Monobank in Ukraine enabled cross-border P2P to their 1.7 million cardholders.

In the payroll category, the earned wage access use case continues to grow with 25 earn wage access platforms now offering Visa Direct for fast and convenient access to employee earnings. G2C continues to grow as well, Global Blue, a leading tax-free shopping solutions company covering 52 countries and 35 million tax-free transactions in 2019 is utilizing Visa Direct to distribute tax refund payments across Europe.

Separate from Visa Direct, we supported the U.S. government's disbursements of economic impact payments to nearly 13 million Visa prepaid credentials in the U.S. so far this year. And add to our third growth, our value-added services were continuing to see strong adoption. Let me highlight a couple of examples.

For CyberSource, Planet, our European acquirer and payment services provider that delivers payment processing and currency conversion solutions to over 600,000 merchants. We'll be partnering with CyberSource to simplify payments across the hospitality, food and beverage and retail sectors.

KeyBanc, a top U.S. acquire will begin to offer CyberSource to its merchant clients. And as e-commerce continued to grow Decision Manager, a key risk offering of CyberSource increased transactions over 30% fiscal year-to-date. Our other risk fraud and authentication capabilities grew as well. For example, we've now crossed the two billion token milestone, up from 1.4 billion tokens just in September.

One of our key authentication capabilities, CardinalCommerce grew revenue almost 50% year-over-year this quarter by rapidly expanding beyond the U.S. origins. In the next year, we plan to more than double our clients in Europe and Central Europe, Middle East and Africa. So while the pandemic has disrupted the world, it has not changed our strategy. In fact, it has reinforced our belief that our three areas of focus will deliver robust growth for years to come.

As we look ahead with COVID recovery underway, a few key important realities, namely the way consumers feel about e-commerce, cash and travel will particularly impact Visa. The pandemic has accelerated e-commerce, global card-not-present credentials, excluding travel grew over 20% in the quarter versus last year. Our growth in card-not-present payment volume, excluding travel has averaged at least 30% in the United States, Canada, Brazil, the United Kingdom, Italy, Germany, India, and Singapore over the last three quarters.

And in global cross-border, excluding into Europe, it's averaged 20% growth. We believe this shift is likely to persist as the convenience of e-commerce is indisputable and its growth continues to be robust even as card-present begins to return. In March in the United States, as some states loosened transactions, card-present as a percentage of 2019 spend improved 11 points versus February. While at the same time card-not-present excluding travel, still expanded eight points.

You look at that in Germany – in Japan, where restrictions were also lifted card-present improved six points and card-not-present excluding travel, still improved four points in that same comparison between March and February. The pandemic has accelerated the digitization of cash. And we see the impact and tap to pay. When we look at cash usage in the last 12 months, just on the Visa brand, such as with ATM withdrawals, we see that global debit cash volumes have decreased by 7%, while debit payments growth – payments side have grown 16% both on a constant dollar basis. This 20 point GAAP is more than doubled at historic GAAP in growth rates and relatively consistent globally demonstrating cash digitization in both mature and emerging regions. Overall, these tap to pay transactions have grown over 30% year-over-year in March.

In Europe, less than a year since contact with limits increased across the region, Visa has seen $1 billion additional touch-free transactions. In the United States, one in 10 face-to-face Visa transactions are now done with a tap, more than a two times increase since the beginning of the pandemic. In New York city, the penetration is nearly 30%, demonstrating the potential of focused issuance and merchant enablement along the transit. In the past three years alone, we've enabled nearly 250 transit systems globally. And we can see based on our research that enabling tap to pay on transit can bring more than a 15% lift in transactions for merchants in the surrounding neighborhoods.

The decline in travel is temporary, and we're starting to see some early signs of recovery. Cross-border travel-related spending excluding Intra-Europe, improved from Q1 driven by two factors. First, those who were abroad are spending more likely because of fewer restrictions. This quarter, essentially all the cross-border travel spend improvement was driven by higher spend per card rather than more active cause. Second, we continue to see strain from countries with open-border. For example, U.S. to Mexico volume was almost 20% above 2019 levels for the quarter. We also saw several top corridors between the U.S. and Latin America, improved by more than 10 points through the quarter versus 2019.

Travel will certainly take more time to recover than other sectors, but we believe personal travel in particular will come back and that's good for Visa for two primary reasons. One, because the vast majority of the travel we capture on our credentials is consumer. And two, we are the global leader in travel co-brands.

With the backdrop of travel, cash digitization and e-commerce, let's briefly explore the future potential of our three growth levers. In consumer payments, in the last two years, we've grown our credentials to $3.6 billion and physical merchant locations to over $70 million, up 7% and 34%, respectively. And remember that our merchant locations only count our partners like PayPal and Square each as one. That said, there's ample opportunity as we focus on specific region’s requirements.

Looking at regions, even with our leading position in both emerging and developed markets, our market-driven approach to growing credentials is succeeding, and Europe is an excellent example. From 2018 to 2020, we grew active card credentials by 10%. And looking ahead, we have line of sight to more than 25 million additional credentials across 50 clients in the next few years.

Let me site a couple of recent partnerships that would show this rapid growth. Since fintech Revolut signed a global agreement in September 2019, selecting these as their lead issuing partner, they've increased the number of cards and payments volume by more than 200% through December 2020. Crypto.com has launched Visa cards in 39 markets across their 10 million user base since 2018. And just this quarter, they find a global growth agreement with us covering 12 markets with plans to expand to even more.

There are so many more partners issuing credentials and building acceptance. For example, wallet providers represent the potential for another 2 billion credentials in 70 billion acceptance locations over time, and the pace of growth here is fast. YooMoney in Russia recently signed on to issue Visa credentials, and has achieved more than 1 million credentials in just five months. In fiscal Q2 last year, we announced that stc pay, Saudi Arabia’s largest wireless operator with 25 million subscribers plan to embed credentials in their stc wallet – pay wallet. To-date, more than a 1 million Visa credentials have been issued.

Our ongoing partnership with Paytm has enabled us to add more than 250,000 contactless enabled acceptance locations at new to card merchants, while the number of Visa credentials issued by Paytm has more than doubled since September of 2020 reaching a total of 3 million. Around the world, tap to phone has also been a significant acceptance effort. Today more than 35 markets offer it with 13 more being added this year. Wallets and tap to phone are just a couple of next-gen partners and capabilities that we believe will help us bring the $1.7 billion unbanked into the financial mainstream, growing the pie for digital payments.

The growth will come from a regional approach and openness to partnering with traditional and new players and by developing new ways to engage the ecosystem all rooted in our strong brand and in technology.

In new flows, our success in the United States is a real asset. While they have been impacted by the pandemic, our strategies against $120 trillion opportunity represent near, medium and longer term growth for Visa. In the near-term, we're focused on supporting businesses small and large. To-date, we've helped 12 million micro and small businesses to digitize and grow against our 50 million global goal. And we continue to focus on card-based solutions. Visa has about 20% more commercial issuers today than we did four years ago. In the medium-term, Visa B2B Connect addresses the major pain points with the current top solution in cross-border B2B. And we are continuing to add banks to reach scale. In the longer-term, we're working with key partners to solve the challenges in accounts payable and accounts receivable.

For the other $65 trillion of new flows, Visa Direct has five clear competitive advantages that we believe will continue to drive growth. The first one is reach. In Visa Direct, the endpoints are card credentials and bank accounts, and we can reach $5 billion endpoints globally. This is unrivaled by anyone else. Second, operating scale; Visa Direct is built upon the operating scale of VisaNet and leverages its real-time authorization, clearing and settlement capabilities. This means we can deliver industry-leading solutions with low marginal cost.

Third is commitment to network strategy. Visa Direct is truly multi-rail, which provides clients flexibility and efficiency. Just in the last year, it has utilized 16 card-based networks, 65 ACM schemes, seven RTP networks and five payment gateways. That is more connections, coverage and capability that we've seen from any other network offerings.

Fourth, investments in our capabilities. We have invested in leading technology stack for both payouts and account funding capabilities. For example, our crowdfunding capabilities include unique codes to help clients manage risk, compliance and authorizations for money movement transactions with API to streamline implementation for apps, neobanks, and fintechs. To our knowledge, no one else has this capability.

This is commercialization. We've now enabled over 20 use cases with more than 450 new program launches. And we will continue to expand by, one, growing existing use cases like marketplaces and cross-border P2P; two, bringing existing use cases like P2P payroll and earned wage access to other new markets; and three, developing new use cases such as tipping.

Visa Direct also brings a network effect in terms of benefits to Visa. For every dollar received on a debit card through Visa Direct, about half of it is then used for debit card purchases. Furthermore card holders who receive payments through Visa Direct can spend up to 50% more than those who do not. So Visa Direct is actually not only helping new flows, but it is helping consumer payments.

Lastly, let's turn to value added services, which are being utilized by our clients more and more. In fiscal year 2020, more than 60% of our clients use at least five value added services from Visa and more than 30% of our clients use 10 or more. Our toolbox is large with hands-on consulting, sophisticated and flexible technology platforms, valuable data and insight and card benefits, all which will improve with the recovery. We also have three platform businesses that scale, very profitably, CyberSource, issuer processing, and risk identity and authentication. With the recovery and the continued strength in e-commerce and debit these capabilities are well aligned with trends toward digitization.

Let me just speak about CyberSource as an example, our strategy to partner with acquirers creates a leveraged opportunity for future growth, both transaction growth and cross selling value added services. We mentioned last year that Japanese acquire SMCC was going to start offering CyberSource capabilities to its merchant customers. Starting with one nationwide convenience store chain and rapidly expanding to over 30,000 merchants.

SMCC is now delivering next generation acquiring solutions to Japanese merchants and CyberSource is processing over half a million e-commerce and in-person transactions per day. With all this opportunity across the three levers, we’re investing heavily to drive future growth in several areas, including simple compelling user experiences examples include Tap to Pay, Tap to Phone and quick to that.

Capabilities to scale new flows and value-added services examples include new needs and direct use cases and advancing fraud and identity solutions. Specific markets that can benefit from targeted resources, such as Europe and Africa. Innovations in payment – in the payments ecosystem such as crypto API for banks and digital currency settlement. To close, Visa has weathered the COVID storm, it is emerging from the pandemic even stronger. There’s significant opportunity ahead and Visa’s existing presence, scale and capabilities, position us well to capture more growth in the future.

With that, now let me turn it over to Vasant for more colors on our financials and what we see ahead. Vasant, over to you.

[Vasant Prabhu, Vice Chairman and Chief Financial Officer]

Thank you, Al. Good afternoon, everyone. Our fiscal second quarter results were stronger than we expected with net revenue down 2% largely due to improving cross model volumes and lower than expected client incentives. GAAP EPS was flat to last year and non-GAAP EPS declined 1% helped by a lower tax rate. Exchange rate shift increased net revenue by 0.5 point, but lower EPS by 0.5 point due to currency related benefits in the second quarter last year.

As Al mentioned, as we lacked the most significant COVID-19 impact, starting in March, 2020, year-over-year growth rates are not the best indicator of the underlying trend. To help you better assess what the magnitude and the trajectory of the recovery so far, they also provided growth rates for key performance metrics relative to fiscal year 2019.

In constant dollars, global payments volume year-over-year growth was over 11% fueled by continued strength in debit, as well as improving credit spending. Compared to the corresponding quarter in 2019, the other payments volume was 16% higher, but 3 point acceleration from the first quarter. Excluding China, total payments volume growth was 13% or 20% higher than 2019 as Chinese domestic volumes continue to be impacted by dual branded card conversion, which have minimal revenue impact.

U.S. payments volume growth was 18% and up 24% from 2019 benefiting from economic impact payments in early January and mid-March, as well as the relaxing of COVID-related restriction in many States partially offset by bad weather lowering spending in mid-February. Even after adjusting for economic impact payments, U.S. payments volumes have bounced back to the people that trend line.

Debit growth accelerated 13 points to 34%, up 44% from 2019 boosted by the two economic impact payments in this quarter. Credit growth of 2% up 6% from 2019, the credit improvement of health by increases in retail, travel, restaurant and entertainment spending mostly starting in early March as restrictions were relaxed in many States. It is important to note that credit has improved without debits volume pointing to accelerated cash displacement. Card not present volume excluding travel continued to grow over 30% in the quarter and what 55% about 2019 levels primarily driven by retail spend.

The most notable sign of a domestic recovery was card presence spent growing 4%, which is up 3% over 2019 and 8 point acceleration from the first quarter led by retail and restaurant spending. Improving card presence spending did not slow e-commerce indicating that e-commerce trend is likely to continue even as card presence spent recovers. International constant dollars payments volume growth was 6% up 9% from 2019 a few regional highlights.

CEMEA remains our fastest growing region, growing 26%, up 50% from 2019 levels. The easing of COVID-related restrictions, particularly in the Middle East and Russia, as well as 0:25:52 drove the robust growth. Latin America grew 23%, up 40% from 2019, but consistently strong performance across the region mostly fueled by accelerating e-commerce adoption and usage as well as client wins.

Europe grew 2% up 8% from 2019, but decelerated from the last quarter, as many countries put significant COVID restrictions in place, particularly the UK, France, Italy and Germany. In Asia-Pacific, excluding China, second quarter spending grew 4% up 8% from 2019. Performance across the region vary based on the level of COVID restrictions that markets like New Zealand and Singapore growing strongly by markets like Hong Kong and Japan, which had restrictions for most of the quarter the weaker.

Global profits transaction growth was 8% up 16% from 2019 lagging volume growth due to higher ticket sizes, particularly in the U.S. and significant code restrictions in Europe. Visa direct continues to perform well. The transaction is growing almost 60% globally this quarter, consistent for the first quarter. The cross model volume recovery continued despite most models remaining completely or partially closed.

Constant dollars cross model volume excluding transactions within Europe declined 21% in the second quarter, another 75% of 2019 volumes. Looking at the trajectory versus 2019, this was a feed point improvement from the first quarter. We’re seeing the typical seasonal uptake in March and into April, which is a positive sign as we look ahead to the summer. Card not present excluding travel volume continued to be very strong growing 28% year-over-year, up 44% from 2019 driven mostly by retail spending and some benefit from cryptocurrency purchases. Cross model travel-related spend declined 55% year-over-year and more than 39% of 2019 levels.

Card presence spend as a percentage of 2019 expanded 3 points versus the first quarter. Some color on the state of cross model travel as we approach the important summer travel season. Travel to and from the U.S. and Latin America is the best performing corridor almost at 90% of 2019 levels by March. Help by U.S. travel, travel into Latin America in general has recovered to over 80% of 2019. Travel between Russia and neighboring countries, as well as travel in and out of the Gulf States has helped CEMEA cross model travel to recover two-thirds of its pre-COVID volume.

Cross model travel in and out of Asian countries remains very depressed down almost 75% versus 2019 and flat lining for the past six months. Travel into the U.S. an important corridor for us, but also down 70% versus 2019 in March, but hasn’t been recovering slowly. The significant U.S., Canada border restriction travel is still down about 80% relative to 2019 in this corridor. As Europe has increased COVID restrictions, travel in and out of Europe remain hard hit down over 50% versus 2019 in March.

Moving now to a quick review of second quarter financial results. Net revenue declined 2% as we recognized service revenues on current quarter payments volume, net revenue growth would have been slightly positive. Service revenues grew 8% helped by small pricing modifications. Data processing grew 11% with strong value-added services growth continuing to be partially offset by the mixed shift away from higher using cross-border transactions.

International transaction revenues were down 19% in line with nominal cross-border volume, excluding Intra-Europe. Other revenues were flat, negatively impacted by low usage of travel related card benefits and client marketing projects pushed to later in the year, while advisory services continued to grow strongly.

In total, value added services revenue continue to perform well growing 14% with strong growth in CyberSource security and identity solutions. This quarter, we reclassified some prior period travel related card benefits as value-added services. And as such, our previously reported first quarter revenue growth would have been similar to the second quarter on a comparable basis.

Prime incentives were 25.8% of gross revenues, lower than expected due to better than cross-border volume lifting gross revenue and lower Europe and Asia Pacific volumes benefiting client incentives. Non-GAAP operating expenses grew 3% in line with expectations. Recorded gain from our equity investments of $156 million. Excluding investment gains non-GAAP non-operating expense was $109 million for the fiscal second quarter, below our expectations, primarily due to benefits, one of which is offset in personnel expenses and the other is related to the completion of certain tax audits.

These completed audits also benefited our GAAP and non-GAAP tax rate with a non-GAAP tax rate lower than expected at 16.8%. GAAP and non-GAAP EPS was $1.38. We bought 8.3 million shares of Class A common stock at an average price of $208.51 for $1.7 billion this quarter. Including our quarterly dividend of $0.32 per share returned approximately $2.4 billion of capital to shareholders in the quarter.

Turning from the past to the future, I’ll start with key business driver trends through April 21. As we look at these weekly trends, keep in mind, three key factors. One, year-over-year growth is napping the 2020 lows in many cases. Two, the timing of Easter is impactful. Three, in the U.S., there are peaks in debit spending when economic impact payments are deposited in people’s bank accounts.

Through April 21, U.S. payments volume growth was 64% with U.S. debit growing 67% and credit up 61%. Compared to 2019, U.S. payments volume, debit and credit were up 29%, 51% and 9% respectively, all consistent with the March trend. Looking outside the U.S., trends versus 2019 are relatively stable, notable exception is included the UK improving as restrictions relaxed, while India is slowing as restrictions increase. Profits transaction growth was 58% up 16% from 2019, which is consistent with the second quarter.

Cross border volume excluding transactions within Europe on a constant dollar basis grew 63% and more than 78% of 2019, which is three points above the second quarter and one point above March. As we look ahead, there are several positive cross border travel indicators to highlight. Travel bubbles were being created. Australia, New Zealand is already in place with an immediate and substantial uptick in bookings. Hong Kong, Singapore is starting in late May with more likely.

So far, all indications are that some popular tourist destination in Southern Europe will be open for the summer and bookings are trending well. Just this week, it was announced that Europe’s border will be open to vaccinated visitors from the U.S. this summer. As a U.S. vaccination program moves along fast, it is possible that travel to and from the U.S. will gather momentum into the summer. Airlines are adding capacity in anticipation.

The trajectory of the cross-border travel recovery remains a key metric to watch. We will be monitoring all leading indicators, using a border restriction for the bookings, as well as surveys of consumer intention and we’ll update you as we learn more. As the previous quarters, accurate forecasting is difficult in this fast changing environment. Assuming stable to improving trends relative to FY2019 continue, Q3 net revenue growth is expected to be in the high teens.

The cross border travel recovery trajectory will be the key factor to watch. Client incentives as a percent of gross revenue are expected to increase 1 to 1.5 points above the second quarter level as client volumes grow significantly over the last year low. And so this fees are recognized that the quarter lag. We plan to increase operating expenses in the mid-teens in the third quarter, as we step up investments on marketing and key initiatives to capture the significant growth opportunities Al described.

We expect non-operating expense to be around $130 million consistent with the second quarter, excluding the non-recurring impacts I mentioned earlier. Our tax rate expectations are 19% to 19.5%, again, consistent with last quarter’s expectations before the tax audit completions in the second quarter, I mentioned earlier.

In closing, we’re stepping up our investments to drive accelerated growth in a post COVID world. A few points to highlight. Our net revenue on profit by the fiscal year 2019 levels, even as the rebound in travel, especially cross-border travel still remains ahead of us after the world is vaccinated and borders reopen. That a significant pent up demand for travel in particular, personal travel. Large swaths of new consumers worldwide have been introduced to the ease, convenience and security that digital payments can offer. This is evidenced by the significant global growth in debit as consumers abandoned cash at an accelerated pace.

These are habits we believe will not only stick, but also continue to grow help my initiatives such as staff to pay. Consumers, merchants and governments globally have recognized the value of e-commerce through the pandemic. Governments are upgrading the digital infrastructure, merchants are significantly enhancing their e-commerce capabilities and more consumers are turning to e-commerce across more categories and also cross-border. We expect these trends will only accelerate.

But in our new flows business, Visa Direct has continued to grow an extraordinary rates. The pandemic has expanded adoption of use cases in P2P, B2C and G2C, many use cases and markets are just starting to scale. B2B remains a huge opportunity and they’re committed to our three-pronged approach to drive growth, card based, cross-border and large enterprise accounts receivables and payables that many capabilities scaling or launching in the near future.

Our value-added services have sustained high growth, despite lower usage of travel related services. That is an e-commerce acceleration have driven growth in our debit processing, security and identity and CyberSource businesses and the recovery in travel related services lies ahead. As a result, we see acceleration across all three vectors of growth in consumer payments, new flows and value added services. As Al indicated, we’re investing in the strategies and capabilities required to capture these growth opportunities.

With that, I’ll hand it back to Mike for the Q&A session.

[Mike Milotich, Head of Investor Relations]

Thank you, Vasant. Jordan, we’re now ready to take questions.

[Operator]

[Operator Instructions] Our first question comes from Timothy Chiodo from Credit Suisse. Your line is open.

[Timothy Chiodo, Credit Suisse]

Thanks a lot for taking the question. I wanted to touch on the evolving mix of the cross-border business. So within cross-border, you call it out a couple of use cases for Visa Direct. Earlier you touched on remittances, you touched on marketplace payouts. But separately, we’d add to that list some of the new flows within cross-border B2B. So maybe you could just comment a little bit on the prospects for those new areas of cross-border to come into the mix and maybe the more meaningful portion over the next, call it, three to five years.

[Al Kelly, Chairman and Chief Executive Officer]

Well, I think as we grow out our capabilities, if you see the recovery in the pandemic. I think that these have payouts capability we just put in place, which basically brings together what was earth for. And Visa Direct is a single point of connection is going to facilitate many more use cases and make it very, very easy for, for people to spend money cross-border. And that’s kind of the high volume, lower value types of transactions.

I think we are continuing to make progress in connecting more banks around the world to B2B Connect. And as we complete the grow out of that network over the next few years, I see us as having great capability to drive cross-border B2B high value, lower volume types of transactions. So I think the combination of our capabilities, what has happened in terms of continued adoption of digitization and the capabilities that we have built in and the use cases that we are working with today and anticipate adding to the mix over time. I think this is going to become an increasingly important and growing part of our business.

[Vasant Prabhu, Vice Chairman and Chief Financial Officer]

A couple of things to add, before we got into the pandemic two-thirds of our cross-border business was travel related, one-third was e-commerce related. Today, in the second quarter two-thirds of our business was cross-border e-commerce, one-third was travel. It says two things, one how much our cross-border e-commerce business has grown and the second, how much recovery is left in our cross-border travel business, because Al has said, most of our cross-border travel is personal travel and there's a substantial amount of personal travel that is going to come back once border is reopened.

So the traditional, cross-border e-commerce is an area of significant growth we've seen that as people move online, they become somewhat less sensitive to where the product is shipped from. And there's just a lot more cross-border e-commerce. The other use case that pulls a lot of potential is to the extent that crypto related transactions become significant and they are enabling a vast number of them. One use case that is particularly useful in either stable coin or Bitcoin type of scenarios is cross-border. And that is another new use case that could have a lot of potential in the long-term.

[Timothy Chiodo, Credit Suisse]

Thanks, Vasant. That's exactly what I was trying to get at, the mix has certainly flipped to more e-com and there are some new flows that are coming in to keep the travel portion lower than it was pre-COVID. So thank you so much for taking the question.

[Vasant Prabhu, Vice Chairman and Chief Financial Officer]

Next question please.

[Operator]

Next question comes from Darrin Peller from Wolfe Research. Your line is open.

[Darrin Peller, Wolfe Research]

Thanks guys and nice job. When we look at the Slide, the index to 2019 was really helpful, showing 16% up from 2019 levels. I mean, there's a lot of considerations we're getting at about including stimulus and higher savings rates, but clearly also structural changes in the industry, which – some of which we just touched on e-com, but just more going on to debit cards faster across the whole industry. How do you parse out what you see as structurally sustainable, e-commerce is a part that you mentioned, but even beyond that, just more on maybe small ticket versus what was maybe stimulus driven or near-term? Thanks guys.

[Al Kelly, Chairman and Chief Executive Officer]

But – I will start Darrin. First of all, I think we definitely see millions of new people coming into the e-com shoppers who weren't there before, and I don't think they're going to turn backward at all. So I think that certainly remains obviously as we get out of the pandemic, the stimulus types of money will dry up and that will go away. I think the people being concerned about cash and much more comfortable shopping online, the combination of that will continue. I think that will also see structurally much more Tap to Pay as people find that to be a more helpful way to shop.

I think we're seeing governments during this pandemic become bigger clients and they're increasingly interested in showing the way in terms of digitizing more of what they do as a government and I think we'll see more of that activity taking as well. I think that, in general we had before the pandemic a very little separation in growth rate between debit and credit, in any given month or quarter, they would kind of grow within a percentage point of each other. We saw incredible separation during the pandemic as much as 40 points of differential incomes of growth.

We're now seeing in this quarter credit come back a bit and then start to drift into a positive territory. But I think that at least for the foreseeable future and maybe for longer, that I think you're going to see debit continue to grow above credit, although as travel comes back that should certainly help bounce back credit buyers, particularly since most of the travel co-brand cards and many of the actual travelers tend to use credit cards.

[Vasant Prabhu, Vice Chairman and Chief Financial Officer]

I mean, a couple of other things to add there is, as you know, debit has become the engine for cash digitization. And what we see in this pandemic, especially as it has gone on for quite a while, is there's often a hurdle in getting people to change habits. So people are used to using cash, getting them to use digital forms of payment, not take some time. This pandemic has called a range of changes in behavior, because there was no choice, whether it's an emerging markets, where there was a greater propensity to use cash or certain cultures, you've heard of Germany and Japan as having been very cash based economies for a very long time or habits in terms of people using cash for certain categories like food and drug that's changing, more people using more cash at the physical point of sale, as Al said, with the cash dirty risk, as well as Tap to Pay are making payments easy at the physical point of sale, we're seeing a substantial shift towards cash digitization, even at the physical point of sale.

And then the point you said about smaller and smaller transactions that used to be cash moving digital, again Tap to Pay is a big engine for that and the trajectory of Tap to Pay remains very significant. And we are probably within a year of coming to the point where the U.S. will be in takeoff with on Tap to Pay to which is a very big market.

[Darrin Peller, Wolfe Research]

Really helpful guys, thanks.

[Operator]

Our next question comes from David Togut from Evercore ISI. Your line is open.

[David Togut, Evercore ISI]

Thank you very much. Just bridging to Darrin’s question on structural changes, when you look at the heightened shift to e-commerce, which you've indicated will likely accelerate even post-COVID. Can you talk about your funding mix of e-commerce transactions, debit versus credit, specifically how you expect that to evolve with economic reopening, would you expect consumers to lean a little bit more heavily on their credit cards as the economy rebounds or should debit likely remain the primary funding of e-commerce transactions?

[Vasant Prabhu, Vice Chairman and Chief Financial Officer]

Well, David, I think one of the incredible stories of the pandemic was that, debit has become the cash of the e-commerce world and people are doing much more everyday shopping post the pandemic than they did pre the pandemic. The amount of food orders that are placed and takeout orders that are placed, buying normal household staples that might have been, many of them were in person or the vast majority and maybe even some of them were in cash. But we're just seeing the type of transaction that typically goes along with debit is everyday spend. And so what we're seeing as a real structural change is, everyday spend is food from in-person to e-commerce in a big way.

I do think though that credit will make a rebound particularly as some of the larger discretionary spending comes back in as the affluent get back into making travel reservations as the online travel agency business starts to grow. I think that there'll be a closing of the gap between debit growth and credit growth. But again, as I said to Darrin, I'm not sure that we get back to those two different card platforms growing at the same level going forward. I think we certainly closed the gap, but I think at least as far out as I'm looking right now, debit will continue to outpace the growth of credit.

[David Togut, Evercore ISI]

Thank you very much.

[Vasant Prabhu, Vice Chairman and Chief Financial Officer]

Thank you.

[Operator]

Our next question comes from Tien-Tsin Huang from JPMorgan. Your line is open.

[Tien-Tsin Huang, JPMorgan]

Hey, thanks so much. You gave a lot of volume growth, a good detail here. I want to ask maybe differently about credential growth building on the last couple of answers here. It seems like everyone is trying to bank their users by giving them cards and there's a lot of new use cases around virtual cards, so I'm wondering either kind of is either out, if you're thinking about credential growth and you compare that to 2019 or are you thinking about potential for issuance or the pipeline for new cards that might be coming out globally? How does that measure it today? If you want to qualify that, is it much larger than what you would have expected, let's say pre-pandemic?

[Al Kelly, Chairman and Chief Executive Officer]

Well, I think the – first of all, good to hear from you. I think that the pandemic has interrupted a little bit, a real bolstering of credentials that was driven by a combination of marketplace platforms, wallets, Neobanks et cetera. I cited a number of examples in my remarks about the fact that we think that there's upwards of 2 billion more credentials out there from a lot of those types of players and we've seen, but I do it by building partnerships with numbers of Fintechs over the course of the last year or two, a tremendous amount of opportunity to grow these credentials. Either by having these players become issuers and acquirers for us, which is a very big and important trend particularly in developing countries, but also just getting currencies and credentials into some of the existing wallets. But we believe there's an enormous opportunity to grow the number of credentials. And it's something that we're certainly focused on particularly as we talked to the FinTechs, the Wallets, and then the Neobank around the world.

[Tien-Tsin Huang, JPMorgan]

Appreciate that.

[Al Kelly, Chairman and Chief Executive Officer]

Thanks Tien-Tsin.

[Operator]

Our next question comes from Dan Dolev from Mizuho. Your line is open.

[Dan Dolev, Mizuho]

Hey guys. Great quarter. Thanks for taking my question. Can you talk a little bit – you spoke a little bit about Bitcoin earlier and about the used case for Crypto and Bitcoin on cross border transactions. Can you talk a little bit about – more about that and kind of the progress you're making on settlement and stable coins and the steps you've taken on a theory. I think there's a lot of interest out there and what you guys are doing there and how it's progressing? Thank you.

[Al Kelly, Chairman and Chief Executive Officer]

Well, thanks, Dan. This is an interesting subject. So let me give a little bit of background to talk about where we see the opportunities. So first of all there's two market segments as we see it. No one is, are the Bitcoin to kind of, which are primarily assets held by people, they're not used much in a form of payments. We kind of think of them as the digital gold, and then there are digital currencies including central bank digital currencies and stable coins that are directly backed by existing fiat currencies, and they're definitely emerging as a payment option. And they're running on public blockchain, which is really an essence and additional network, much like an RTP or ACH might be. So our focus is on five different opportunities that we see in this space.

And I would say that this is space that we are leaning into in a very, very big way and I think are extremely well positioned. The first opportunity is really at the core of what we do, which is enabling consumers to make a purchase of these currencies or Bitcoins, and we're working hard with Wallets and exchanges to just make sure we're facilitating acceptance of people's ability to use their Visa cards to buy. And besides referenced that in his remarks that we through our some increase, some of them by paying for people making these purchases on Visa card.

Secondly, the second opportunity is enabling digital currency cash outs to fiat. So converting a digital currency to a fiat on a Visa credential, which then makes that those funds available for shopping at any one of the 70 million Visa merchants and gives immediate utility to the digital currency and we're the clear leader here. We've got over 35 digital currency platforms and wallets that have chosen to work with us. Coin based crypto.com, block five-fold BitPay are just some examples. And, so that's certainly the second big opportunity.

Thirdly is enabling financial institutions and FinTech partners to be able to have a crypto option for their customers. So what we've done in this space is we created APIs that enable financial institution customers to purchase custody, or even trade digital currencies held by anchorage, which is the first federally charted digital asset bank in the U.S. and we've done our first rollout with first Boulevard, which is a digital Neobank focused on building generational wealth for the black community. So that's the third opportunity just helping FIS and FinTechs have this crypto option for their customers.

Four point is settlement, which you started to reference, we've upgraded our infrastructure to allow a financial institution to settle with Visa in a digital currency with stable coin, starting with USDC. As you think, today we transact in 160 currencies every day, and we settle every evening in 25 currencies. So we're going to now be able to support digital currencies as an additional settlement currency on our network. And on our end, we're going to settling in USDC is pretty similar to settling in U.S. dollars, but the mechanics of receiving these funds is a bit different and requires just some integration work with several crypto custodian like players like anchorage.

And then the fifth area of opportunities just working with central banks. Central bank digital currencies being explored in many nations and I think it could end up being proved to be quite valuable in countries where the infrastructure to distribute cash is either unavailable or limited. And it's one of the factors that hinders these 1.7 billion people I referred to on remarks that are outside the financial mainstream for being in the financial mainstream.

So we're talking to central banks about the criticality though of public private partnership, and in particular the criticality of acceptance, because for these central bank digital currencies to have value they're going to have to both these secure in the minds of consumers and that's something we have a long track record with and can help. And then secondly, obviously they have to have some form of utility. So Dan, that's a bit about how we're thinking about crypto with our real focus on digital currencies and those five opportunities.

[Dan Dolev, Mizuho]

Thank you, Al. Yes, it definitely sounds like you guys are at the forefront of these. So recharge on that. Thank you.

[Operator]

Our next question comes from Lisa Ellis from MoffettNathanson. Your line is open.

[Lisa Ellis, MoffettNathanson]

Hi, good afternoon guys. Al, I'll use your comment there that debit is becoming the cash of online transactions as an opening task about the online debit competitive environment. Can you just highlight or describe what in your view from Visa's perspective are the advantages of Visa signature debit products over alternatives like account-to-account transfers or pinless debit for online transactions? Thank you.

[Vasant Prabhu, Vice Chairman and Chief Financial Officer]

Al, I think you're on mute.

[Al Kelly, Chairman and Chief Executive Officer]

Sorry, Vasant. I'd better tread a little bit lightly there in light of the DOJ case, so we feel very good about our Visa debit business. We think we've got very, very good capabilities and we believe that the innovations that we have the ability to stand behind customers in disputes and other cases makes our products something that both consumers, merchants and issuers look to true. And we will continue to invest in debit for a product that we hope people use both online and in purchases around the world.

[Lisa Ellis, MoffettNathanson]

Perfect. Thank you. Thanks for covering.

[Operator]

Our next question comes from Dan Perlin from RBC Capital Markets. Your line is open.

[Dan Perlin, RBC Capital Markets]

Thanks and good evening. I in keeping with the kind of structural change being that we all seem to be on tonight. All of these new products, I'm just wondering how the long-term growth rates of the company are going to be sustainable if not accelerating from these kind of levels. You're using these indexes back to 2019, but I'm thinking back even a couple of years, it's a much larger organization. You seem to outline many potential avenues of growth. So I'm wondering, are you at a point now where there is just this pivot in the actual business itself where it constructionally grow faster than they did over the next five to 10 years, then maybe you did over the prior five to 10 years, just given all of the new constituents that you're ultimately servicing these days?

[Al Kelly, Chairman and Chief Executive Officer]

Well, Dan, we don't typically get into forecasting out that far, but obviously you hopefully got a good sense in my remarks that we feel like we have three very strong growth drivers and we think each of them has tremendous gas left in the tank. We – and our consumer payments which has been our staple for years still has huge upside, you're back to Tien-Tsin’s question about credentials growth. We think there is tremendous amount of growth in credentials, we think there is tremendous amount of growth in acceptance footprint. We think there is a tremendous amount of growth when we look at various geographies, and we look at the 1.7 billion people that are outside the financial mainstream.

When we look at new flows there is $185 trillion of opportunity there. So we think we've got two big efforts going in both B2B and Visa directed to take advantage of those. And value-added services is relatively new as well, but we've got to – in terms of how we talk about it, we've had many value-added services or capabilities or solutions for years and they've always contributed well to our revenue, but we were increasingly been focused on them the last two years. And we’re driving a lot more revenue and higher revenue growth than we had in consumer payments through value-added services.

And so we think there is still a tremendous amount of upside there, I commented about the fact that we're getting high usage from a lot of our clients, but there is still a huge amount of room to grow with existing – with clients that are already using value-added services, as well as clients that are not assuming as many of their value-added services. So I look ahead and say the future is very, very bright and adding on top of that a lot of what we've talked about in terms of digitization and the fact that we will come out of this pandemic and we'll start to see travel recover all of those are extremely good trends for us.

[Dan Perlin, RBC Capital Markets]

Excellent. Thank you so much. I appreciate it.

[Operator]

Our next question comes from Harshita Rawat from Bernstein. Your line is open.

[Harshita Rawat, Bernstein]

Hi, good afternoon. Thank you for taking my question. My question is on the growth in buy now, pay later. In a very long time horizon, how do you see the NPL coexisting with credit and debit? And I know it’s globally very small right now, but the growth rates are very interesting. Given your partnerships with the NPL providers your installment relations, it’s a growth here as it's growing opportunity from your perspective. Thank you.

[Al Kelly, Chairman and Chief Executive Officer]

I don't know where installments is going to end up, but we are attacking that, like we attack crypto and other things and assuming that it's going to be successful and that we want to lean in heavily and be in the middle of it and be a driver of what's going to potentially happen. As you alluded to, we have both strategy working with third-party providers as well as offering our own Visa proprietary platform that would allow issuers to offer their own buy now, pay later capability. And we see it as potentially having a very, very good effect for us. I mean, we could see – we could work with a whole bunch of options, virtual cards from Visa could be used for repayments, a Visa card on file could be used for repayment, we could explore Visa Direct as a way for installments to be paid off.

And in many of those cases, if that's the case, what ends up happening is a single purchase turns into a number of installments. So that one transaction can end up being three to four or five payment transactions, which is certainly very, very good for us. We also think that this is a space where we can sell value-added services, data analytics broadband providers underwriting for example are risk products to help some of the third-party provider. So we’re doing a lot in this space, we're committed to it, there are countries where it has taken off, there is other countries where it's nascent. Again, I can't predict exactly where it's going to land, but we are going to the degree that it takes off, we're going to be there to be part of it.

[Harshita Rawat, Bernstein]

Great. Thanks, Al.

[Operator]

Our next question comes from Jamie Friedman from Susquehanna. Your line is open.

[Jamie Friedman, Susquehanna]

Al, in your prepared remarks, you talked about the trajectory and the spend per card, I was hoping you could elaborate on that. How you see that evolving, I would think with the recovery of travel, there would be more gas in the tank, there as well? But anything you have on spend per card, would appreciate it. Thank you.

[Al Kelly, Chairman and Chief Executive Officer]

Well, in my remarks, what I believe I referenced was that in travel, we were seeing higher spend per card versus seeing more people active. And while we haven't been able to study that, what we think is happening is that with – in places that people can travel, there tend to be also just less restrictions. And that's just opening up more options for people to actually spend. And for instance instead of doing takeout, go to a restaurant and eat a more expensive meal or a nice bottle of wine and et cetera. So I think that right now, what we're seeing is simply higher spend per card in terms of travel. We haven't commented on spend per card beyond that.

[Jamie Friedman, Susquehanna]

Got it. Thank you.

[Al Kelly, Chairman and Chief Executive Officer]

One last question, Jordan.

[Operator]

Our last question comes from Jason Kupferberg from Bank of America. Your line is open.

[Jason Kupferberg, Bank of America]

Hey guys. Thank you. I was just curious if you could share with us some of your underlying assumptions for the different gross revenue lines, if we look at the high teens revenue growth outlook for the June quarter, I know there is a lot of moving parts in the macroenvironment, it just seems like high teens could maybe be conservative based on what you've seen in April so far, even though I know the comps won't be as easy in May in June. So would just love to hear more about how you're thinking about the different pieces of gross revenue, because you outlined the rebate piece pretty clearly.

[Vasant Prabhu, Vice Chairman and Chief Financial Officer]

On revenues – high teens is our best estimate. Service revenues as you know were recognizing with a quarter lag. So the service revenues you've seen in the third quarter remember will not reflect the revenues related to the volumes in the third quarter. So the third quarter will have a big ramp in volumes as you're seeing, because we're lapping, but the revenues in service fees will reflect the revenues from the volumes in the second quarter, it's important to remind people of that.

In terms of the cross border business, I think you see what the trends are. In terms of transactions, I think the trends are fairly stable at this point quarter-over-quarter. A point to make on incentives, it's important for you to note that last year third quarter was when our incentives were really hit because volumes declined, even though we recognized and received that allowed – our incentives are recognized in the quarter based on quarter volumes. So this quarter we'll see a big ramp in volumes relative to last year, which are going to cause incentives to go up a lot and be compared to a quarter last year where they went down.

The second thing is, we have these incentives tied to certain thresholds being achieved last year because of all the drops, thresholds were not achieved, this year we're resuming the ability, so you get an additional amount of incentive, because clients are going to hit certain thresholds. So you have to factor in the fact that year-over-year incentives growth is going to be quite high in the third quarter and factor in the fact that we won't have the benefit of the volumes in our service fees because of the lag. So you should make sure you have all that as you think about our third quarter revenue growth.

[Jamie Friedman, Susquehanna]

Right, okay. Well, thank you for all the color.

[Al Kelly, Chairman and Chief Executive Officer]

And with that, I'd like to thank everyone for joining us today. If you have additional questions, you can always reach out to myself or Jennifer and we're happy to help you. So thanks so much and have a great day.

[Operator]

Thank you for your participation in today's conference, you may disconnect at this time.