Deutsche Bank Research, Reshaping Models in Covid-19 World
Summary
This is a Deutsche Bank Research North America report dated 15 April 2020, Payment Networks: Reshaping Models in Covid-19 World, by Research Analyst Bryan Keane and colleagues. It lowers estimates for V and MA, expecting revenues for V to decline -1.5% cc in FY20 (from prior +10.7% cc) and MA to grow +0.7% for its FY20 (from prior +15.4% cc). It models a rebound in revenue growth for V in FY21/FY22 to +11.1%/+13.7% cc. The report notes that the networks both pre-announced results for the upcoming quarter at the end of March and withdrew their full-year outlooks. It reiterates Buy ratings on V and MA.
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Deutsche Bank
Research
North America Industry Date
United States 15 April 2020
Payment Networks
TMT Forecast Change
Payments, Processors,
& IT Services
Reshaping Models in Covid-19 World
Bryan Keane
Lowering near-term outlook and looking beyond crisis Research Analyst
As headwinds from COVID-19 have intensified, expanding beyond cross-border +1-415-617-4246
travel into domestic volumes globally offset by strong eComm growth, we are Marcel Abend
lowering our ests for V and MA. We now expect revs for V to decline -1.5% cc in FY20 Research Associate
(from prior +10.7% cc) with MA growing slightly faster at +0.7% for its FY20 (from +1-904-645-4197
prior +15.4% cc) due to a partial contribution from the Nets acquisition, V having a
Korey Marcello
1 qtr lag in service revs, and V’s fiscal year-end being Sep (1 less qtr of lower
Research Analyst
recovering growth). Positively, however, we believe the economic shutdowns and +1-904-527-6235
stay-at-home orders are helping accelerate the shift to digital. In addition, stimulus
packages deployed globally bode well for supporting consumers and business
during the slowdown and we see potential for a recovery. In addition, client
incentives act as a partial natural hedge to rev growth. We are modeling a rebound
in rev growth for V in FY21/FY22 to +11.1%/+13.7% cc (from prior +12.6%/+11.4%
cc) and for MA in its FY21/FY22 to +17.7%/+13.2% cc (from prior +15.5%/+13.3%
cc) as MA should continue to benefit from the Nets acquisition in FY21 creating
difficult comps in FY22. In addition, lower expenses help partially protect the
bottom-line. We are lowering our FY20/FY21/FY22 EPS estimates for V from $6.09/
$7.17/$8.23 to $5.31/$6.09/$7.24 and for MA in its FY20/FY21/FY22 from $9.00/
$10.83/$12.95 to $7.69/$9.58/$11.31. We reiterate our Buy ratings on V and MA.
Cross-border headwinds offset by eComm strength
Cross-border volume strength through the Jan update, with V growing ~8% cc and
MA ~15% cc, appears to have slightly accelerated into Feb as V’s COVID-19 update
shows estimated ~10% cc growth for the month (partially helped by leap year).
However, growth for V moderated to -19% cc in March and we est. an exit growth
rate of -28% cc with similar decelerating trends for MA. Although travel volume
growth decelerated through March, dropping +80% in recent weeks, physical
eComm has accelerated from +20% Y/Y in Jan/Feb to +34.4% Y/Y in March (see our
4/8 note, “Booming eComm Strength Sustainable”). In addition, we see new users
and habitual changes accelerating the trend to online benefitting V and MA
particularly as they roll out Click-to-Pay. We are assuming cross-border volume
growth bottoms in the June-ended qtr at down ~30-40% Y/Y and rebounds
thereafter over time. In addition, cross-border yields don’t vary by card-present vs.
not-present and travel vs. eComm but there is a data processing premium for cross-
border. Further, disruptions could actually be positive for value-added services
demand (e.g., risk products), which should hold up better in a downturn (more fixed
Deutsche Bank Securities Inc.
Distributed on: 15/04/2020 04:57:08 GMT
Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware
that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report
as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED
IN APPENDIX 1. MCI (P) 066/04/2019.
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15 April 2020
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in nature).
Domestic volumes soft but habitual digital changes positive
As per the V COVID-19 update, US payment volume growth accelerated from ~10%
in Jan to an estimated ~14% in Feb before declining -4% in March with an estimated
exit growth rate of -20% for the month. Strength has been driven partially by debit,
which benefits from higher non-discretionary spend in categories like grocery. In
addition, we est. processed transactions growth of ~13% cc in Jan for V accelerated
to ~15% in Feb before moderating to -2% in March with an estimated exit growth
rate of -17%. Tap-to-Pay transactions globally, which are starting to gain a foothold
in the US, have gotten a boost from COVID-19 due to social distancing efforts,
which we expect to accelerate the shift, increase share of digital small dollar
transactions, and improve Network volumes over time. We are assuming total
payment volumes and transaction growth potentially bottoms at down mid to high
teens in the June-ended qtr before improving over time. In particular, we will be
monitoring small business failures and the timing of stimulus relief programs (see
our 4/5 note, “Dire Small Business Warning”). The Networks are also well
positioned, through Visa Direct and MasterCard Send, to facilitate gov’t
disbursements and through fintech partnerships.
Natural client incentive hedge, expense control, and pricing push-out
Although volume headwinds will impact Network revenue growth, client
incentives positively act as a partial natural hedge. Incentives are tied to payment
volumes and are not typically specific to cross-border. As a result, gross revenue will
fall more than the incentives offset. However, due to the structure of incentives,
which tend to be based on life of the deal or multi-year, the Networks could further
benefit from incentives accrued being released creating an incremental hedge in
case of a sustained downturn. In addition to natural hedges to the bottom-line, such
as travel spend, the Networks have taken incremental steps to lower costs. For
example, V has updated expense growth guidance from mid-teens to high single
digits in 2Q20 and we expect cost-cutting benefits to ramp further over time.
However, due to COVID-19, V is operating under a freeze with normal releases (~2
annually) being on hold until further notice. As a result, pricing changes expected
to go into effect in the back half of FY20 are currently being pushed out (impacting
service and international transaction fees) and FY19 price increases will
anniversary.
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Quantifying the Potential
COVID-19 Headwinds
Networks pre-announce and pull full-year guidance
The networks both pre-announced results for the upcoming quarter at the end of
March, lowering guidance due to increased concerns and uncertainty around
COVID-19 headwinds, and withdrew their full-year outlooks. Initially, the impact
from COVID-19 was limited to cross-border travel volumes primarily in Asia, in
particular cross-border volumes from China, where the virus first developed.
However, as the virus spread across the globe leading to economic shutdowns,
cross-border travel headwinds have intensified and the impact of COVID-19 has
spilled into domestic volumes globally. Although essential categories like grocery
initially benefitted from stockpiling, growth has normalized and non-essential
categories such as restaurants have been hit hard. In addition, due to the
vulnerability of small businesses, there is concern that we could see significant
failures, layoffs, and permanent damage to the economy. Positively, eCommerce
shopping has gotten a boost from stay-at-home orders despite some initial supply
chain issues coming out of China. In addition, governments around the world
including in the US have deployed significant relief programs to help small
businesses, large merchants, specific categories hit hard by the virus, and
consumers through direct checks in the mail. As a result, we will continue to
monitor for a potential recovery globally, which will depend on the spread of the
virus, duration of the economic shutdowns, and speed at which stimulus can get
into the hands of businesses and consumers.
Visa pre-announcement
Initially, on March 2nd after the close, V updated their guidance factoring in the
potential cross-border impacts from COVID-19. The company expected the virus to
create a net revenue headwind of ~2.5-3.5% to the previously guided low-double
digit net revenue growth in constant dollars. However, the run-rate impact only took
into account trends seen through Feb 28th and some continuing deterioration in
early March, which did not fully reflect the virus spreading outside of Asia. Later into
the month, as the Virus spread globally, V adjusted guidance again claiming that
transaction volumes began seeing significant impacts due to COVID-19's effect on
consumer spending and cross-border travel related spending. As a result, V (on a
constant dollar basis and ex acquisitions) guided to 2Q20 revenue growth in the
high end of mid single-digit with an a 150bps FX tailwind and a 50bps drag from
acquisitions. Furthermore, V expects adjusted operating expenses in the low end of
the high single-digit range and adjusted EPS in the high end of mid single-digits
including an 150bps FX tailwind and a 1pt acquisition tailwind.
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Figure 1: Visa 2Q20 Guidance
Source : Visa
MasterCard pre-announcement
After the close on February 24th, MA originally quantified the expected 1Q20 impact
from the Coronavirus at a 2-3pt drag to revenue growth vs previously guided
expectations at the end of January (expecting ~9-10% cc rev growth ex-
acquisitions for 1Q20). This adjustment mainly took into account the cross-border
impacts from the virus, which were primarily only in Asia at the time.
Subsequentially, due to the spread of the Virus across the globe, MA saw further
deterioration in cross-border, switched volume and switched transaction metrics
leading the company to readjust guidance again on March 24th. MA now expects
1Q20 (currency neutral and ex-acquisition) net revenue growth in the low-single-
digit range with a 200bps FX drag and a 100bps tailwind from acquisitions and
expects operating expenses to be in the low- to mid-single-digit range.
Figure 2: MasterCard 1Q20 guidance
Source : MasterCard
Analyzing the run-rate volume impact
Visa has provided the below table to show the percentage change in key metrics
quarter-to-date from January 1st through March 28th and month-to-date from
March 1st through March 28th. Looking at the quarter-to-date data, we can see the
impact to cross-border started much earlier and intensified into the back half of the
month of March spilling into domestic volumes as seen by the month-to-date data.
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Figure 3: Key growth metrics
Source : Visa
For example, US payment volumes for V grew ~7% in 1Q20 and through the Jan 28th
update they grew ~10%. Assuming ~10% growth in Jan and -4% growth in March
per the metrics below, this would imply ~14% growth in the month of Feb. In
addition, assuming ~12% growth in 1H of March, this would imply US payment
volumes declined ~20% in the back half of March. We have done a similar back-of-
the-envelope analysis for Credit and Debit, which shows that debit is holding up
better than credit as expected but both Credit and Debt growth was strong in Jan
accelerating into Feb.
Figure 4: Visa US payment volumes analysis
Source : Company data, Deutsche Bank estimates
For the cross-border volumes, we know that the impact to travel started much
earlier in the quarter and intensified into March as travel bans were implemented
while eCommerce volumes likely accelerated into the back half of March as stay-at-
home and shelter-in-place orders were implemented helping partially offset some
of the headwinds. Using data from the Jan 28th update, which showed cross-border
growing ~8% constant currency and ~7% normalized for Intra-Europe, as well as
the data above from the COVID-19 update, which shows month-to-date growth in
March of -19% constant currency and -23% normalized for Intra-Europe, we can
see that cross-border growth actually accelerated in Feb despite headwinds in Asia
travel starting. However, growth has dropped off significantly into the back half of
March.
Figure 5: Visa cross-border volume analysis
Source : Company data, Deutsche Bank estimates
Similarly, using data from the Jan 28th update and the COVID-19 update, we have
analyzed overall processed transactions and estimate that growth accelerated from
~13% in Jan to ~15% in Feb with strong growth in 1H of March and deteriorating
growth to -17% exit rate in the back half of March.
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Figure 6: Processed transactions
Source : Company data, Deutsche Bank estimates
Updating estimates based on run-rate and potential
recovery
Based on the current run-rate of payment volumes exiting the quarter, and
assuming the most significant impact from COVID-19 occurs in the June-ended
quarter with a gradual rebound month over month starting in May, we have updated
our V and MA estimates. We are assuming debit transactions hold up better than
credit due to non-discretionary spend with cross-border seeing the biggest drop in
volumes due to exposure to travel offset partially by eCommerce. In addition, we are
assuming the networks will be able to partially offset some of the headwinds
through lower volume-based incentives.
One of the key differences with V over MA is that V will see less of a drag on revenue
in the upcoming March quarter versus MA because of the lag in Service fee revenue,
which will start to flow through in the following quarter. In addition, MA should
recover in terms of its revenue growth rate faster in the back half of the year due to
the acquisition of Nets, which we are assuming comes on starting in July impacting
the model starting in the Sep-ended quarter. Furthermore, we are assuming that the
impact to margins will be most pronounced in the June-ended quarter with margins
gradually recovering on a year-over-year decline basis as expense controls kick in
and volume growth returns.
We now expect revenues for V to decline -1.5% cc in FY20 (from prior +10.7% cc)
with MA growing slightly faster at +0.7% for its FY20 (from prior +15.4% cc). MA
will benefit from the Nets acquisition coming on in 2H of its FY20. However, V has
a 1 qtr lag in service revenue and its fiscal year-end is September versus MA's being
December, so it will have 1 less quarter of lower recovering growth in its FY20
numbers.
We are modeling a rebound in revenue growth for V in FY21/FY22 to +11.1%/
+13.7% cc (from prior +12.6%/+11.4% cc) and for MA in its FY21/FY22 to +17.7%/
+13.2% cc (from prior +15.5%/+13.3% cc). MA should continue to benefit from the
Nets acquisition in FY21 for 1H of its fiscal year creating difficult comps in FY22.
However, both V and MA will benefit from easier comparisons particularly in FY21
and in the June-ended quarter for that year.
In addition, lower expenses help partially protect the bottom-line. V and MA should
benefit from lower expenses like travel and marketing as well as from incremental
spending cuts. However, we expect margins for both companies to be impacted
near-term and recover over time. We are lowering our FY20/FY21/FY22 EPS
estimates for V from $6.09/$7.17/$8.23 to $5.31/$6.09/$7.24 and for MA in its FY20/
FY21/FY22 from $9.00/$10.83/$12.95 to $7.69/$9.58/$11.31.
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Cross-Border Travel
Headwinds Offset by
Strong eComm Growth
Cross-border payment volumes, which are more profitable than domestic
transactions, are made up of both online eCommerce as well as international travel.
With many airlines cutting flights and governments imposing international travel
bans, we have seen cross-border travel related volumes suffer materially, which is
expected to continue in the near term. Data from the US Transportation Security
Administration shows that travelers checking in for flights in the US have
significantly diminished since March 1st, and a Reuters report showed similar
deteriorating travel trends across the globe with air traffic being significantly down
across regions. As per the Signifyd COVID-19 Weekly Pulse Report for eCommerce,
eCommerce sales have cumulatively grown ~19% in March compared with
February levels. Although eComerce sales initially declined 2% in the first week of
March compared with Feb exit levels, likely due to some of the supply chain issues,
growth was flat in the second week of March and handily accelerated into the back
half of the month. In addition, the first week of April saw the largest weekly %
change since the end of Feb. (+17%) bringing the total cumulative growth to ~40%.
Furthermore, Signifyd saw strong Y/Y eComm trends in March with eComm
volumes tracking well ahead of pre-virus CAGR models and no signs of slowing
down.
US travel volumes
According to data provided by the US Transportation Security Administration, TSA
checkpoints beginning in the month of March have dramatically decreased Y/Y
implying a slowdown in travel within the country. Though volumes were slightly
down in the beginning of March, the decrease rapidly accelerated starting mid-
March, progressively reaching the -90s territory towards the end of the month.
Similarly, data from FlightAware shows that US international flights saw a drop of
~83% Y/Y as of March 30th and US domestic flights were down 51% Y/Y by month-
end. Early April data from the US TSA also shows that travel remains down and will
likely continue until the pandemic concerns pass.
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Figure 7: TSA checkpoint travel numbers
Source : Transportation Security Administration
Travel down across the globe
According to a Reuters report leveraging FrightAware data (tracks air traffic in real
time), there has been an ongoing decline in flights across 4 major regions as
governments implemented restrictions to contain virus outbreaks in the first
quarter of 2020. The latest data shows that in the week of March 24th - 30th, the
number of flights tracked by FlightAware across the globe were down ~44% with
only 280k flights in comparison with 500k the same week in 2019. Overall, Global
flight volume by the end of March showed a 72% decline Y/Y, with major
deteriorations beginning on March 3rd as the virus spread into Europe and the
Middle East.
Figure 8: Global flight volume
Source : Reuters
Before authorities closed travel into Wuhan, China was seeing air traffic that was up
~7% as of Janurary 7th, which then rapidly dropped +80% following the travel
restrictions. Similarly, the Middle East was showing air traffic relatively in line with
the previous year and then began falling rapidly as of Feb. 29th, which was two days
before the US restricted travel from Iran. In addition, Europe was on a similar path
up until March 2nd, when air traffic began free falling as well following the lockdown
of towns in Italy by Italian officials.
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Figure 9: China (orange), Middle East (green) and European (blue) flight
volumes
Source : Reuters
eComm Trending Higher
As the spread of the COVID-19 virus caused cities across the globe to implement
stay-at-home protocols, consumers began to avoid going out into the public and
many businesses closed. As a result, a shift in consumer behavior has been
observed, where the decrease in in-person commerce has led to a lift in online
purchases across all industries. According to Signifyd data, which excludes Travel
and Amazon, COVID-19 has led the B2C eComm market CAGR projections to
accelerate between 1-2 years ahead of schedule, with some verticals and
geographies showing jumps as high as 4 years ahead of their initial projections.
Within Signifyd's same storefront (online) Y/Y sales, the company observed growth
of 34.4% Y/Y in March vs last year and they observed an 18-month acceleration on
CAGR models. This compares with the 15% 2020 estimated growth by Statista prior
to the crisis and ~20% growth seen by Signifyd in Jan and Feb. Furthermore, the
most recent Signifyd data showed that although online spending has increased
every week since the outbreak, the increase during the week ended April 6th has
been the biggest increase to date, contributing to a nearly 40% increase in eComm
sales since the end of Feb. For further details, see attached in the back of this report
our note "Booming eCommerce Strength Sustainable" where we met with
Signifyd's Vice President of Operations and Corporate Development J. Bennett.
Figure 10: Pre-COVID-19 US eCommerce Market - Physical Goods Shipped ($m)
Source : Statista
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Figure 11: Signifyd - Physical Shipped Goods Growth Observed in March Post-
COVID-19
Source : Signifyd
In addition, Signifyd has seen a surge in eCommerce transactions as well as new
online shoppers. The surge in new user levels are comparable with those of
Cyberweek and holiday seasons, and these cohorts are maturing into repeat
customers showing no signs of a potential slowdown. Furthermore, Signifyd's data
is showing trends of new users converting into repeat buyers at accelerated rates
compared with previous periods. As cohorts mature, the data shows that they are
much more likely to become repeat users implying that the share of wallet that is
transitioning to online seems to also be holding up pretty well. Typically, ~50% of
new user cohorts mature into repeat online shoppers within 30 days and Signifyd
believes this relationship should hold. As a result, eCommerce growth should
benefit longer term making prior CAGR projections too low. In particular, Signifyd
has seen acceleration in online volumes across multiple regions impacted by
COVID-19 (e.g., APAC, EMEA, LatAm, and the Americas) correlating to the wave of
shelter-in-place and work-from-home orders. For example, the US is seeing a ~18
month acceleration in its CAGR and some markets are as much as ~4 years ahead
of prior projections.
Figure 12: New Users
Source : Signifyd
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Figure 13: Repeat Users by Cohort Age
Source : Signifyd
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Monitoring Small
Businesses and Domestic
Volumes
Small businesses make up ~$10trn in GDP and ~55% of American jobs. Unlike
previous financial crises, the massive effect of this economic slowdown began with
small businesses shutting off due to lockdowns and stay-at-home measures
because of the COVID-19 virus. As a result, there is no typical trickle-down effect on
small businesses, and although the government is going well out of their way to
help out with a large stimulus package, if they don’t figure out how to quickly deliver
capital to small business owners, many SMBs won't survive. According to Womply,
the company is seeing tons of data (excluding large businesses and accounting for
seasonality) showing the devastation to small businesses with a large amount of
closures across all industries. Although most industry revenues are down
considerably Y/Y, some industries such as Groceries and Retail/Services saw a
spike in recent weeks as a result to panic buying. However, Womply expects these
to fall over the coming weeks as most consumers' panic buying sprees come to an
end. In addition, there is disproportionate harm to hourly workers, where the
amount of hourly workers scheduled to work fell by ~70% in the last week of March.
Total domestic card volumes
In their pre-announcement press release, Visa showed that their US payment
volumes quarter-to-date (January 1-March 28, 2020) showed 7% Y/Y growth and
month-to-date (March 1-March 28, 2020) showed -4% Y/Y growth. In addition,
processed transaction were up 9% QTD and down 2% MTD implying that for both
US payment volumes and processed transaction, growth began deteriorating in the
month of March and we believe MA is likely seeing similar trends.
Figure 14: Key Metrics Y/Y
Source : Visa
Womply COVID-19 Data Dashboard
Among the top level industries namely Retail & Services, Restaurants, Grocery
Stores and Travel and Tourism, there have been widely differing impacts thus far as
a result of the virus. Womply data shows that up until March these industries were
overlapping pretty closely; however, beginning in March, with a more pronounced
impact in 2H, we see that Travel & Tourism as well as Restaurants plummeted. Retail
& Services was slightly impacted but not as much, with sales growth dropping into
negative territory in the 2H of March and bouncing back in more recent weeks.
Furthermore, the data shows how Grocery Stores sales rose sharply mid-March,
likely due to panic consumption; however, towards the end of March sales began
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to slow down significantly as consumers satisfied their hoarding needs.
Figure 15: Top level industries - sales Y/Y
Source : Womply
Womply data also provides an outlook on the amount of local businesses across
different categories that have stopped processing carded transactions since the
start of the virus outbreak in comparison with those that were actively processing
transaction since Jan 1st 2020. The numbers vary significantly by industry, with
Health and Beauty businesses seeing the most closures at 89% followed by Arts/
Entertainment businesses at 74% and Bars and Lounges at 66% (as of April 8th).
Positively, categories such as Pet Services, Auto Services, and Food and Beverage
Shops have seen closure rates only in the single-digit to low double-digits range.
Figure 16: Business closure rate by category
Source : Womply
SMB Hourly Workers
According to data from Homebase, an employee scheduling company for over 100k
businesses, the number of SMB employees and amount of hours worked by each
has seen a significant decline in March. The latest data shows that the numbers of
employees going to work was down ~60% with the number of hours worked down
closer to ~70%. Not only are the number of people working much less, but the hours
of those that do get to go into work have been significantly cut.
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Figure 17: Change in hours worked by SMB employees in US
Source : Homebase
Figure 18: Change in number of hourly SMB employees going to work in the US
Source : Homebase
In addition, Homebase data, not surprisingly, shows that the number of businesses
that remain open are significantly decreasing with time. There was a higher
percentage of closed businesses among cities with lockdown implementations;
however, the total US numbers are quickly following.
Figure 19: Percentage change in number of SMBs open
Source : Homebase
CardFlight Small Business Impact Report
As per the CardFlight Small Business Impact Report, small business sales declined
-4.3% week-over-week starting March 9th through the 15th accelerating to -16.4%
week-over-week from the 16th through 22nd, further accelerating -26.9% week-
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over-week from the 23rd through the 29th and slightly moderating from the previous
weekly decline to -26.4% week-over-week from the 30th through the April 5th.
However, transactions declined even more significantly but were offset by higher
ticket sizes as individuals stocked up on goods and limited their in-person shopping
journeys.
Figure 20: Change in Transaction Volume and Sales
Source : CardFlight Small Business Impact Report, April 8, 2020
Overall, more than 26% of small businesses closed starting March 2nd and the
remaining merchants have seen transactions decrease by ~30% since the
beginning of March. Positively, the number of transactions per merchant in the first
week of April saw a lift for the first time.
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Figure 21: Change in Active Merchants and Transactions Per Active Merchant
Source : CardFlight Small Business Impact Report, April 8, 2020
As anticipated, the most impacted businesses were food and drink establishments,
such as bars and restaurants, services providers and retail sales. Positively, Food
and Drink as well as Services small businesses registered a week-over-week sales
increase for the first time since the March 2-8 baseline. In addition, certain
categories mainly across non-discretionary essential products and services like
grocery have seen strong growth primarily helping debit card transactions.
Figure 22: Business Change by Merchant Category
Source : CardFlight Small Business Impact Report, April 8, 2020
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Tap-to-Pay Getting a Boost
Contactless payments leveraging near field communication (NFC), including both
mobile and card-based transactions, continue to gain adoption globally including
in the US market where card issuers are starting to support the rollout. In addition,
due to the spread of COVID-19 on surfaces, there has been increased demand and
attention around contactless payments. In a number of countries, MA and V have
raised the limit for contactless payments to minimize the need to enter a PIN and
shops are encouraging contactless over cash and other methods that require the
customer to touch surfaces. In Turkey, the country recorded a sharp increase in the
number of contactless transactions, showing an 170% jump in March 2020 vs
March 2019. According to data from InterBank Card Center (BKM), ~2.5m
contactless cards were used for the first time in March and 20% of all card
transactions were contactless. Furthermore, according to CardFlight data, EMV
payment volume fell 5.17% from March 9th through March 15th compared with
mag-stripe at 13.07% and contactless payments at only 1.43%. We expect
contactless payments globally to continue gaining traction over cash and chip/PIN
partially helped by the COVID-19 spread.
Deutsche Bank Securities Inc. Page 17
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Economic Stimulus Could
Lessen Damage
CARES Act
The Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"), signed into
law on March 27th, provides needed stimulus particularly for small businesses and
individuals across the US to manage through the global health crisis. Small
businesses will have access to EIDL grants, PPP loans, and SBA disaster loans.
Larger businesses will also benefit across certain industries in distress such as the
air carriers. In addition, individuals will receive direct payments to help manage
through the crisis along with better unemployment insurance.
In particular, as it relates to small businesses, the CARES Act enables Economic
Injury Disaster Loans (EIDL) of up to $10k as well as the Paycheck Protection
Program (PPP) for companies below 500 employees to get up to $10m. Further, the
loans could be forgiven if used primarily for payroll and less than 25% for things like
the mortgage/rent and utilities.
Overall, the current stimulus package (also ongoing discussions of further potential
stimulus) should help to stem some of the job losses and small business closures
across the country. In addition, depending on the depth and breadth of the
economic impact, it could help to spur a more robust recovery post the health crisis,
which we will monitor. Furthermore, globally, there are multiple countries impacted
by COVID-19 that have announced significant stimulus packages amounting to
over $7trn.
Aiding with government disbursement
As the US government developed a stimulus package to spur economic growth, the
world's largest payment and fintech companies began battling for their own share
in aiding to distribute the relief money. The networks have reportedly been lobbying
the Treasury Department to participate as an option in the disbursement of funds,
where the Visa Direct and MasterCard Send tools would be an attractive option due
to their capabilities to move money instantly and securely; however, neither
company has specified any deal yet. With time being increasingly more important,
as getting funds to small business owners as well as consumers sooner is crucial
to the stability of the economy, fintech companies including the networks became
prime prospects for the movement of funds. Some fintechs, namely PayPal, Square
and Intuit already declared they will be working with the government to distribute
part of the stimulus packages; however, their inclusion in the process revolves
around them getting access to government support to help with small business
loans as opposed to actually facilitating the movement of the handouts (a job better
suited for V and MA). According to a person familiar with the matter though, V/MA
are likely to join the other fintechs in the process and will be a part of the Treasury
Department's rollout to distribute funds.
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Networks Tap Into Debt Markets
Visa
On March 31st, V announced an offering of $4bn in total senior notes to be used for
general corporate purposes. The company received net proceeds of ~$3.96bn after
underwriting fees and the notes with the following tranches were issued on April
2nd:
n $1.5bn of its 1.9% Senior Noted due in 2027
n $1.5bn of its 2.05% Senior Notes due in 2030
n $1bn of its 2.7% Senior Notes due in 2040
MasterCard
On March 26th, MA also completed an offering of $4bn in total of senior notes for
general corporate purposes. The tranches of the offering are as followed:
n $1bn aggregate principal amount of its 3.300% Notes due 2027
n $1.5bn aggregate principal amount of its 3.350% Notes due 2030
n $1.5bn aggregate principal amount of its 3.850% Notes due 2050
Deutsche Bank Securities Inc. Page 19
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CFO Believes Model Will
Rebound
Please visit, "CFO Believes Model Will Rebound" published on March 19, 2020 for
the full detailed note.
Natural hedges and secular tailwinds
We met with V’s CFO, Vasant Prabhu as well as EVP & Chief Product Officer, Jack
Forestell and President of NA, Oliver Jenkyn during our virtual payments tour this
year. Vasant Prabhu remains upbeat about the long-term secular growth drivers of
the business including new payment flows and value-added services (nothing
happening short term changes any of the bullish outlook shared at last month’s
analyst day). However, near-term headwinds from COVID-19 have clearly
worsened since V lowered 1Q20 rev growth guidance on March 3rd by ~2.5-3ppts,
which was largely related to Asia, as the virus has spread globally (last 2 weeks saw
progressive gov’t action). Positively, Vasant Prabhu did highlight some natural
hedges that could partially soften the impact to volumes (increasing debit/ eComm)
and lower volume based incentives could further protect revenue. In addition, V has
the ability to better control expenses and investments to reduce the potential
impact to the bottom-line. We remain Buy rated on V and would use the pullback
in shares as a long-term buying opportunity.
Offsetting volume and revenue headwinds
Cross-border volumes, particularly travel related, will likely be impacted the most
depending on the duration of COVID-19, which will primarily flow through
International and partially Data Processing revs. In addition, domestic volumes will
be impacted in the countries most affected by the virus. Positively, V has exposure
to non-discretionary spending primarily in debit, which should partially offset
domestic headwinds, as well as eComm where some physical spend is likely to shift
(how much remains to be seen). The indication is that China has been opening back
up with supply chain issues improving (~6-8 weeks post outbreak) but Vasant
Prabhu highlighted concerns over other countries being able to receive the goods
due to travel cuts, which we will monitor (FedEx taking up some slack from airlines).
Volume-based incentives could also partially hedge the impact to revenue.
Incentives are contract specific with some being linked to cross-border for
companies with heavy cross-border businesses but the offset is not 1 for 1 as they
are typically based on minimums over the fiscal year or longer. In addition, value-
added services are mostly tied to the core with some being discretionary.
Potential to pull back on expenses and investments
Vasant highlighted multiple areas the company could potentially leverage to
control costs and lower the impact to the bottom-line. Personnel should benefit
from lower T&E spending as travel is cut and longer-term the company could slow
hiring or even cut headcount including through attrition from restructuring if
needed. In addition, although V will need to honor prior commitments, Marketing
spend could be an area of significant savings. In particular, a large chunk of the
marketing spend this year was planned for the Olympics, which could be pushed
out depending on developments although some costs are likely sunk. V also has
some flexibility, more so than personnel, on professional fees, contractors and
outside services. Furthermore, there are nearly 2 dozen different investment work
streams the company is involved with and some could be partially delayed or
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reduced without impacting the company’s long-term competitive position and
trajectory.
Secular trends and new flows create long-term tailwinds
V also continues to benefit from penetration of new flows and strong growth in
value-added services. Visa Direct is more at the beginning than even the middle of
the life cycle and Earthport will significantly expand end-points while Plaid should
help accelerate growth. V is investing in digital B2B capabilities, new verticals like
the gig economy, virtual card space, and its bread and butter namely T&E/prepaid.
In addition, V sees the most opportunity in real-time payments across application
and services rather than the infrastructure where it can deploy the same level of
quality, security, auth rates, and liability/guarantee as it does with Visa Direct to
capture revs. In addition, V is not only focused on share shift, which is a small factor
in growth, but more importantly wants the best partners, which are key to driving
long-term success. Further, although V has always done well with fintechs, it has
improved win rates recently from better sales efforts, FastTrack, and simply raising
the intensity. V should also benefit from secular trends including things like tap-to-
pay and click-to-pay.
Deutsche Bank Securities Inc. Page 21
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Dire Small Business
Warning
Please visit, "Dire Small Business Warning" published on April 5, 2020 for the full
detailed note.
Small Business needs help urgently
We hosted a conference call with Toby Scammel, Founder & CEO of Womply, to
discuss the evolving negative impact from COVID-19 on US small business sales
and the challenges with the US small business stimulus plan. Toby Scammel
described the current small business situation pessimistically, with small business
owners panicked, confused and running out of time. Through robust data insights,
gathered across its +450k merchant commerce platform and payment
partnerships, Womply has seen small business physical transaction revenue drop
-25% Y/Y in recent days. Small businesses are critical to the US economy making
up ~$10trn in GDP and ~55% of jobs but are also the most vulnerable and hardest
entities for the gov’t to reach. In addition, with the gov’t using traditional SBA and
bank rails to deliver stimulus (Friday was first day to start applying for loans), Toby
Scammel was cautious on the current plan's ability to reach small businesses
effectively and in time. Urgently, he believes pushing funds through fintechs such
as SQ and PYPL as well as card processors like FIS, GPN, and FISV to small
businesses faster could be one of the only viable solutions (gov't needs to embrace
this method immediately). Please see body for detailed data on current trends,
stimulus, and let us know if you are interested in a replay and slides for the call.
Significant small business headwinds could worsen
Some of the hardest hit sectors include transportation, arts/entertainment, lodging,
restaurants/bars, health/beauty, and auto sales/services. Restaurant sales are
down 50-70% with data from OpenTable showing table reservations falling to zero.
Toast POS data shows restaurant revenue down ~73% nationwide. Further, travel
and tourism sales are down +80%. Although retail and grocery initially saw a strong
boost from panic buying and stocking up on essential goods, those trends have also
recently moderated. In addition to overall physical small business sales being down
significantly in recent weeks, data from Homebase (+1m employees in the US)
shows 60% fewer hours worked from hourly employees (disproportionate impact
on hourly workers, minority businesses, and poorer communities) with many local
businesses being fully closed. According to Faire survey data, ~70% of
independent retailers don’t have enough cash, 64% have started reducing
inventories, and retailers are expecting a temporary revenue reduction of 50% of
more (potential for tens of millions of lost jobs). As lockdowns and shelter in place
orders continue, Toby Scammel sees the potential for further weakness with many
of the companies now looking for phase 2 of their job cuts. He sees the risk of
substantial US business bankruptcies as real, with potential for an over 30% failure
rate to be realized without significant small business assistance.
Stimulus leveraging traditional rails despite faster methods
Positively, the CARES Act, signed into law March 27th, provides stimulus for small
businesses and individuals. However, the gov’t is currently using traditional rails to
deliver the funds like banks and the SBA with the timing being crucial. Although
Toby Scammel was positive on the treasury and its hard work/talent, historically the
SBA track record for delivering funds in a timely manner has been lackluster. For
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example, the SBA failed to deploy just ~$1bn in funds effectively during Hurricane
Sandy with application processing taking 46 days on average, approval rates of
24%, and long delays for disbursement (current rules like 75% of loan going to
payroll to be forgiven creating challenges). Additionally, the whole loan process is
too convoluted with requirements and risk for small business, so Toby Scammel
believes grants or revenue replacement instead of loans are what’s required to save
small businesses. Positively, players like Womply, SQ, PYPL, Intuit, and Plaid
(acquired by V) are coming together and leveraging their unique data to support the
gov’t. In addition, other fintechs as well as payment processors like FIS and FISV are
working to distribute funds faster. Fintechs like SQ Capital, Shopify Capital, and
PYPL Working Capital underwrite on existing sales data so they are best suited to
revenue replacement.
Womply platform and business model
Womply is a local commerce platform, with a suite of solutions such as CRM and
marketing automation, partnering with ~55 of the largest processors, banks and
other small business providers (e.g., FIS/WP, GPN/TSS, Elavon, and PaySafe). As a
result, the company has robust and diversified data insights across US small
businesses primarily into credit card transactions as well as sales data from bank
accounts and other sources. The company operates through a SaaS model
charging merchants for access to software and also generating revenue share from
processing relationships (high 70% gross margins with large % of margin coming
from revenue share). Womply has strong software capabilities and has also
invested +$150m in the platform to drive data analytics. Merchants benefit from
business management and increased sales and processors benefit from better
retention.
Deutsche Bank Securities Inc. Page 23
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Booming eCommerce
Strength Sustainable
Please visit, "Booming eCommerce Strength Sustainable" published on April 8,
2020 for the full detailed note.
Strong growth in eCommerce
Following our conference call last week with Womply on the negative impact to
small business in-person sales from COVID-19, we hosted a conference call today
with J. Bennett, Vice President of Operations and Corporate Development at online
fraud leader Signifyd to discuss the positive offsetting trends in eCommerce. The
global health crisis has shifted consumer transactions online and is driving a surge
in first time eCommerce shoppers driving up penetration and transactions to an
accelerated sustainable level. As a result, compared with prior projections for
physical eCommerce growth of ~15% Y/Y in the US vs. actual Jan and Feb growth
above 20%, growth has accelerated to +34.4% Y/Y in March and Signifyd believes
the trend will continue (will not normalize or fade). In addition, online volume
growth for small businesses is doing well despite small business shutdowns and
potential failures, but J. Bennett is concerned these robust small business growth
rates could begin to falter. With strong eComm volumes, PYPL, FIS, and FISV stand
to potentially benefit the most in payments, in our view. Let us know if you would
like the slides and replay details from the call.
Pushing up long-term CAGR projections
The recent surge in new eCommerce shoppers is at levels approaching Cyberweek,
which J. Bennett described as getting an extra holiday season and there are
currently no signs of slowing. Typically, ~50% of new user cohorts mature into
repeat online shoppers within 30 days and J. Bennett believes this relationship
should hold. As a result, eCommerce growth should benefit longer term making
prior CAGR projections too low. In particular, Signifyd has seen acceleration in
online volumes across multiple regions impacted by COVID-19 (e.g., APAC, EMEA,
LatAm, and the Americas) correlating to the wave of shelter-in-place and work-
from-home orders. For example, the US is seeing an ~18 month acceleration in its
CAGR and some markets are as much as ~4 years ahead of prior projections.
Mexico is ~3 years ahead and including Brazil and Argentina is expected to quickly
take over Canada in terms of spend. LatAm is slightly behind other regions on the
impact of COVID-19, which we will monitor but could also see strong eCommerce
trends. In addition, Bennett sees strong opportunities in countries like India and
positively described trends in China and APAC as already starting to recovery.
Overall, J. Bennett believes the share of wallet from physical retail will shift more
quickly than previously projected going forward.
Areas of strength offsetting vertical weakness
While COVID-19 is driving strong growth across many sectors, other sectors are
suffering (multiple winners and losers emerging). For example, digital games and
grocery are up 126% and 165% since early February (WMT Grocery now the #1 app)
while furniture and home decor is up 62% over the same period. However, travel is
down +80% and services are down 50% Y/Y except for deliveries. Areas like high
fashion are hurting but the rest of apparel is doing fine (apparel is ~40% of
eCommerce) as most sales come in 3Q and 4Q. eCommerce verticals that are
providing distractions like media, toys, hobbies, and games have benefitted
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significantly. In addition, although sectors like beauty and cosmetics have not
experienced growth overall, partially due to fulfillment concerns, many merchants
are finding demand online by overcoming challenges. Although stockpile verticals
have peaked, such as baby, consumer packaged goods, medical, and pet supplies,
they experienced a strong influx of new users who are expected to return to the
online channel (potential for more subscription models).
Small business volumes strong but monitoring future
Across the SMB space, online volumes are showing strength growing ~30-40%
similar to overall eCommerce trends. However, J. Bennett predicts ~30-50% of
these businesses could fail in the coming weeks (~45-60 days) due to COVID-19
disruptions. Positively, the remaining ~50-70% are currently growing fast enough
to more than offset that loss but it’s unclear if the strength will continue. As a result,
J. Bennett was much more confident in calling the overall eCommerce strength
continuing than predicting the path of future SMBs sales online. Although ~80% of
the US eCommerce market is from the IR 100, SMBs represent the remaining 20%
and are important to the overall economy. Our recent discussion with Womply
highlighted concerns over small business failures in the US as well as the timing,
distribution, and effectiveness of the coming stimulus. See our call note with
Womply, “Dire Small Business Warning” for details on the state of small business
physical transactions in the US market.
Signifyd partnering with payment players
Signifyd is a SaaS-based, enterprise-grade fraud technology company for
eCommerce stores and is the largest provider of guaranteed chargeback
protection. The company works with over 10k merchants, shipping products into
100+ countries, ranging from small businesses to some of the largest
marketplaces. In addition, it has +250 risk experts with an experienced leadership
team from PayPal, Google, FedEx and Wilson Sonsini Goodrich & Rosati. The
company charges for its core product namely guaranteed fraud protection by
taking a percentage of the volume similar to other payment models like PYPL. In
addition, it partners with many of the key payment players across the industry such
as the networks (e.g., V/AXP), acquirers and software players (e.g., Salesforce)
layering its fraud solutions on top of the payments stack. As a result, Signifyd sees
more data spanning beyond checkout (+97% of global transactions), leveraging
email, IP, phone, address and device ID, helping to improve online friction and lower
false transaction declines. Signifyd helps increase merchant revenue by ~3.2% and
lower costs by ~0.7% on average.
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Figure 23: Visa Income Statement
Deutsche Bank Securities Inc.
Source : Company data, Deutsche Bank estimates
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Deutsche Bank Securities Inc.
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Figure 24: MasterCard Income Statement
Source : Company data, Deutsche Bank estimates
Page 27
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Appendix 1
Important Disclosures
*Other information available upon request
Disclosure checklist
Company Ticker Recent price* Disclosure
MasterCard MA.N 270.72 (USD) 14 Apr 2020 1, 7, 8, 14, 15
Visa Inc. V.N 174.62 (USD) 14 Apr 2020 1, 7, 8, 14, 15
*Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg and other vendors . Other
information is sourced from Deutsche Bank, subject companies, and other sources. For disclosures pertaining to recommendations or estimates made on securities other than the primary
subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at https://research.db.com/Research/Disclosures/
CompanySearch. Aside from within this report, important risk and conflict disclosures can also be found at https://research.db.com/Research/Topics/Equities?topicId=RB0002. Investors
are strongly encouraged to review this information before investing.
Important Disclosures Required by U.S. Regulators
Disclosures marked with an asterisk may also be required by at least one jurisdiction in addition to the United States.See
Important Disclosures Required by Non-US Regulators and Explanatory Notes.
1. Within the past year, Deutsche Bank and/or its affiliate(s) has managed or co-managed a public or private offering for
this company, for which it received fees.
7. Deutsche Bank and/or its affiliate(s) has received compensation from this company for the provision of investment
banking or financial advisory services within the past year.
8. Deutsche Bank and/or its affiliate(s) expects to receive, or intends to seek, compensation for investment banking
services from this company in the next three months.
14. Deutsche Bank and/or its affiliate(s) has received non-investment banking related compensation from this company
within the past year.
15. This company has been a client of Deutsche Bank Securities Inc. within the past year, during which time it received
non-investment banking securities-related services.
Important Disclosures Required by Non-U.S. Regulators
Disclosures marked with an asterisk may also be required by at least one jurisdiction in addition to the United States.See
Important Disclosures Required by Non-US Regulators and Explanatory Notes.
1. Within the past year, Deutsche Bank and/or its affiliate(s) has managed or co-managed a public or private offering for
this company, for which it received fees.
7. Deutsche Bank and/or its affiliate(s) has received compensation from this company for the provision of investment
banking or financial advisory services within the past year.
For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this
research, please see the most recently published company report or visit our global disclosure look-up page on our website
at https://research.db.com/Research/Disclosures/CompanySearch
Analyst Certification
The views expressed in this report accurately reflect the personal views of the undersigned lead analyst about the subject
issuers and the securities of those issuers. In addition, the undersigned lead analyst has not and will not receive any
compensation for providing a specific recommendation or view in this report. Bryan Keane.
Page 28 Deutsche Bank Securities Inc.
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Historical recommendations and target price: MasterCard (MA.N)
(as of 04/14/2020)
400.00 Current Recommendations
Buy
Hold
7
Sell
300.00 Not Rated
6
Suspended Rating
Security price
5
** Analyst is no longer at
4
Deutsche Bank
200.00 3
2
1
100.00
0.00
Jul '17 Jan '18 Jul '18 Jan '19 Jul '19 Jan '20
Date
1. 07/09/2017 Buy, Target Price Change USD 150.00 Bryan Keane 5. 04/01/2019 Buy, Target Price Change USD 267.00 Bryan Keane
2. 10/16/2017 Buy, Target Price Change USD 185.00 Bryan Keane 6. 07/11/2019 Buy, Target Price Change USD 320.00 Bryan Keane
3. 02/02/2018 Buy, Target Price Change USD 208.00 Bryan Keane 7. 01/29/2020 Buy, Target Price Change USD 380.00 Bryan Keane
4. 07/17/2018 Buy, Target Price Change USD 221.00 Bryan Keane
§§§§$$$$$§§§§§
Historical recommendations and target price: Visa Inc. (V.N)
(as of 04/14/2020)
250.00 Current Recommendations
Buy
Hold
200.00 Sell
5 Not Rated
Suspended Rating
4
Security price
150.00 ** Analyst is no longer at
3 Deutsche Bank
2
100.00 1
50.00
0.00
Jul '17 Jan '18 Jul '18 Jan '19 Jul '19 Jan '20
Date
1. 07/09/2017 Buy, Target Price Change USD 122.00 Bryan Keane 4. 03/21/2019 Buy, Target Price Change USD 177.00 Bryan Keane
2. 10/16/2017 Buy, Target Price Change USD 139.00 Bryan Keane 5. 07/11/2019 Buy, Target Price Change USD 225.00 Bryan Keane
3. 02/02/2018 Buy, Target Price Change USD 160.00 Bryan Keane
§§§§$$$$$§§§§§
Deutsche Bank Securities Inc. Page 29
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Equity Rating Key Equity rating dispersion and banking relationships
Buy: Based on a current 12- month view of total share-holder
return (TSR = percentage change in share price from current
price to projected target price plus pro-jected dividend yield ) ,
we recommend that investors buy the stock.
Sell: Based on a current 12-month view of total share-holder
return, we recommend that investors sell the stock.
Hold: We take a neutral view on the stock 12-months out and,
based on this time horizon, do not recommend either a Buy or
Sell.
Newly issued research recommendations and target prices
supersede previously published research.
Page 30 Deutsche Bank Securities Inc.
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Additional Information
The information and opinions in this report were prepared by Deutsche Bank AG or one of its affiliates (collectively 'Deutsche
Bank'). Though the information herein is believed to be reliable and has been obtained from public sources believed to be
reliable, Deutsche Bank makes no representation as to its accuracy or completeness. Hyperlinks to third-party websites in this
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If you use the services of Deutsche Bank in connection with a purchase or sale of a security that is discussed in this report, or
is included or discussed in another communication (oral or written) from a Deutsche Bank analyst, Deutsche Bank may act as
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Deutsche Bank may consider this report in deciding to trade as principal. It may also engage in transactions, for its own account
or with customers, in a manner inconsistent with the views taken in this research report. Others within Deutsche Bank,
including strategists, sales staff and other analysts, may take views that are inconsistent with those taken in this research
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Opinions, estimates and projections constitute the current judgment of the author as of the date of this report. They do not
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David Folkerts-Landau
Group Chief Economist and Global Head of Research
Pam Finelli Anthony Klarman Michael Spencer Steve Pollard
Global Chief Operating Officer Global Head of Head of APAC Research Head of Americas Research
Research Debt Research Global Head of Company
Research
Gerry Gallagher Andreas Neubauer Peter Milliken
Head of European Head of Germany Research Head of APAC
Company Research Company Research
Jim Reid Francis Yared George Saravelos Peter Hooper
Global Head of Global Head of Rates Research Global Head of FX Research Global Head of
Thematic Research Economic Research
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