Will Visa and Mastercard lock horns over Brazilian fintech?

Payments platforms earn the bulk of their revenue by taking a percentage of the fees merchants pay to banks when consumers use their cards to make a purchase. With inflation putting pressure on consumer spending, Visa and Mastercard could pursue growth through M&A.

- A $1bn bid from Visa was rejected earlier this year; this has now been raised to $1.4bn.

- Pismo could help Visa and Mastercard tap into Latin America’s growing instant payments market and reach the unbanked.

- The pair are the top holdings in the ETFMG Prime Mobile Payments ETF, which is up 6% year-to-date.

Payments giants Mastercard [MA] and Visa [V] are reportedly in talks to buy Brazilian fintech Pismo, as reported by Bloomberg last week.

Pismo’s cloud-based platform enables banks and financial companies to launch cards and payment products as digital banking and digital wallets. Its clients include Brazilian investment bank Banco BTG Pactual [BPAC11.SA] and financial services firm Itau Unibanco Holding [ITUB].

Visa had an original bid of $1bn rejected by Pismo, and, according to Valor Economico, it has since raised its offer to $1.4bn. But a buy-out battle could be brewing, as both Visa and Mastercard look for growth opportunities in Latin America, possibly through M&A activity.

The Visa share price is up 8.7% year-to-date and up 2.5% in the past month, versus gains of 4.7% and 2.3% in the same periods for the Mastercard share price.

Growing through M&A

The two companies generate the bulk of their revenue from earning a percentage of the fees merchants pay to banks each time a consumer uses one of their cards. In theory, inflation should boost the money they earn, although there have been concerns that higher prices will force consumers to further cut back on their spending.

Mastercard’s purchase volume for the fourth quarter (Q4) of 2022 was up 11% year-over-year, versus a 15% growth rate the previous quarter. Visa’s payments volume was up 7% in Q1 2023 versus a 10% gain in Q4 2022, and a 15% rise for the previous full fiscal year.

While both companies are optimistic about consumer spending holding up, Visa chairman and CEO Alfred Kelly spoke on the earnings call in February about “growing through M&A”. Falling fintech valuations are a “helpful characteristic” in the current climate, and have created better opportunities to go hunting for targets, he added.

A deal for Pismo would help the company access Latin America’s rapidly changing payment landscape.

Visa’s purchase volume growth rate in the region was 59% in 2022, up from 46% in 2020, Kelly said. Although growth in Mastercard’s Latin America purchase volume fell from 35.4% in 2021 to 33.1% last year, it was the best-performing region.

Reaching the unbanked

Latin American countries are increasingly becoming hotbeds of fintech innovation. Brazil’s central bank’s instant payment system, Pix, is the most-used payment method in the country. Colombia, Chile and Mexico have similar systems.

Daniel Passarelli, managing director for Latin America at Worldline [WLN.PA], told industry publication Pymnts last month that he believes instant payments are the future in the region, because their higher approval rates help to speed up cross-border transactions and improve financial mobility.

Demand for payment methods that provide an alternative to credit and debit cards is rising. They currently account for around 39% of digital commerce volume in Latin America, and 44% in Brazil, said Passarelli.

Instant payments have helped to boost financial inclusion in countries like Brazil. For Visa and Mastercard, partnering with or acquiring fintechs such as Pismo enables them to tap into the alternative payments methods market, helping them to reach markets that traditional banks have underserved.

Funds in focus

While inflation may be weighing on consumer spending habits, debit and credit card spending remains elevated after Covid-19 accelerated the digitisation of payments.

Visa and Mastercard are the top and third-biggest holdings in the ETFMG Prime Mobile Payments ETF [IPAY], with weightings of 6.36% and 6.31%, respectively, as of 1 April.

The fund is down 1.6% in the past month, but up 6.1% year-to-date.

The two stocks are the second- and third-biggest holdings in the iShares US Financial Services ETF [IYG], with weightings of 11.04% and 9.24%, respectively, as of 31 March.

The fund is down 10% in the past month and down 3.6% year-to-date.

The pair are also both held by the Capital Link Global Fintech Leaders ETF [KOIN] and have weightings of 2.59% and 2.60% respectively.

The fund is up 0.7% in the past month and up 5.9% year-to-date.