Earnings Call Transcript - V Q3 2024

Operator, Operator

Welcome to Visa's Fiscal Third Quarter 2024 Earnings Conference Call. The conference is being recorded. I would now like to turn the conference over to your host, Ms. Jennifer Como, Senior Vice President and Global Head of Investor Relations. Ms. Como, you may begin.

Jennifer Como, Senior Vice President and Global Head of Investor Relations

Thank you. Good afternoon, everyone, and welcome to Visa's fiscal third quarter 2024 earnings call. Joining us today are Ryan McInerney, Visa's Chief Executive Officer; and Chris Suh, Visa's Chief Financial Officer. This call is being webcast on the Investor Relations section of our website at 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 annual report on Form 10-K and any subsequent reports on Forms 10-Q and 8-K, which you can find on the SEC's website and the Investor Relations section of our website. Our comments today regarding our financial results will reflect revenue on a GAAP basis and all other results on a non-GAAP nominal basis unless otherwise noted. The related GAAP measures and reconciliation are available in today's earnings release and related materials available on our IR website. And with that, let me turn the call over to Ryan.

Ryan McInerney, CEO

Good afternoon, everyone. Thank you for joining us. We delivered strong third quarter results with $8.9 billion in net revenue, up 10% year-over-year, and EPS up 12%. Our key business drivers were relatively stable compared to Q2, adjusted for leap year. In constant dollars, overall payments volume grew 7% year-over-year, U.S. payments volume grew 5%, and international payments volume grew 10%. Cross-border volume excluding intra-Europe rose 14%, and processed transactions grew 10% year-over-year. We recently received the results from our annual Global Client Engagement Survey where Visa achieved a Global Net Promoter Score, or NPS, of 76, up three points from last year. We saw NPS increases across all of our client types: merchants, issuers, fintechs, and processors, and across our regions, the results remain strong, with a notable 6-point NPS improvement in North America. I want to thank all of our 30,000 employees who helped deliver these fantastic results. As I review some highlights from the quarter, you'll see how this focus on serving our clients by meeting their needs, innovating, and helping them grow is fueling our success across consumer payments, new flows, and value-added services. Let's start with consumer payments, where we see more than $20 trillion of opportunity to capture cash, check, ACH, domestic schemes, and other forms of electronic payment. In our client engagement survey, our clients ranked our strategic partnership and our brand as two of the most important factors in our successful relationships. I'll share some examples of how each of these played out this quarter. In strategic partnerships, we are constantly seeking ways to add more value and grow together with our clients. We are pleased to have been named the Preferred Network Partner by Lloyds Banking Group, renewing our debit relationship and significantly expanding our relationship in credit, winning 10 million additional credit credentials across the Group's consumer and commercial business. Also in the U.K., NatWest has launched a new Visa Travel Reward credit card, following the signing of our partnership last year. They will also be utilizing many value-added services, including transaction controls and card benefits. On the European continent, we worked with Raiffeisen Bank International AG, a leading bank in several markets. Recently, in the Czech Republic and Romania, we renewed our commercial business and expanded our consumer debit and credit business totaling over two million potential new credentials. In Korea, we deepened our partnership with leading issuer KB Kookmin Card. Already a user of Visa Direct cross-border money movement and a Visa consumer and commercial issuer, they will grow their consumer credit and debit portfolios with Visa and use value-added services, including consulting and marketing services. In Peru, we extended our partnership with leading issuer, Banco de Credito de Peru, across consumer and commercial portfolios with plans to launch additional new flows offerings and value-added services. In the U.S., we extended our agreement with Wells Fargo. This will allow us to continue to support Wells Fargo's strategy to reinvent their credit business and provide additional growth by leveraging key Visa assets like consulting and Visa sponsorships such as FIFA and the Olympic and Paralympic Games. On the brand front, with the Olympic Games opening ceremony later this week, it is exciting to see the engagement with the Visa brand and activation across the world in marketing campaigns, cardholder experiences, and Olympic and Paralympic-branded Visa issuance, which I am happy to report in Europe is at nearly six million cards compared to the five million number I quoted just last quarter. We have also added nearly 100,000 new merchant locations in France in advance of the event. Our brand also plays an important role in winning co-brand partnerships. In India, growing credit issuance and reaching affluent and cross-border consumers remain areas of focus. We are excited about the launch of a co-brand card with Adani One and ICICI Bank as India's first co-branded credit card with rich airport-linked benefits for their target base of 400 million customers through the Adani One platform. We also signed an agreement to launch a new co-brand card with Tata Digital, along with an Indian banking partner, building on the success of our existing credit co-brand relationship. This new co-brand offering consists of a multicurrency prepaid foreign exchange card that will target travelers from India, also benefiting from the rewards of the Tata Digital Super App, Tata Neu. Across seven countries in Latin America, we will work with Unicomer, a major retailer and financial services provider with numerous brands to deliver a co-brand credit card in addition to using CyberSource. In CEMEA, we reached a de novo co-brand arrangement with BinDawood, a leading grocer in the Kingdom of Saudi Arabia with 88 outlets and over five million loyalty program members. On the travel side, we extended our relationship with Malaysia Airlines from a prepaid co-brand card targeting millennials and Gen Z customers to also launch a new co-brand credit card for affluent, travel-minded individuals. In the U.S., Turkish Airlines have chosen Visa to be their exclusive network partner for their new Miles and Smiles co-brand credit card. Our consumer payment strategy is focused on growing credentials as we are doing across all the partnerships I just mentioned and increasing acceptance locations. Wallets are a great example of where this comes together, where Visa can be a funding source, an embedded credential, and an accepted form of payment by wallet merchants. This increases the value proposition for wallet providers and their users. Two wallet highlights this quarter are in Peru and Vietnam. Yape is a Peruvian super app with more than 15 million users who already have a Visa credential that enables them to send money across P2P apps via Visa Direct. Recently, they launched Tap to Phone functionality for their more than two million merchants to accept Visa. In Vietnam, approximately 50 million wallet users are now enabling their users to utilize Visa cards as a funding source for transactions at over 500,000 QR acceptance points managed by these wallets. One additional area that we are very focused on is delivering simple, easy, and secure checkout experiences. Let me share a few recent examples. First, we are integrating Click to Pay and the Visa Payment Passkey Service, enabling a customer to authenticate themselves using biometrics. Already, we have hundreds of issuers enabled for passkeys in Europe and a number of issuers who represent more than 50% of our e-commerce payments volume in Europe piloting the solution. Second, we crossed 10 billion tokens this quarter, a significant milestone. In 2023 alone, Visa tokens helped generate more than an estimated $40 billion in incremental e-commerce revenue for businesses globally and saved more than $600 million in fraud. Third is the ability to tap for more use cases on a mobile device. With tapping as one of the best in-person commerce experiences, we want to provide Visa users with more ways to tap, including Tap to Pay, tap to authenticate an identity, tap to add a card, or tap to send money to family or friends. Finally, this quarter, Tap to Pay grew four percentage points from last year to 80% of face-to-face transactions globally, excluding the U.S. In the U.S., we surpassed 50% and have 30 U.S. cities above 60% penetration. Moving on to new flows: this quarter, new flows revenue grew 18% year-over-year in constant dollars with Visa Direct overall transactions growing 41% for the quarter to 2.6 billion and commercial volumes up 7% year-over-year in constant dollars. Let me provide some updates, starting with B2B, where we have focused on penetrating new verticals and delivering innovative products and solutions. In healthcare, we will work with AXA and Paysure to launch a commercial virtual card solution to simplify the claims processes for their customers worldwide. We have also expanded our virtual card acceptance with a key business services provider, Cintas, who offers uniform, safety, and fire protection services to over one million customers. Together with our partner, Billtrust, we will help Cintas streamline their payments, automate processes, and manage costs on Billtrust's Business Payments Network or BPN. We also just recently extended our long-standing BPN collaboration with Billtrust that connects suppliers and buyers to facilitate straight-through processing of virtual card payments with rich data that optimizes acceptance costs. Our products and solutions in B2B remain very important in winning and growing our business. One such solution is the enhanced B2B data that we can provide. In Brazil, together with Solero, a leading business financial management solution, we will provide issuers with enhanced visibility into small business spend by aggregating data across cards, bank accounts, boletos, and more, enabling them to better manage their client relationships and offer compelling products. Another solution is Spend Clarity, which provides expense program management, including card issuance, controls, and reporting. Wells Fargo has white-labeled our solution called Wells One Expense Manager, which has now onboarded 6,000 corporate clients representing over one million users, providing access to their spend data. Moving on to Visa Direct: we continued to grow our transactions through expanded and new relationships. Over the past year, total Visa Direct cross-border P2P transactions have nearly doubled, with Europe and CEMEA being the largest regions. In CEMEA, we are very excited to have renewed our Visa Direct relationship with fintech Monobank, in addition to renewing their consumer and commercial credit, debit, and prepaid portfolios. In Asia Pacific, we are partnering with China Zhongsheng Bank on cross-border capabilities, including Visa Direct and Currencycloud, allowing the bank to support cross-border payments for their merchant clients. Canadian fintech Nuvei has extended its agreement with us for Visa Direct across all cross-border use cases in more than 30 countries for their merchant clients and recently became the first Visa Direct enabler in Colombia. We also executed our first global agreement with WorldRemit and Sendwave, enabling their customers to eventually send Visa Direct cross-border remittances from 50 countries to recipients in 130 countries. Quickly, a leading South Asian marketplace has enabled Visa Direct cross-border remittance solutions for U.S. customers to send money to relatives and friends in India and the rest of South Asia. In earned wage access, we reached an agreement with Weaver, a U.K.-based embedded finance provider. In addition to card issuance, they will be utilizing Visa Direct to enable Weaver's business clients to offer employee expense reimbursement, reward and recognition, and earned wage access. Earned wage access provider PayActiv, who serves 4,000 businesses, has renewed its agreement with us and will enable Visa+ for payouts. Similarly, we expanded our relationship with enabler Astra, which will now offer cross-border remittances and implement Visa+ to reach domestic wallets in the U.S., and expand to additional use cases, including payroll, earned wage access, and marketplaces. Visa+ is still in the early stages but is fully rolled out for PayPal and Venmo users, and more providers continue to join the platform. Wrapping up new flows, we also renewed an agreement with FIS, an important issuer processing partner, to enable a suite of value-added services and new flows capabilities for their clients, including Visa Direct. Now on to value-added services, where revenue was up 23% in the third quarter in constant dollars. Let me highlight some of the progress we have made in driving adoption and growth among our value-added services portfolio. First in issuing solutions, card benefits enabled our clients to offer unique value propositions tailored to their customer base in travel, entertainment, restaurants, insurance, and more. Strong issuance in premium cards across most of our regions has fueled this growth. For example, in Latin America, travel benefits have grown with over 370,000 unique visits to our Visa Infinite Airport Lounge in Brazil, representing customers from a number of leading issuers. Since its launch in 2022, our Visa Infinite Fast Pass in Brazil, which allows cardholders to get through airport security more quickly, has screened over one million travelers. These are among the top five card benefits in Brazil and deliver value to customers, issuers, and Visa. We continue to add more benefits like the recently launched partnership with OpenTable to offer eligible Visa cardholders access to coveted restaurant reservations and experiences in the U.S., with plans to expand into Canada and Mexico. In Acceptance Solutions, third quarter growth was driven by increasing utilization across both token and e-commerce-related services. In e-commerce, one such example is with iFood, the largest food delivery platform in Brazil, who is utilizing our Verifi solution to help prevent disputes before they become chargebacks. In Risk & Identity Solutions, we continued to see strong adoption by new and existing clients, driven in part by growth in card-not-present transactions. In North America, acquirer Worldpay will be expanding their use of our authentication solutions from CardinalCommerce, fostering collaboration and real-time enhanced data exchange between Worldpay merchants and issuers during card-not-present transactions, reducing fraud and allowing more transactions to be properly authenticated and authorized securely. We are pleased that the pilot of our account-to-account risk scoring solution Visa Protect with Pay.UK has had great results, showing an average 40% uplift in fraud detection over the 3-month pilot. In addition, we are launching Visa Protect in Argentina with core payments technology company Celsa after successfully piloting the solution there. The last two value-added services are open banking and advisory services. We continue to sign new partners with Tink in Europe and the U.S. We continue to see strong growth in client demand for our consulting and marketing services, particularly around marquee events such as the Olympic and Paralympic Games. Our value-added services portfolio solutions are strong and are driving meaningful growth for our clients and for Visa. Before I close, I wanted to speak to the fact that the settlement reached for the injunctive relief class was rejected by the court. We are, of course, disappointed with this decision. We believe that the prior settlement provided meaningful relief to all merchants and we will continue to work towards another settlement. To close, so far this fiscal year, we have seen strong revenue and EPS growth as a result of relatively stable volume and transaction growth. I remain very excited about the opportunity that lies ahead of us. At Visa, we come to work in service of our clients and partners and are focused on building and deploying the best solutions possible across consumer payments, new flows, and value-added services.

Chris Suh, CFO

Thanks, Ryan. Good afternoon, everyone. In Q3, we had another strong quarter with relatively stable growth across payments volume, cross-border volume, and processed transactions when compared to Q2, adjusted for leap year. In constant dollars, global payments volume was up 7% year-over-year and cross-border volumes, excluding intra-Europe, was up 14% year-over-year. Processed transactions grew 10% year-over-year. Fiscal third quarter net revenue was up 10% in both GAAP and constant dollars, in line with our expectations. EPS was up 12% year-over-year and 13% in constant dollars. Now let's go into the details. In the U.S., payment volumes growth numbers were generally in line with Q2 adjusted for leap year, with total Q3 payments volume growing 5% year-over-year, with credit and debit also growing 5%. Card-present volume grew 2% and card-not-present volume grew 7%. In the U.S., while growth in the high spend consumer segment remained stable compared to prior quarters, we saw a slight moderation in the lower spend consumer segment. Moving to international markets. Total payments volume was up 10% in constant dollars, relatively stable with Q2 when adjusted for leap year. Payments volume growth rates were strong for the quarter in most major regions, with Latin America, CEMEA, and Europe ex U.K. each growing more than 16% in constant dollars. Asia Pacific payments volume slowed to less than 0.5 point of year-over-year growth in constant dollars for the quarter, driven primarily by the macroeconomic environment, notably in Mainland China. Now to cross-border volume, which I will speak to today in constant dollars and excluding intra-Europe transactions. Total cross-border volume was up 14% in Q3, relatively stable to Q2 adjusted for leap year. Cross-border card-not-present volume growth, excluding travel and adjusted for cryptocurrency purchases, was in the mid-teens, helped by continued strength in retail. Cross-border travel volume growth was also up in the mid-teens or 157% indexed to 2019. This quarter, we saw the inbound Asia Pacific Index improve nine points at a similar pace to Q2 to 151% of 2019. The improvement in Asia Pacific outbound travel, however, slowed from Q2 with the index increasing by less than one point to 125% of 2019. We continue to see the same primary drivers as last quarter with some additional pressure from macroeconomic conditions. Now let's review our third quarter financial results. I'll start with the revenue components. Service revenue grew 8% year-over-year versus the 8% growth in Q2 constant dollar payments volume, with revenue yield improving sequentially and versus last year due to improving utilization of card benefit. Data processing revenue grew 9% versus 10% processed transaction growth with the revenue yield generally in line sequentially and versus last year. International transaction revenue was up 9% versus the 14% increase in constant dollar cross-border volume, excluding intra-Europe, impacted by lapping higher currency volatility from last year. Volatility levels remain consistent on average with last quarter. Other revenue grew 31%, primarily driven by strong consulting and marketing services revenue related to the Olympics and, to a lesser extent, pricing. Client incentives grew 11%. Our three growth engines are: Consumer payments growth, driven by relatively stable payments volume, cross-border volume, and processed transaction growth. New flows revenue grew 18% year-over-year in constant dollars, Visa Direct transactions grew 41% year-over-year, helped by growth in Latin America for interoperability among P2P apps. Commercial volumes rose 7% year-over-year in constant dollars. In Q3, value-added services revenue grew 23% in constant dollars to $2.2 billion, primarily driven by Issuing and Acceptance Solutions and Advisory Services. Operating expenses grew 14%, primarily due to increases in general and administrative personnel and marketing expenses, including spend related to the Olympics. FX was a 0.5 point drag versus the 1.5 point benefit we expected. Pismo represented an approximately one-point drag. Non-operating income was $73 million. Our tax rate was 18.8% and EPS was $2.42, up 12% over last year, inclusive of an approximately 1.5 point drag from exchange rates and an approximately 0.5 point drag from Pismo. In Q3, we bought back approximately $4.8 billion in stock and distributed over $1 billion in dividends to our stockholders. At the end of June, we had $18.9 billion remaining in our buyback authorization. Now let's move to what we've seen so far in July through the 21st with volume growth in constant dollars. Cross-border is excluding intra-Europe. U.S. payments volume was up 4%, with debit up 4% and credit up 3% year-over-year. The slight deceleration from Q3 does not appear to be from any one factor but likely a number of smaller factors such as weather, timing of promotional shopping events, and the technology outage, among others. Cross-border volume grew 13% year-over-year, below Q3 levels, with travel-related volume growing slightly less, which continued to be impacted by Asia Pacific and card-not-present ex-travel volume growing at similar levels to Q3. Processed transactions grew 9% year-over-year. Now on to our expectations. Remember that adjusted basis is defined as non-GAAP results in constant dollars and excludes acquisition impacts. You can review these disclosures in our earnings presentation for more detail. Let's start with the fourth quarter. We expect payments volume and processed transactions to grow at a similar rate to Q3. For total cross-border volume growth, we expect to end up slightly below Q3. Currency volatility continues to average around 4-year lows through July 21. Thus, we are adjusting our currency volatility expectations for Q4, now assuming volatility will stay in line with Q3 levels. Incentives are expected to be at their lowest growth rate all year. Pulling it all together, we expect adjusted net revenue growth in the low double digits, which equates to a slight improvement from the 10% adjusted revenue growth rate in the third quarter. We expect our Q4 adjusted operating expenses to grow in the high single digits. Non-operating income is expected to be between $40 million and $50 million. The tax rate is expected to be between 19% and 19.5% in Q4, which puts Q4 adjusted EPS growth rate in the high end of low double digits. Moving to the full year. With three quarters now complete, our expectations for full year adjusted net revenue growth remains unchanged from what we shared at the start of the year. While absorbing the impact of lower currency volatility and the macroeconomic challenges in Asia, which have affected volumes, we still expect to reach low double-digit adjusted net revenue growth for the full year. Full-year adjusted operating expense growth will be in the high single-digit to low double digits, reflecting the less favorable impact of FX. This keeps full-year adjusted EPS growth in the low teens. In closing, we delivered strong results this quarter, with new flows and value-added services revenue growing faster than consumer payments. We extended our existing relationships, won new clients, and invested to develop innovative products and solutions, all positioning us for continued growth into the future. But now, Jennifer, it's time for some Q&A.

Jennifer Como, Senior Vice President and Global Head of Investor Relations

Thanks, Chris. And with that, we're ready to take questions.

Operator, Operator

Our first question comes from Darrin Peller from Wolfe Research. Please go ahead.

Darrin Peller, Analyst

Hi, thanks, guys. Let me just start. The U.S. volume growth rate obviously is a bit softer. And if you could help us distill what you consider structural versus cyclical, I think that would be a good place to start. But adding on to it really is, just the ability for you to grow double-digit revenue with only four, five, six, mid-single-digit U.S. volume growth is, coming from value-added services. It's coming from cross border. Can you help us understand if that kind of trend, you believe the company has that capability to grow those rates on revenues, even in this context of U.S. volume trends? Thanks, guys.

Chris Suh, CFO

Yes. Hi Darrin. So let me start with the U.S. Let me start with the first part of your question, and then we'll maybe get into zoom out and talk about maybe the longer question. So in the U.S. in Q3, we did see stable drivers relative to Q2, once you adjust for leap year. That's 5% payment volumes growth in the third quarter. In the 21 days since in July, that number did tick down to 4%. Maybe I'll just sort of give you the full arc of what we're seeing. So 4%, we'll just level set on those numbers, 4% in the 21 days versus 5% in Q3. And so for that, we did stare at a lot of the drivers, the factors that impacted those three weeks. A lot was going on and I referenced a few of them on the call and maybe I'll expand on those a bit. First, we had a major hurricane, Hurricane Beryl, and it impacted Texas and other parts of the U.S. nearby. The second, I referenced the timing of promotional e-commerce events. Maybe I can expand on that a little bit. The timing this year was later and e-commerce customers are billed when the goods are shipped. Some of that shipping period fell out of that 21-day period. So we had a little bit of difference in the 21-day period compared to the same period year ago. Third, obviously the major tech outage that happened at the end of last week, that also impacted. So when we look at that, no single factor drove that one point of change from Q3 to the first part of July. But all things considered, we actually feel pretty good about the three-week results. Now the second part of your question really was around sort of the low double-digits in the context of cross-border, VAS, and CMS. I'll sort of back into the question. We've had consistent strong performance in VAS, over $2 billion of revenue, over 20% growth for many quarters consecutively. We're seeing strength across the business in issuing solutions and acceptance and advisory. That's a business that we feel great about the momentum in. With our new flows business, 18% growth, as Ryan talked about in the quarter, that's the second quarter in a row, where we're seeing growth in the teens, great execution, stable volumes, and Visa Direct transactions growing at a high level. As you know, that business also, quarter-to-quarter, can vary a little bit in the growth rates, as we saw in the first half of the year. But all in all, feel really good about the continued strength in that business. And then cross-border, well, cross-border, maybe I'll zoom out a little bit and talk about what we've seen over the course of time. If you recall, pre-pandemic, cross-border grew, travel grew in the high single-digits to low double-digits. E-commerce, which was about a third of the business, grew into the teens, sometimes into the mid-teens. Obviously, the pandemic happened, travel really contracted, and e-commerce grew faster. Now post-pandemic, what we're seeing now is that e-commerce is roughly 40% of the business. The growth rate has normalized. It's stabilized back to pre-pandemic levels. Let's say, teens growth on e-commerce on 40% of the cross-border business. Travel after the post-pandemic run-up has normalized. It's a little hard to tell exactly where it's going to stabilize at, but we've seen high growth. We've seen it continue to normalize. What we do know structurally is that with e-commerce being a bigger portion of the business, that's a tailwind for the total cross-border growth. We are confident that that will continue to be healthy relative to the domestic spend. I'll pause there, and certainly if there's anything else to add, Ryan, or others, please jump in.

Ryan McInerney, CEO

No, nothing to add from me, Chris. Thanks, Darrin.

Jennifer Como, Senior Vice President and Global Head of Investor Relations

Next question, please.

Operator, Operator

Next, we'll go to the line of Andrew Jeffrey from William Blair. Please go ahead.

Andrew Jeffrey, Analyst

Hi. Good afternoon. Appreciate you taking the question. Very impressive value-added services growth this quarter at 23%. And I think, as you mentioned, Chris, it's approaching 25% of total revenue, so perhaps driving more than half your consolidated revenue growth. Can you talk a little bit about at what point we might expect value-added services to sort of bend up the growth curve of Visa consolidated?

Ryan McInerney, CEO

It's Ryan, Andrew. Thanks for the question. Yes, we're excited about not only what we delivered in terms of value-added services growth for the quarter but also what we've been consistently delivering for several years now since we shared our strategy and became very purposeful about our go-to-market approach. You go back to, I think it was 2021, we did about $5 billion in revenue; 2022, $6 billion; last year was $7 billion. Like you said, we did $2.2 billion this quarter, up 23%. What we've shown is that we have delivered consistent growth quarter after quarter and year after year in these businesses. We're optimistic about where we go from here. We think about the opportunities in three different segments. First, we have a series of value-added services that focus on enhancing value for Visa transactions. Risk products like Visa Secure, dispute tools like Visa Resolve Online, card benefits, like I mentioned in my prepared remarks, have historically been the largest part of our value-added services business, and we've shown that we can drive great growth in that area. Increasingly, we're building out a set of services that add value for non-Visa transactions. We've done some things in this space before. Some of our platforms like CyberSource, Authorize.Net, Verifi. But then you've heard me talk about expanding our risk capabilities, for instance, not just to other card networks, but also to RFCP and account-to-account services. I mentioned the great results we've had in the U.K. and in Argentina on that front. The third area of opportunity for us is expanding our value-added services beyond payment options. Historically, we've had things like Visa Consulting and Analytics, marketing services, and open banking services delivered by Tink, but we're continuing to build out a portfolio of value-added services for our clients and partners beyond payments, including cyber protection capabilities. We believe we will continue to demonstrate consistent growth moving forward. We've got a product pipeline, and a go-to-market strategy across the globe with a diverse set of clients, and we feel good about the opportunity.

Jennifer Como, Senior Vice President and Global Head of Investor Relations

Next question, please.

Operator, Operator

Next, we'll go to the line of Bryan Keane from Deutsche Bank. Please go ahead.

Bryan Keane, Analyst

Hi, guys, good afternoon. Chris, just want to ask about incentives, being the lowest expectation for the fourth quarter. Can you just talk a little bit about how much of that is volume-driven versus the amount of renewals you're seeing? I'm just trying to think about, as we head into next fiscal year, what kind of growth or sustainable growth we should consider for incentives? Thanks.

Chris Suh, CFO

Thanks for the question. I'll even take us back a little bit on the expectations we had for incentives coming into the fiscal year. As we ended fiscal '23, that was a high year for us in terms of volume of renewals, a little higher than our typical normal cadence. That did impact how we thought about the incentive volumes in FY '24. Even last year, we had a different growth rate in the first half and the second half of the year. As we looked across this year, we had a slightly lower volume of renewals. Obviously, year-to-date incentives have played out differently, largely due to client performance, deal timing, things like that. Overall, it's been better than what we anticipated. When we go into Q4, the same trend applies. We still expect Q4 to benefit from the lapping of the high incentives we saw in the second half of last year, which informs the growth rate we anticipate in Q4. We don't have much to share about FY 2025 at this point, but we'll share plenty in the next earnings call.

Jennifer Como, Senior Vice President and Global Head of Investor Relations

Next question, please.

Operator, Operator

Next, we'll go to the line of Ken Suchoski from Autonomous Research. Please go ahead.

Ken Suchoski, Analyst

Hi, good afternoon. Thanks for taking the question. I wanted to ask about value-added services and how some of the VAS revenue is correlated with transaction growth. But you also have parts of that business that are more recurring or less cyclical in nature. So can you just help us understand how you think about the cyclicality of VAS, and how that business might perform in a lower volume growth environment? Also, you've talked about pricing in value for VAS. So how much more room is left to go there? And how does that help with the resiliency of the business? Thank you.

Ryan McInerney, CEO

Yes, Ken, it's Ryan. On the second part of your question, our ability to price for value is a function of the value we bring to the market, and we feel great about the value we are bringing to the market. You see it in our results. Across various areas of issuing solutions, acceptance solutions, risk and identity solutions, and advisory, we continue to bring products and services that help our clients grow their businesses, reduce fraud, and increase authorizations. We believe we'll continue to do that and continue to price for that value. As you know, the largest portion of our value-added services is a function of Visa transactions. Visa transactions up or down will impact that, but so will our ability to sell more services. We still have many clients with which we have yet to achieve the type of penetration and depth that we have achieved with others. So, as we continue to penetrate our clients around the world in various markets, I'm very optimistic about our ability to continue to grow this business.

Jennifer Como, Senior Vice President and Global Head of Investor Relations

Next question, please.

Operator, Operator

Next, we'll go to the line of Tien-Tsin Huang from JPMorgan. Please go ahead.

Tien-Tsin Huang, Analyst

Hi, thanks, good afternoon. Just curious if you updated your U.S. outlook here in the second half. Are you still expecting transaction sizes to accelerate in the U.S., especially in the fourth quarter?

Chris Suh, CFO

Hi, Tien-Tsin. Thanks for the question. Yes, we had forecasted ATS growth to improve throughout the pace of this year from quarter to quarter, and we did see that. We saw ATS improve in the third quarter. Specifically in the U.S., ATS was slightly better in Q3 than in Q2. It got to basically flat year-over-year in Q3. We saw improvement in several categories sequentially: restaurant, QSR, fuel, telecom, utilities, insurance, to name a few. We anticipate in Q4 that we'll continue to see slight improvement sequentially again. The one thing I'll call out is that fuel prices could impact that trajectory, so we'll watch that closely. It is playing out as we anticipated. The pace is slightly varied from what we anticipated, but it is continuing to improve. That's the important thing.

Jennifer Como, Senior Vice President and Global Head of Investor Relations

Next question, please.

Operator, Operator

Next, we'll go to the line of Gus Gala from Monness, Crespi, Hardt. Please go ahead.

Gus Gala, Analyst

Hi, guys. Thank you. Can we talk a little bit about the contactless payments penetration? Can you highlight the gap in penetration rates across some of your older cardholders or young cardholders? What could a terminal level of penetration look like?

Ryan McInerney, CEO

You're asking—just so I heard you're asking about Tap to Pay?

Gus Gala, Analyst

Yes.

Ryan McInerney, CEO

Yes, maybe first in the big picture of things. Currently, outside of the United States, eight out of 10 of all the Visa face-to-face transactions across the entire planet are Tap to Pay. That just tells you that it's across all segments, demographics, use cases, and product types. We are at 80% overall around the world. More than 55 countries are now seeing more than 90% contactless penetration. In most countries, for most customers, and for most products around the world, this is becoming the default way that people are paying. In the U.S., the curve is maturing exactly how we'd expect based on what we've observed in over 100 countries worldwide. One out of every two transactions in the U.S. are taps. In New York City, for example, we're above 75% now. In New York City, which was one of the early adopters of transit, we're above 75% of all face-to-face transactions being taps, up from just 50% two years ago. At that level of penetration in a market the size of New York City, it's across the board regarding products and issuers. We're going to continue to see this growth happen, as buyers and sellers love tapping as a way to pay. We're excited to see that growth accelerate in the U.S.

Jennifer Como, Senior Vice President and Global Head of Investor Relations

Next question, please.

Operator, Operator

Next, we'll go to the line of Will Nance from Goldman Sachs. Please go ahead.

Will Nance, Analyst

Hi, guys. Thanks for taking the question. We've been getting a lot of questions around the litigation updates, and I totally understand the level of uncertainty is a lot higher now. But the most common investor question we're receiving is around the potential impacts on the overall ecosystem if we see a much greater reduction in interchange rates from what was proposed. Specifically, how the reduction in interchange rates could reverberate through renewal negotiations with issuers and then longer-term, how this may impact the trajectory of incentives and net yields. Just wondering if we could hear your perspective on the potential reduction, or a larger reduction in the total size of ecosystem revenue, and if that changes the direction of any of the key indicators that we're focused on over time? Thanks.

Ryan McInerney, CEO

Hi, Will. Thanks for the question. To address the MDL litigation, we strongly disagree with the judge's decision. We believe the settlement was fair, providing meaningful relief to all merchants. The second point to highlight is the decision failed to consider the complex multisided ecosystem that we operate in and the roles delivered by many players. After this decision, we're pursuing a revised settlement. It's too early to speculate on the terms of that settlement, but I want to emphasize that it can occur at any point before, during, or even after the trial. Just keep that in mind as this process plays out.

Jennifer Como, Senior Vice President and Global Head of Investor Relations

Next question, please.

Operator, Operator

Next, we'll go to the line of Timothy Chiodo from UBS. Please go ahead.

Timothy Chiodo, Analyst

Hi. Thanks for taking the question. I want to tackle both incentives and value-added services revenue at the same time. Specifically, on the concept of value in-kind incentives, I was hoping to hear whether these are becoming more prominent, meaning you're using them a little bit more in discussions with issuers. Additionally, could you briefly recap some of the mechanics around revenue recognition, the contra revenue, the addition to deferred revenue, and eventually, the value-added services revenue? Thanks.

Ryan McInerney, CEO

Yes. Value in-kind is an excellent way for us to deliver value to our clients. Increasingly, our clients, as evidenced in our performance, are preferring to buy our value-added services versus just take incentives that might drop to the bottom line. This is something our clients are asking for more. This is helping them grow their businesses. I've discussed how over the last several years we have built new products, solutions, and services for our clients. This is what's driving the demand. Value-added services are becoming a key part of our client renewals and discussions, helping us differentiate ourselves and grow our consumer payments business.

Chris Suh, CFO

Tim, to address the second part of your question, at a high level, when value in-kind is offered in lieu of a cash incentive, it can be recognized as contra revenue at the time it’s granted or earned, depending on the nature of the contract. When the client utilizes that value in-kind for services from Visa, commonly in our value-added services business, that is then recognized as revenue, and the associated costs are recognized in our P&L.

Jennifer Como, Senior Vice President and Global Head of Investor Relations

Next question, please.

Operator, Operator

Next, we'll go to the line of James Faucette from Morgan Stanley. Please go ahead.

James Faucette, Analyst

Great. Thank you very much. I wanted to ask a follow-up question on near-term trends. We've seen a little bit of further slowing in credit than in debit over the last couple of months, which has been an indication of consumer stress. I'm wondering how you're interpreting that. It seems like you're looking for the rest of the September quarter to see a bit of re-acceleration as we move past some of the issues you identified in July. I want to confirm that interpretation and understand how we should interpret the divergence in credit and debit growth right now.

Ryan McInerney, CEO

Let me give a little context on it and then Chris can add. We're three weeks into the quarter, and we've faced a hurricane, and a tech outage nationwide. A lot has been happening recently, so we're not concerned about three weeks being a trend. We will see how things progress for the rest of the quarter, and in terms of what's happening with the credit-debit divergence.

Chris Suh, CFO

Yes. I'll refer back to a previous comment regarding the July results. We're seeing a little bit of moderation in the lower spend consumer segment, correlating with the volume numbers for the quarter related to credit versus debit. Overall, however, we see it as relatively stable compared to Q2 and Q3 once we factor in the days mix with the leap year.

Jennifer Como, Senior Vice President and Global Head of Investor Relations

Next question, please.

Operator, Operator

Next, we'll go to the line of Bryan Bergin from TD Cowen. Please go ahead.

Bryan Bergin, Analyst

Hi, good afternoon. Thank you. I wanted to ask on new flows. You had a nice acceleration in growth over the last two quarters with consistent comps. Can you provide more color on the specific areas of strength that have picked up? I know Visa Direct was one of those. Do you believe you can sustain that level of expansion, or might it moderate a bit?

Chris Suh, CFO

Yes. Thanks for the question. 18% growth, as I mentioned, feel really good about the execution and momentum in the business. We have enormous opportunity in both our commercial business and money movement with Visa Direct. As you know, we faced a unique situation in Q1 where some one-time items largely influenced our reported growth. If you look at the last couple of quarters, the reported growth reflects the underlying health of the business. That said, as seen in Q1, growth can vary from quarter to quarter based on deal timing and terms and one-time impacts. Overall, the macro level momentum appears good. The underlying business remains healthy, growing outpacing consumer payments, with anticipated normal variability quarter to quarter.

Ryan McInerney, CEO

To build on Chris's points, we are in the early stages of Visa Direct growth. We've invested years building the necessary infrastructure and connectivity for both domestic and cross-border operations, collaborating with issuers, acquirers, and processors. We're now marketing our capabilities worldwide, identifying new use cases, several of which I mentioned in my prepared remarks. Back in 2019, we had 2 billion Visa Direct transactions, and this quarter we did 2.6 billion. This illustrates that by identifying market needs and investing appropriately in infrastructure, we can expect strong growth from this business and the number of diverse use cases and partners we'll be able to support in the future.

Jennifer Como, Senior Vice President and Global Head of Investor Relations

Next question, please.

Operator, Operator

Next, we'll go to the line of Sanjay Sakhrani from KBW. Please go ahead.

Sanjay Sakhrani, Analyst

Thank you. My questions have mostly been asked and answered, but I wanted to ask about the yield evolution. Can those go higher as you continue to expand in some of those categories with Visa Direct? Regarding Reg II, is the full impact of Reg II now in the run rate, or should we expect any uncertainties related to that? Thank you.

Ryan McInerney, CEO

Yes. Regarding the yield on use cases, we're still in an early stage of exploring all opportunities. For example, earned wage access was not even a conversation for us just a few years ago. We now have 65 plus use cases on the platform, and our teams are continually discovering new ones. The economic effects will develop progressively. Pointing to our recent achievements in cross-border, we've successfully developed and sold new use cases that have contributed positively to our growth there—yields are higher in cross-border due to the exceptional value our services bring. As for Reg II, the e-commerce debit market remains competitive, and we expect that environment to continue. As noted, we haven't observed changes in impacts, and we do not anticipate any changes for Q4. We're engaged heavily with clients, emphasizing the benefits of transacting on Visa. We're confident in our selling capabilities and overall win rate in this area.

Jennifer Como, Senior Vice President and Global Head of Investor Relations

Next question, please.

Operator, Operator

Next, we'll go to the line of Jason Kupferberg from Bank of America. Please go ahead.

Jason Kupferberg, Analyst

Thanks, guys. I wanted to clarify on revenue and a question on volumes for this fiscal year. It seems for Q4, you're looking for revenue growth of about 11% to 12%. I think that would put you at the low end of the low double-digit guide you're maintaining for the year. So that's what I wanted to clarify. And just a question about volumes. I believe you said Q4 should align with Q3, putting the full year at around 7%, versus the updated high single-digit guide last quarter. So as we start to tune our models for next year, could you discuss what some potential accelerators off that 7% level we should be considering?

Chris Suh, CFO

Hi, Jason. Let's unpack that. You had a couple of points in there, be super clear. For Q4, my guidance is that our Q4 adjusted net revenue would be low double-digits, slightly above the level we reported in Q3, which was 10% growth. That math aligns with your suggestion about the low end of the low double digits for the full year. The second part concerning drivers from Q3 to Q4, I've articulated that our payment volume and processed transactions are expected to be consistent with Q3, with the sole exception of cross-border, which is expected to fall slightly below Q3 levels due to the travel circumstances in Asia. Overall, those are the components informing our Q4 guidance.

Jennifer Como, Senior Vice President and Global Head of Investor Relations

Next question, please.

Operator, Operator

Next, we'll go to the line of Dan Perlin from RBC Capital Markets. Please go ahead.

Dan Perlin, Analyst

Thanks. A bigger picture question here, Ryan. Your AI and gen AI investment plans were previously discussed. I'm curious about the current status of those investments. What use cases do you anticipate emerging, and what would be the expected payback period? Is there potential to drive true incremental sales, or better outcomes for your merchant constituents as opposed to just the banks? Thanks.

Ryan McInerney, CEO

Yes, Dan, thanks for your query on AI. To frame it, we are all in on gen AI at Visa, just as we've been for over a decade with predictive AI. We're applying it in two broad-based ways: one is to enhance productivity company-wide, and we are seeing notable results; the second is to apply generative AI to improve the entire payment ecosystem. As for the latter part of your question, absolutely, I'd point to our risk tools and capabilities. An example would be the risk products used on RTP and account-to-account payments that are geared towards preventing fraud for both merchants and issuers. Another instance is our Visa Provisioning Intelligence Service, which leverages AI for predicting token provisioning fraud before it occurs. We're enthusiastic about the potential positive impact of generative AI on both our productivity and our ability to reduce fraud and drive incremental sales across our ecosystem.

Jennifer Como, Senior Vice President and Global Head of Investor Relations

We'll do one more question, please.

Operator, Operator

For our final question, we'll go to the line of Harshita Rawat from Bernstein. Please go ahead.

Harshita Rawat, Analyst

Good afternoon. Ryan, Chris, U.S. card volume growth of 5% suggests a mature market. I understand the category differences between card volume growth and DC growth that influence the delta here. Ryan, you discussed your global down estimate of $20 trillion in consumer payments for Visa. How should we think about the secular digitization opportunity and the growth algorithm for the U.S., which is your largest market? Thank you.

Ryan McInerney, CEO

It was hard for us to hear you, Harshita, but I think I captured your question about the growth algorithm for consumer payments in mature markets. As I stated, we see more than $20 trillion in opportunity globally; about a quarter of that is in the U.S. This includes cash, checks, ACH, electronic transactions, and cards running on domestic networks. We aim to capture this through several methods: expanding acceptance to more locations while enabling smoother e-commerce growth, thereby driving overall Visa transaction growth. We recently announced a series of new product innovations at our Visa Payments Forum. These products aim to enable us to win in our marketplace and capture a larger digital payment volume in the Visa network.

Jennifer Como, Senior Vice President and Global Head of Investor Relations

And with that, we'd like to thank you for joining us today. If you have any additional questions, please feel free to call or email our Investor Relations team. Thanks again, and have a great day.

Operator, Operator

Thank you all for participating in the Visa Fiscal Third Quarter 2024 earnings conference call. That concludes today's conference. You may disconnect at this time and please enjoy the rest of your day.