The cross-border business is one of the most important growth drivers of payments processing companies in the post-pandemic era. This is fueled by the travel and entertainment-related transactions, which were severely impacted by the pandemic. With declining restrictions after the pandemic, domestic and cross-border travel surged by a significant margin, signaling a robust recovery in the tourism and hospitality sectors. Revenge travel quickly gained popularity as people sought to make up for lost vacations and experiences, boosting cross-border payments of financial services providers like Visa Inc. V and Mastercard Incorporated MA.
Per the 2023 Visa Global Travel Intentions Study, the surge in travel post-pandemic is not showing signs of slowing down despite inflationary pressures. This is expected to continue benefiting payment companies, including American Express Company AXP and Discover Financial Services DFS, as witnessed in the past few quarters.
Visa, Mastercard, American Express and Discover Financial presently carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Per the Travel Price Index of the U.S. Travel Association, 73% of surveyed Americans notice an increase in travel costs; however, only 6% of travelers delay or cancel their plans. Inflation can act as a double-edged sword for digital payments companies, as higher prices of goods and services can increase the commission earned on transactions. On the flip side, high prices can result in a decline in consumer spending, leading to an overall reduction in payment volumes. However, so far, inflation has not slowed down the current pace of cross-border travel, positively impacting the results of companies in this space.
Improving travel numbers coupled with the continued adoption of electronic payments should continue to act as a boon for companies in the digital payments space. Per the 2023 McKinsey Global Payments Report, electronic or digital payments have surpassed overall payment growth, averaging at a five-year rate of 17% versus 6%. Moreover, the e-commerce uprise is also facilitating growth of digital payment companies. E-commerce global volumes are expected to grow 12-15% per year up to 2025. Growth in cross-border e-commerce is also expected to boost cross-border payment volumes.
Cross-border payments are a high-margin business, as companies can charge an additional foreign exchange fee, thus complementing its top line. Cross border Peer to Peer transactions grew at a rate of 65% year over year in the fiscal fourth quarter for Visa. Cross-border travel volume, excluding intra-Europe, year-over-year growth is expected to be near the low 20s in constant dollars in 2024 for the company.
Per the Visa Global Travel Intentions Study, digital wallets are an integral part of the travel journeys for 74% of travelers. The company is also expanding the use of Visa Direct, which proved to be an important revenue driver, marking a 19% year-over-year increase in the fourth fiscal quarter of 2023. Visa is collaborating with digital wallet companies in several countries, expanding Visa Direct’s reach to a new plethora of customers. This trend is mostly seen in unbanked countries where digital wallets are gaining traction. With Visa Direct, customers do not require a card or account to receive funds in their wallet, further enhancing its value proposition and adding to the company’s cross-border revenues.
Cross-border travel was strong for Mastercard in the third quarter of 2023 at 155% compared with 2019 levels. Both V and MA are expanding to new markets in Africa and the Middle East in an attempt to grow their footprint in those regions and leverage from resurging travel. Resurging travel in China is also expected to benefit payment services companies, as it is one of the last countries to open its borders. Cross-border travel volume for China continued on its improvement trajectory but stood below 2019 levels for Visa in the fiscal fourth quarter. Hence, growth in China tourism should reflect positively on the upcoming results of the companies.
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