Visa (V) filed its latest 10-K with the Securities Exchange Commission late Friday, November 30. Comparing the language in the "Risk Factors" section (1A) year-over-year (compared to the 10-K filed in October 2011) shows that the company has expanded the verbiage in the section by 60%. Over 6,000 new words of warning have been added to the section (by comparison, 184 words were deleted and about 200-some changed or changed within changes).
So, what's in Visa's wallet of woe? The expansive list includes regulations, litigation, market volatility, technology, which spawns non-traditional competition, global challenges, and upcoming executive changes, to name a few.
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If last year's 10-K provided a sketch of the problems the company might face as the result of Dodd-Frank-stemming regulations and interchange reimbursements, this year’s can be considered a painting.
In new words this year the company says:
If we cannot set default interchange rates at optimal levels, issuers and acquirers may find our payments system unattractive. This could materially lower overall transaction volume or slow growth of transactions in the future.
Historically, of course, Visa and the other credit card issuers set default interchange reimbursement fees in the United States and many other geographies. Losing that ability, or having it restricted, is now an issue that will "materially increase the attractiveness of closed-loop payment systems"; in other words, systems that link the merchant and the consumer and cut out the middleman.
This "will likely create negative pressure on our pricing, reduce the volume of US debit payments we process," and "diminish" revenues. Last year the 10-K acknowledged the new Consumer Financial Protection Bureau created by the Reform Act/Credit Card Act which are in turn a result of Dodd-Frank.
Worse, it sees the issues which have been previously US-centric going global. New this year, the company identifies jurisdictions including "Australia, Canada, Brazil, and South Africa" as witnessing new consumer-oriented rules that could materially impact its business.
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Now, on a global basis, its says, "we may have to re-examine and possibly renegotiate certain of our contracts to ensure that their terms comply with new regulations, these and other clients will have the opportunity to renegotiate terms relating to fees, incentives and routing."
Since 2005, the 10-K states, approximately 55 class actions and individual complaints plaintiffs estimate that damages will range in the tens of billions of dollars. Because these lawsuits were brought under the US federal antitrust laws, any actual damages will be trebled.
Indeed, skimming down the 10-K to a line item for deposits into litigation escrow accounts shows that the amount the company has put aside has more than tripled since 2010. This year it has $1.715 billion in escrow compared to $1.2 billion in 2011 and $500 million in 2010.
Other outside forces are worrying Visa executives as the poor economic climate has brought its own set of woes. "Other threats include additional consolidation in the banking industry which could lead to lost business and decreased negotiating power. [T]he current economic environment [has led] clients [to] curtail or postpone purchases…some existing clients have been put under government receivership."
Visa specifically identifies that "extreme volatility" in the stock market "can cause consumer spending to decline materially."
In an entirely new section this year, the 10-K goes into the "significant technological changes confronting the payments industry" including developments in smart cards, eCommerce, mCommerce, and radio frequency and proximity payment devices, such as contactless cards.
We cannot predict the effect of technological changes on our business. We rely in part on third parties, including some of our competitors and potential competitors, for the development of and access to new technologies. We expect that new services and technologies applicable to the payments industry will continue to emerge. These new services and technologies may be superior to, or render obsolete, the technologies we currently use in our card products and services. In addition, our ability to adopt new services and technologies that we develop may be inhibited by industry-wide standards, by resistance to change from clients or merchants or by third parties’ intellectual property rights. Our success will depend in part on our ability to develop new technologies and adapt to technological changes and evolving industry standards.
And, of course, every tech company's bête noire, cybersecurity, makes a prominent appearance. In Visa's case it's not only worried about its own information but that held in third-party processors, any damage to which would have more than a reputational impact.
If we are sued in connection with any material data security breach, we could be involved in protracted litigation. If unsuccessful in defending such lawsuits, we may have to pay damages or change our business practices or pricing structure, any of which could have a material adverse effect on our revenues
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With all the challenges in the US, a global company might take some comfort in the relative strength of it international divisions. In this, too, however, Visa faces yet more challenges.
Before the company's reorganization in October 2007, Visa Europe and Visa US shared authorization, clearing, and settlement systems. Since then, Visa Europe completed and substantially deployed its own systems in the 2010 fiscal year.
As a result, Visa Europe and Visa the parent company has to ensure that the two systems can process every transaction involving both of the territories, regardless of where it originates. Needless to say, the company notes:
Visa Europe's newly independent system operations could present challenges to our business due to the heightened difficulty of maintaining the interoperability of our respective systems as they diverge over time. Failure to authorize or clear and settle inter-territory transactions quickly and accurately could impair the global perception of the Visa brands.
We have little ability to control Visa Europe's operations and limited recourse if it breaches its obligations to us. Visa Europe has very broad rights to operate the Visa business in its region under the agreement that governs our relationship. If we want to change a global rule or require Visa Europe to implement certain changes that would not have a positive return for Visa Europe and its members, then Visa Europe is not required to implement that rule or change unless we agree to pay for the implementation costs and expenses that Visa Europe and its members will incur as a consequence of the implementation.
If Visa Europe fails to meet its obligations, our remedies under this agreement are limited. We cannot terminate the agreement even upon Visa Europe's material, uncured breach. Although we have a call right to acquire Visa Europe, we can exercise that right under only extremely limited circumstances.
Capping off the expanded litany of risks, the 10-K concludes with concerns about its CEO stepping down when his contract expires in March 2013. Obviously, the company has known about this and has been seeking a replacement but as of the writing of the 10-K didn't feel to good about the prospects. In the 10-K it notes the company might face "inadequate depth of institutional knowledge or skill sets" which could adversely affect business. It says it cannot assure that there will be an effective transition to a new CEO when necessary.
The company sees little chance of acquiring its way out of its problems.
Although we may continue to make strategic acquisitions or investments in complementary businesses, products or technologies, we may be unable to successfully finance, partner with or integrate them. The integration of CyberSource, PlaySpan and Fundamo, all acquired recently, will take time and resources that would otherwise have been available for other acquisitions. We will be subject to the terms of the exclusive license granted to Visa Europe in most acquisitions and major investments that involve countries in the Visa Europe territory. Regulatory constraints, particularly competition regulations, may affect the extent to which we can maximize the value of acquisitions or investments.
Life may still take a Visa, as the old tagline went, but Visa is expecting to take a hit or two, or more.