VISA has a sustainable competitive advantage. Visa has an enviable competitive position within its industry; as one of three dominant credit-card brands, it benefits from strong network effects. Consumers demand to use Visa's credit and debit cards because of the convenience, security, and rewards they provide, which forces merchants to accept Visa's cards to satisfy those customers and earn their business. This positive feedback loop makes the entire network more valuable over time and prevents newcomers from gaining traction.
Visa also possesses multiple intangible advantages. The company has spent decades building a trusted, globally recognized brand through massive advertising campaigns like the one we saw at this year's Summer Olympics in Rio. And the 83 billion-plus transactions Visa processed in 2016 add to a huge database of valuable proprietary information that can be used to offer ancillary services and make customer relationships even stickier.
Because of these advantages, Visa is insanely profitable. The company's operating margin is consistently higher than 60%, and its return on capital (in the mid- to high teens) is well above its cost. Those profits have attracted an ever-growing cadre of competitors trying to capture a tiny piece of the pie, but Visa's relative size allows it to invest heavily in research and development to maintain a technological edge and fend off the newbies.
VISA has very predictable revenue.
Every time someone makes a purchase with their Visa credit or debit card, whether in a physical store or online, Visa's cash register also rings. If the global economy stays reasonably healthy and consumers continue to transition from cash to electronic payments, we can expect Visa's share to expand as the whole pie does. Further, Visa does not take on the risk of issuing credit to consumers, leaving that business to the card-issuing banks. Instead, in exchange for a small piece of each transaction, Visa ensures the digital money moves smoothly from customer to merchant.
I hope you learn something new today. Have a great week ahead.