Will Visa and Mastercard lock horns over Brazilian fintech?

Payment platforms make most 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 can pursue growth through M&A.

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

– Pismo can help Visa and Mastercard enter Latin America’s growing market for instant payments and reach the unbanked.

– The pair is the top holding in the ETFMG Prime Mobile Payments ETF, which is up 6% so far this year.

The payment giants Mastercard [MA] and Visa [V] is 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 such as digital banking and digital wallets. Their clients include the Brazilian investment bank Banco BTG Pactual [BPAC11.SA] and financial services firm Itau Unibanco Holding [ITUB].

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

Visa shares are up 8.7% so far this year and up 2.5% in the past month, compared to increases of 4.7% and 2.3% in the same periods for Mastercard shares.

Growing through M&A

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

Mastercard’s purchase volume for the fourth quarter (Q4) of 2022 was up 11% year-over-year, compared to growth of 15% the previous quarter. Visa’s payment volume was up 7% in Q1 2023 versus a 10% gain in Q4 2022, and a 15% increase 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 feature” in the current climate and have created better opportunities to go hunting for targets, he added.

A deal for Pismo will help the company gain access to Latin America’s rapidly changing payments landscape.

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

To reach the unbanked

Latin American countries are increasingly becoming hotbeds of fintech innovation. Brazil’s central bank’s instant payment system, Pix, is the most widely 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 the industry publication Decorations last month that he believes instant payments are the future in the region, because their higher approval rates help speed up cross-border transactions and improve financial mobility.

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

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

Funds in focus

While inflation may weigh on spending habits, debit and credit card spending remains high after Covid-19 accelerated the digitization of payments.

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

The fund is down 1.6% in the last month, but up 6.1% so far this year.

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

The fund is down 10% in the last month and down 3.6% so far this year.

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

The fund is up 0.7% in the last month and up 5.9% so far this year.