Welcome to Visa's Fiscal Third Quarter 2016 Earnings Conference Call. Today's conference is being recorded. If you have any objections, you may disconnect at this I would now like to turn the conference over to your host, Mr. Jack Karski, Head of Global Investor Relations. Mr.
Karski, you may begin.
Thanks, Carrie. Good afternoon, everyone, and welcome to Visa Inc. Fiscal 3rd quarter earnings conference call. With us today are Charlie Scharf, Visa's Chief Executive Officer and Vasant Prabhu, Visa's CFO. This call is currently being webcast over the Internet and is accessible on the Investor Relations site of our website at www.investor.visa.com.
A replay of the webcast will be archived on our site for 90 days. A PowerPoint deck containing the financial and statistical highlights of today's call have been posted to our IR website. Let me also remind you that this presentation may include forward looking statements. These statements aren't guarantees of future performance and our actual results could materially differ as a result of a variety of factors. Additional information concerning those factors is available on our most recent reports on Forms 10 ks and Q, which you can find on the SEC's website in the Investor Relations section of our website.
And finally, for historical non GAAP or pro form a related financial information disclosed in this call, the related GAAP measures and any other information required by Regulation G of the SEC are available in the financial and statistical summary accompanying today's press release. And with that, I'll turn the call over to Charlie.
Thank you very much, Jack, and good afternoon, everyone. Thanks for taking the time. There are a series of topics that I'm going to discuss today, talk a little bit about Q3 results, a few comments about our European acquisition and talk about litigation, going to make some comments about the agreement we signed with PayPal today. I have a series of business updates that I'm going to walk through and then just a few sentences on the future before I turn it over to Ghassan. First of all, with the closing of our Visa Europe acquisition, as you can see, if you look through the numbers, the quarter is somewhat complicated, but we try to be as clear as we can in explaining the results.
I want to start by saying that we're pleased with our continued consistent and predictable results in the face of an unchanged economic environment and increased geopolitical risks. To that point, the consumer has remained remarkably steadfast in the face of significant global instability. Getting on to the results, we reported GAAP EPS of $0.17 per share and adjusted EPS of $0.69 per share. This includes several special items related to the acquisition of Visa Europe. Vasant will discuss in further detail, but we view these as non recurring items and are not a reflection of business performance.
On an adjusted basis, net operating revenue grew 3% nominally or 6% on a constant currency basis, reflecting a continued negative 3 percentage point impact from FX and in line with expectations we discussed last quarter. Our growth continues to be subdued by similar themes we have previously spoken about, such as the strength of the U. S. Dollar on translation and cross border volumes, continued low oil prices and weakness in China and oil based economies. However, U.
S. Spend remains steady as does other domestic spend. Overall, payments volume, cross border volume growth and process transaction growth was similar to last quarter. The following numbers do not include Europe. U.
S. Payments volume growth was 10%, basically unchanged from last quarter after adjusting for a leap year. International payments volume growth was 11%, down from 14% last quarter, driven almost entirely by lower domestic transactions in China that yield very little revenue. Cross border volume growth was 5% unchanged. Process transaction growth was 10%, an acceleration of 1 point due to lapping of Russia's NSPKOV migration.
More recently though, through July 14, U. S. Payment volume growth was 11%, U. S. Credit grew 18%, driven almost entirely by the positive impact of Costco and USAA.
Debit growth on the other hand moderated considerably falling from 8% in fiscal Q3 to 3% through July 14. The decline was driven primarily by InterLink. About a third of the decline is due to the lapping of very high growth at one of our large issuers who added InterLink to their cards last year and the remainder is due to dynamic routing decisions. The decline due to the lapping will continue for another 3 quarters, while the remainder is volatile as merchants and acquirers make right routing decisions dynamically. Cross border growth through July 14th is up 156%, but that's inclusive of Europe in the July 14th period.
For comparability, if you include Europe in both periods, through July 14, growth is 12% versus 8% in the 3rd quarter. The increase is driven by the timing of Ramadan and improvements that we see in the U. S. And Asia. And process transactions rose 42%, including Europe.
If you include Europe in both periods, then process transactions are flat at 11%. Moving on to Europe, just a couple of comments. We're very happy to have closed the acquisition on June 21. We are well into the integration process. We have a management team in place, which provides a great deal of consistency.
We've developed an integrated management approach and the teams are working extremely well together. We hosted 500 clients the week after the close in Europe where we showcased the benefits of a combined Visa to those clients. We've implemented an integrated approach to global and multi region clients and we're working through product and digital roadmaps ensuring Europe is appropriately prioritized within Visa. Regarding Brexit, just make a couple of comments. First of all, with Brexit or without Brexit, it does not change our long term view that the strategic rationale for putting these two companies together, makes extraordinary sense.
Also want to just remind people that they had a put and in that scenario, a negotiated transaction is a far better approach than having someone exercise a put at a time which is out of your control. Certainly, in the short term, currency weakness and reduced economic growth are factors. We haven't seen much impact yet, but time will tell. We still feel good about our ability to deliver the accretion that we discussed and Desant will review that in more detail in his comments. Let me quickly touch on legal matters now.
The recent decision by the 2nd Circuit Court of Appeals to reverse the approval of our multi district litigation class settlement is certainly disappointing. These cases were originally filed in 2,005 and we continue to believe that the settlement was fair and reasonable for all stakeholders. However, the appeals court found that there were conflicts of interest between the 2 merchant settlement classes, a class that would have received money for alleged past damages and a class that would receive the benefit of certain changes to our network rules going forward. The court concluded that the conflict of interest between these classes meant that the classes were inadequately represented for purposes of settlement. It will take some time for the impact of this ruling to be determined and there may be further appeals.
Meanwhile, Visa continues to honor the terms of the class settlement agreement, which remains in effect and did not terminate automatically because of the court's ruling. So, for example, Visa has not reversed its rule change, permitting U. S. Merchants to surcharge credit transactions and the funds that Visa paid pursuant to the class settlement remain in court supervised escrow accounts. If the Court of Appeals decision remains after any further appeals, the matter will resume in the lower federal court where we will defend the case and in time likely make a renewed effort to settle with the merchant classes.
It is too early to speculate what shape that might take. However, I note that the U. S. Retrospective responsibility plan continues to provide protection against monetary claims in the class litigation. As you know, a number of merchants have opted out of the class and filed their own complaints and we're continuing to defend those claims, which have not yet already been settled.
The District Court has set a status conference on August 11, where we hope to obtain further clarity about next steps in both the class action and opt out cases, but this will likely go on for some time. Finally, I should note that all the individual settlements we've entered into with opt out merchants remain in effect despite the court's ruling and regardless of the direction of any further appeals. The only exception is our settlement with Walmart, which was contingent upon the class settlement being affirmed. Its status will be determined after we have a final non appealable decision in the class settlement. Let me move on and talk about PayPal now.
Earlier, we announced a new strategic partnership with PayPal. The partnership will result in significantly improved payment experiences for Visa cardholders in the PayPal and Venmo wallets. The partnership is designed to deliver significant benefits for Visa's issuing experience for their customers, more spending volume on their credit and debit cards, lower operational costs and improved security. Merchants will also benefit from improved customer experiences, efficiency and security, which together should help drive increased sales. The details include the following.
1st of all, enhanced consumer choice and improved experience for Visa cardholders. PayPal will make it easier for new and existing customers to choose to pay with their Visa cards and ensure a more seamless experience. Visa cards will be presented as a clear and equal payment option during enrollment and subsequent payments with an easy ability for consumers to set as their preferred payment method. Visa digital card images will be incorporated into payment flows. PayPal will not encourage Visa cardholders to link to a bank account via ACH.
PayPal will also support and work with issuers to identify consumers who choose to migrate existing ACH payment flows to their Visa cards. Consumers will also be able to instantly withdraw and move money from their PayPal and Venmo accounts to their bank account via their Visa debit cards leveraging Visa Direct, providing experience that offers speed, security and convenience. An important aspect of our agreement is enhanced data quality. PayPal will ensure that the data provided to issuers and their cardholders for Visa funded transactions will be consistent with the information that is received with traditional Visa card transactions. This will ensure a better consumer experience, reduced cardholder confusion, ensure proper application of rewards and reduce costly and time consuming disputes.
PayPal will join the Visa Digital Enablement Program, what we refer to as VDAP, to enable them to expand their point of sale acceptance. This is a commercial framework for Visa Partners to access our token services and other digital capabilities in the United States. Consistent with VIDA, issuers will be able to choose whether to participate or not. The agreement affords PayPal certain economic incentives, including Visa incentives for increased volume and greater long term Visa fee certainty. Importantly, Visa issuers will have a 12 month period of exclusivity for promoting their cards that are within PayPal's wallets.
The partnership puts PayPal and Visa on a new constructive path forward and provides a framework for our companies to work together collaboratively. A couple of notes about some client activity. We're pleased to announce that we renewed a multi year agreement with TD in the United States and Canada for continued Visa credit and debit issuance Regions Bank, a longtime Visa client, renewed a multiyear credit and debit agreement Chevron, one of the world's leading energy companies renewed a multiyear credit co brand with Visa. And as I'm sure you know, on June 20, Visa credit cards became exclusively Costco, U. S.
And Puerto Rico warehouse locations and fuel stations and the new Costco Anywhere Visa card by city launched. This has been a long complex process, but we're very encouraged by the results so far. And outside of North America, HomePlus, the 2nd largest retailer in South Korea with branch and home delivery services, renewed a multiyear co brand program across multiple issuers supporting PayWave. In Taiwan, we renewed a multiyear credit co brand agreement with Taixin Bank, one of the largest co brand programs in the market. And in Indonesia, we renewed a multiyear debit agreement with Mandiri, who is the largest state owned bank in the country.
Moving on to EMV in the U. S. 9 months out from the official kickoff to chip in the U. S, we continue on the journey of moving from mag stripe to chip and the U. S.
Is now the largest chip market in the world. More than 326,000,000 Visa Chip Cards were issued as of June 2016 making the U. S, as I said, largest in the world and larger than the U. K. And Brazil combined.
58% of credit cards and 37% of debit cards have a chip on them today. More than 1,300,000 merchants now have chip enabled terminals or roughly 28% of all merchant locations. Based on client surveys, we expect 75% of credit cards, 55% of debit cards, representing 96% and 73% of volume respectively and roughly 45% to 50% of merchant locations will be enabled with EMV by the end of calendar 2016. Having said all of this, this is a huge effort and we're doing a series of things to help make this process move more quickly and more smoothly. To that end, Visa announced a series of initiatives to help accelerate EMV chip migration for merchants.
We streamlined our testing requirements, we amended and simplified the terminal certification process, we committed to investing further resources and technical expertise in a manner that can reduce time frames by as much as 50%. We are also making policy changes to help limit exposure to counterfeit fraud liability for merchants who are not yet ship ready. I do want to say a few things about our relationship with U. S. Merchants.
We continue to invest in people, products and solutions to help our merchant clients grow their business and reduce their costs. We've made good progress on this front with many of our merchant clients, though it's early days and this is a long term commitment on our part. You have read Shirley about some of the disputes we have with some merchants. We are committed to doing everything reasonable to resolve these issues and we're committed to continue strengthening our relationship with all merchants. As we continue to expand Visa Checkout around the world, we're constantly working to perfect the user experience and to deliver on a promise to make paying with Visa in the digital world as easy as it's been to pay in the physical world for more than 50 years.
We rolled out the new Visa checkout experience to all of our merchants globally. Working with dozens of our top U. S. Merchants, we updated the checkout experience to simplify the sign up process for consumers to enroll, add cards and manage their information with more fluid interactions and smart autofill capabilities. We also have begun to roll out an interactive checkout button allowing customers to enter their password right into the checkout button and confirm checkout with a single tap.
Most of these features will be automatically available, which means merchants do not have to make any adjustments to their existing online checkout processes or payment systems. As we head into the Rio Olympics, we use the global sponsorship platform to highlight Visa Checkout and its merchants, including Best Buy and United Airlines, with whom we've created Olympic themed ads that you'll likely see on TV in the U. S. In the coming weeks. As we continue to look forward and drive new technologies in the payment space, As you know, we opened an innovation center in our San Francisco headquarters, which has served as a destination for clients, partners and developers to see our new payments technologies and work alongside us and our experts and jointly create the next generation of payment and commerce applications.
We've had great success and we've committed to expand the number of facilities so we can be close to our clients. To that end, in April, we opened our Singapore Innovation Center. In May, we opened 1 in Dubai. And in June, we opened 1 in Miami, all of which will serve our clients, partners and developers in that region and act as a hub to jointly create the next generation of payment commerce applications. Accessible to both local and global clients, all these innovation centers will provide our partners with access to Visa APIs and software development kits available through our Visa developer platform.
We also have an innovation center in London and have plans to open others in 2017. We announced yesterday that we'll be opening a new facility in Palo Alto later this year. The office will house work that we do around data, business intelligence, technology research and merchant solutions. We decided to open this facility following on the great success that we've seen with our San Francisco and Bangalore facilities. We found that the combination of location, physical design and coworker colocation concentration are critical in our quest to continue to lead and innovate.
All of these new locations provide opportunities to draw talent from communities that have concentrations of skills different from each other and allows Visa to benefit from the diversity of people and ideas in these very different communities. We announced a new $5,000,000,000 share repurchase program. This brings the total available for share repurchases to $7,300,000,000 This is a reflection of our confidence in our business, our commitment to offset the dilution from the preferred stock issued to these U. S. Members and our continuing commitment to return excess capital to shareholders.
Before I turn the call over to Vasant, just a few words about the future. You can see that we provided full year guidance on a GAAP and an adjusted GAAP basis as required, and we've tried to give you a clear indication of the impact of Europe in the 4th quarter. On an adjusted basis and without the impact of Europe, we reaffirmed all of our 2016 guidance metrics. You will hear from Vasant, but we're still confident in our ability to achieve the accretion from the European transaction we shared at the time of the announcement. Looking ahead, we expect next quarter's results to improve modestly similar to first half of the year's results.
We'll provide more commentary on 2017 in October, but our underlying business is strong and with the lapping effect of several items based on what we know today and assuming similar consumer spending patterns, we feel good about our ability to produce stronger revenue and earnings growth. With that, I'll turn the call over to Vasant. Thank you, Charlie.
In a world that's turbulent, both from a macroeconomic and a geopolitical standpoint, our business remains steady and resilient. A few points to note. Net revenues grew 6% in constant dollars and 3% in nominal dollars at the high end of the range we had given you. Key business trends, payment volumes, process transactions and cross border transactions remained stable. Currency volatility stayed high, especially post the Brexit vote.
As expected, client incentives are almost 19% of gross revenue. Once again, we had good expense management. Expenses declined 7% in the quarter on an adjusted basis and are flat year to date versus 2015. Lower personnel and marketing costs contributed to lower than projected expenses in the quarter. Non GAAP EPS in Q3 was $0.69 after you adjust for our GAAP EPS of $0.17 for 4 significant vis a Europe related non recurring items.
First, a $1,900,000,000 loss related to the settlement of the Visa Europe framework agreement as part of our acquisition of Visa Europe. 2nd, a $92,000,000 staff duty paid to the UK Treasury recorded in general and administrative expenses. 3rd, dollars 60,000,000 in transaction related expenses recorded in professional fees 4th, a net gain of $103,000,000 as we accumulated euros leading up to the closing of the transaction, which is recorded in non operating income. You might recall, we had a similar gain of $116,000,000 last quarter, which we also excluded from our reported EPS as a non GAAP adjustment. Now a quick review of the quarter's business drivers.
Global Payments volume in constant dollars grew 10%, roughly in line with the prior quarter when you adjust for the leap day. U. S. Payments volume picked up modestly adjusted for the leap day as we start to benefit from USAA and Costco conversions, which helped credit growth to exceed debit growth in the US. International payment volume growth of 11% ticked down modestly.
The strong dollar continued to weigh on international payment volumes, nominal growth was 5%. Despite Brexit and oil price collapse, commodity market weakness, a slowdown in China, terrorism and other destabilizing forces, payment volumes have remained stable for most of this year. Cross border volumes grew 5% in constant dollars, a modest step up from a leap day adjusted second quarter. As the strengthening trend in the dollar has moderated, we have seen a reduction in the rate of decline in our large U. S.
Acquired business and in outbound commerce from Canada. However, this improvement is largely offset by a continuing slowdown of outbound commerce from China, down from 50% growth rates in Q3 last year to barely positive right now. Cross border commerce from oil commodity based economies remain sluggish. Process transactions totaled $19,800,000,000 in the quarter, up 10%. US growth was 11% and international growth was 7%.
As expected, international process transaction growth rates are stepping up as we lap the transfer of domestic processing to NSPK in Russia. As you know, these numbers are not inclusive of Visa Europe. In our operational package this quarter, we have included a schedule that provides you with a 5 quarter history of the European geographies payment volume and transaction statistics. If we add these to our Q3 metrics, both to this year and last, constant dollar global payment volume growth would be 9%, cross border volume constant growth calculated based on merchant currencies merchant country currencies would be 8% and process transaction growth would be 11%. Of course, starting next quarter, we will incorporate Europe as a new region in our operational performance data package.
Moving on to our financial metrics. Service revenues grew 6%, roughly in line with nominal payments volume growth. The reduction in the growth rate from the last quarter was anticipated as we lack pricing increases from last year. Data processing revenue grew 10%, in line with process transaction growth. International revenues grew 4%, generally in line with volume growth as we lap our price increases and the drag of the strong dollar moderates.
Fortunately, currency volatility has stayed high and comparable to the highs reached last year. Post the Brexit vote, volatility has reached levels we have not experienced in recent years. Incentives were in line with our expectations. As we indicated, the significant year over year increase was driven by an unusually low level of incentives in the Q3 of 2015. Incentives as a percentage of gross revenues approached 19% and will pick up further in Q4 as Costco incentives kick in.
This will bring full year client incentives as a percent of gross revenues to around 18.5%, the high end of the 17.5% to 18.5% range that we had provided you. With expense growth down 7% and a tax rate of 30.4%, our run rate EPS was $0.69 after making the 4 Visa Europe related adjustments I described. As a reminder, there is no Visa Europe revenue, expense or income in our Q3 numbers. Had we included Visa Europe results for the 9 days we owned it in the quarter, it would have added a de minimis $12,000,000 to our net income. Some vis a Europe related considerations.
The European leadership team is in place as Shali said and running the business. The business is performing as expected and integration activities have commenced. The employee consultation process, which is required by law before any restructuring of operations is underway in the UK. The technology harmonization program has also been launched. We are moving fast to bring Visa's global capabilities to European customers, including Visa Checkout, Visa Token Service, Visa Direct, as well as our consulting resources.
Significant customer relationships have already been renewed and others are in process. We believe our customers are excited by what a global Visa can offer them. Visa Europe members have been informed that rebates will be terminated at the end of September 2016. We are working with our customers to transition to commercial relationships with competitive client incentive programs as we have elsewhere in the world. This will be a multi year process, but the early results have been positive.
The longer term impact of Brexit on Visa Europe's business is too early to determine. The immediate impact has been on exchange rates. The weaker pound and euro will hurt revenues as reported in dollars. However, a significant portion of Visa Europe's expenses are currently denominated in pounds, which offsets the negative revenue impact. Given the relative values of the pound and the euro at this point, the net impact of Wizzi Europe earnings as reported in dollars is roughly neutral right Brexit has also introduced significant uncertainty, which is never good for business sentiment.
Most economic prognosticators are expecting an economic slowdown in Europe. Beyond this, it is too early to know what the broader and longer term implications of Brexit are for our business. Assuming exchange rates stay where they are today and there are no major economic dislocations as a result of Brexit, we accept Visa Europe earnings to offset interest expense from debt in the Q4 of fiscal year 2016 as we told you last quarter. Visa Europe is expected to add 2% to 3% to EPS accretion in fiscal year 2017, in line with the low single digit accretion we had anticipated. Our accretion estimate assumes the current tax structure stays in place through fiscal year 2017.
Under this structure, Visa Europe is a U. S. Taxpayer. This tax structure is favorable from a cash tax standpoint. However, the current tax structure results in a high reported or book tax rate for Visa Europe's earnings.
This will add approximately 1 percentage point to Visa's reported tax rate in fiscal year 2017. As always, we will be working on plans to improve both our cash and reported tax rates over time. Visa Europe has over $2,000,000,000 of cash on its balance sheet. Based on discussions with our regulator in the UK, we will leave this cash within the Visa Europe legal entity. As a result of this action and due to the higher upfront cash consideration after we eliminated the earn out provision, we will issue additional debt later this year to fund stock buybacks to offset dilution from preferred stock issued in the transaction.
Our current plan is to issue at least $2,000,000,000 in debt before the end of this calendar year. As we indicated, we plan to offset the dilutive impact of the preferred shares issued by buying stock in excess of our normal buyback program. We have been buying stock back at a stepped up pace for the past two quarters in anticipation of the closing of the transaction. We plan to continue buying at this space until we have bought back sufficient stock to offset the impact of the shares issued. We expect that we will be done by the end of the Q1 of fiscal year 2018.
In the 3rd quarter, we recognized a $1,900,000,000 loss related to the Visa Europe framework agreement. Under U. S. GAAP, as part of our accounting for the Visa Europe acquisition, we are required to assess all pre existing contractual relationships between Visa Europe and Visa. If the terms of those agreements are determined to not be at fair value at the time of the close, a portion of the purchase price paid in the transaction is deemed to relate to the effective settlement of these arrangements between the parties.
The Visa Europe framework agreement was established in October 2007 between Visa and Visa Europe as part of our 2007 reorganization. This agreement provides Visa Europe with a perpetual exclusive right to operate the Visa business in the European Union in exchange for a license fee paid to Visa. Under the terms of the framework agreement, the license fee paid by Visa Europe has increased modestly since 2007. However, the value of the Visa Europe business has increased at a greater rate. As such, management concluded that the terms of the framework agreement were not at fair value as determined under U.
S. GAAP at the time of the close. We estimated the value of settling the framework agreement at $1,900,000,000 The size of this settlement value is driven by the fact that the agreement was perpetual in nature and would have continued indefinitely had the acquisition not occurred. Under U. S.
GAAP, $1,900,000,000 of total consideration transferred to VE in the transaction is immediately charged to the income statement as a one time non recurring operating expense, representing the cost of settling this arrangement. Had this arrangement not existed or its terms been at fair value, this amount would have been allocated to net assets acquired. This would have resulted in $1,900,000,000 additional goodwill recorded in the transaction. Our 3rd quarter balance sheet includes Visa Europe. In a few days, we'll be filing our 10 Q, which will provide considerable detail on all aspects of the accounting for the Visa Europe transaction.
Allocation of the purchase price to net tangible assets and liabilities and to intangible assets and goodwill, as well as the impact of Visa Europe on cash and working capital balances. We would of course be happy to answer any questions you have after you review the 10 Q. Moving to our outlook for the Q4 and the impact of Visa Europe. We expect nominal net revenue growth in Q4 for the legacy Visa business, not including Visa Europe, of around 5% to 6%, in line with the first half trends. Q3 growth rates were depressed by unfavorable year over year comparisons on client incentives, which will normalize.
We are also projecting a modest uptick in cross border growth rates as dollar strength moderates and we lap the slowdown from last year. Visa Europe will add 13 points to 14 points to 4th quarter net revenue growth. We expect 23% expense growth for legacy Visa in Q4 from RIO related marketing and higher technology project spend. Visa Europe will add as much as 15 to 16 points to expense growth. As I mentioned earlier and in line with what we told you last quarter, Visa Europe income should offset debt interest expense in the 4th quarter.
For the year, our key guidance metrics for legacy Visa remain largely unchanged. Visa Europe will add 3 to 4 points of growth to both revenue and expenses. The concentration process is underway in Europe. We're also looking at adjustments to our global cost base as we integrate Europe. Assuming our plans are finalized, we expect to take a restructuring charge in the 4th quarter to resize our global cost structure as a result of the Visa Europe acquisition.
As we've said previously, the technology integration will happen later. We will regularly update you on progress. A quick word on fiscal year 2017. As we normally do, we will provide our comprehensive perspective on 2017 when we talk to you in late October. As we look ahead, we feel good about our business and what Visa Europe will add to it.
There are as always tailwinds and headwinds. In the tailwinds column, payments volume uplift from USAA and Costco, 2 significant drags look likely to ease gas prices and the dollar translation impact cross border growth could improve as dollar strength moderates and last but not least, accretion from Visa Europe. In the headwinds column, continuing global uncertainty, both economic and geopolitical, the impact of Brexit on Europe China slowdown and market entry costs. On balance, we anticipate 2017 will be a year with healthy top and bottom line growth for Visa. With that, I'll turn this back to Jack.
Thank you, Vasant. Operator, at this time, we are ready to take questions.
Thank you. Thank you. One moment please for your first question. Our first question is from Mr. Simon Crohn of CLSA.
Your line is now open.
Hi, thank you. A question on the PayPal agreement. So one of the aspects of the agreement seems to be focused on having Visa being more of the default payment option, funding option in the PayPal account. So today, what is Visa share as a default funding option for PayPal accounts? Where do you believe this new agreement is going to move that share?
And what happens at the end of the 12 month period, exclusivity period of fees doesn't get the share that you expected to get as a result of your negotiations? Thanks.
Let me do a couple of things and Jack can chime in here, Joyce. Relative to what we make up of a PayPal wallet, you really have to ask PayPal that question because we know what we know and we have some general thoughts, but they really can be the ones and should be the ones. I just generally, what we've always thought is that roughly half the transactions that run through PayPal run through a network and we're roughly half or so of that, split between credit and debit. But those are I would call those gross approximations and directional and it's you really need to talk to them. Relative what happens in terms of the flows, again, if you go through what I said, what we really are interested in doing is to ensure that Visa cards are on a level playing field.
And if they're on a level playing field, we feel great about our ability to increase the amount of volume that run over Visa cards and ultimately benefit our clients. And so what the agreement does is it enables that to occur and there's a period of time where we can we will work actively together and exclusively, to move volume from ACH back onto Visa cards if that's what the client wants to do. And so to the extent that that happens, net net that's a financial plus for us. As part of this agreement, as we've said, there are incentives that we will pay these incentives that we will pay to PayPal. And if those numbers aren't reached, then the incentives don't get paid.
But the last thing I just I do want to say is, partnership agreements work when there's alignment for everyone. And so we've had extensive conversations over a long period of time with PayPal, with our issuers and other members of the payments community. And what we've tried to do here is to come up with something that really does work for everyone. And so where we could sit here and say, this is all about driving growth in the electronic payments universe, because we're creating better customer experiences where they're allowed to use products that they want to use, where they get all the benefits of those products are, it is seamless experience through PayPal. These products become a better alternative to cash and check and other alternatives out there.
So the way we see it, we've given ourselves an opportunity to grow, we've given PayPal an opportunity to grow and most importantly, we've given from our perspective, Avisa, our clients an ability and opportunity to grow and provide a better experience for their consumers.
Thanks, Tom. Operator, next question?
Our next question is from David Togut of Evercore ISI. Your line is now open.
Thanks and congratulations on completing the Visa Europe acquisition. Now that you own Visa Europe, can you update us on your thoughts with respect to the pricing opportunity there to move Visa Europe's price over time closer to Mastercards which are currently at a significant premium?
Yes. I mean, I don't think there's much that we're going to add that we haven't said before on that. In the process of moving to a commercial enterprise, we obviously know what the market is, but we're also keenly aware that pricing should be reflective of value that's added. And so I think that's a conversation that we'll have directly with our clients. And when it's appropriate, we'll talk more broadly about
it. Next question, please.
Thank you. Our next question is from Jason Kupferberg of Jefferies. Your line is now open.
Great. Thanks guys. Maybe just a quick clarification and then a question. Are you still expecting high single digit EPS accretion from Visa Europe in fiscal 2020. And then my question just on the PayPal agreement, it looks like it's U.
S. Only. Is there still something potentially in the works for non U. S. As well?
So on PayPal, it is U. S. Only, and I think we're each in the position where we'd like to turn our attention outside the U. S, but we wanted to get the U. S.
Done first.
And on the VZ Europe accretion, no, there's no change in our expectations for the long term.
Perfect. Thank you.
Thanks, Jason. Next question please, operator.
Our next question is from Darrin Peller of Barclays. Your line is now open.
Thanks, guys. Thanks for the update. Just want to go back to the timing you mentioned before around tailwinds. You mentioned a number of renewals also around large clients in your remarks. Incentives and rebates broadly were thought to be time for the Costco and USAA deals, I think early followed by then revenue coming on the next couple of quarters.
So can you just provide us an update with the timing on those as the incentives are now flowing through and should we get the revenue off that in the next few quarters? And then also other types of incentives coming with those renewals? Is there going to be any type of spike on that going forward? Thanks guys.
Yes. I guess you were referring to the headwinds and tailwinds comments I had made. Yes, there was no there was nothing there about renewals as it relates to next year. There is a normal course renewals that we would do in the course of the year. In terms of incentives kicking in, as I mentioned, Costco incentives will definitely kick in meaningfully in the Q4 with a quarter lag.
As you know, service revenues kick in a quarter later. We will you will see in our gross revenues an uptick in the rate of growth, both from USA and Costco. And of course, there will be an uptick also on the incentive line. And the net of all that, we'll talk about all that as we talk more comprehensively about 2017. Other than that, I don't think there was anything else I said that you were talking about.
That pretty much explains the comments on 2017.
Next question, please.
Thank you. Our next question is from Dan Perlin of RBC Capital Markets. Your line is now open.
Thanks. I just had a question on the PayPal Visa agreement. The participation now in VDAP, I just want to be clear that is that does now qualify them for a different interchange here, which would be lower. And then the incentive fee that you're talking about, just so I'm clear, that's coming out of your that would come out of your contra revenue? And do we need to be contemplating that more significantly in 2017?
So, I just want to be so VDAP, I just want to be just a couple of things on VDAP. So again, what we've done is we have agreed with PayPal that they will have the ability to access Visa tokens. But in order to do that, they have to work with the financial institutions and they have to agree to provide those tokens. So what we've done is, think of it like we've enabled PayPal to have those discussions directly with the issuers and that's up to the issuers to determine whether or not they would like to do that.
Next question please.
Thank you. Our next question is from Moshe Katri of let me check of Williams Trading. Your line is now open.
Hey, thanks. Just going back to Visa Europe, your large competitors talking about opportunities for them to gain some share in Europe. Maybe you can give us some color on any sort of potential churn that you're seeing in that business and what are we doing to kind of protect that down the road? Thanks.
Listen,
listen, there are a lot of people that do a lot of talking out there, and that's fine. We spend a lot of time talking to our clients and working actively with them on delivering value day in and day out and letting the results speak for themselves. I would say that from the moment that we've announced the transaction, I think we're extremely, extremely comfortable with the renewal activity that's taken place, in Europe. The team in Europe, I would tell you, has our team in Europe has delivered everything that they said they would deliver to us, and that has continued, in the period after the close. Our conversations with clients, I feel are exactly what we want them to be, which is they are very excited about having the opportunity to get access to the capabilities that the global Visa can bring, which Visa Europe was not able to bring.
And so there are a lot of things that they liked about Visa Europe that encouraged them to do business with Visa Europe over a long period of time with those relationships and we bring additional capabilities. And so, I look at the environment and say, listen, everywhere we compete across the world, you have to show up with better products day in and day out and that's what we're able to do in Europe. And until I see anything different than what we've seen, I'm going to continue to feel great about where we are. Helpful. Thanks, Moshe.
Thanks. Next question please, operator.
Next question is from Chris Brendler of Stifel. Your line is now open.
Hi, thanks. Good afternoon. I want to ask a question on your comments around Intralink and dynamic routing. Can you just sort of refresh our memory, what to extent the landscape has changed recently? What's causing the increased dynamic routing.
My sense is there are some merchants who are using chip cards to take advantage of not just routing on PIN, but also routing on signature And wanted to see if you could potentially also discuss any legal aspects of the Kroger lawsuit as it relates to forcing consumers to choose PIN?
Yes. Well, I'm not going to talk about anything regarding any ongoing litigation that we have, which I think is what you'd expect. But I'd say the following things. I think as we go through the conversion to EMV, there are just there are a lot of moving pieces, especially in the debit world. With terminals having to be reprogrammed, new terminals out there, multiple applications embedded on chips and things like that and merchants turning on pin pads at different times from times when they've actually turned on the EMV reader.
And so there's just so there's a lot of movement between Signature and PIN, which is somewhat different than we would have seen in a steady state environment and that will play itself out. And that's not a plus or minus. There's just movement there and that's the reality of what happens during a conversion like this. What we see is ultimately, we just want our consumers to have the ability to use the cards. Merchants have whatever abilities that Durbin has given them and we've and they've had those capabilities ever since Durbin was passed.
And a big part of that is they have the ability to choose, the routing preference. And so as we've seen since Durbin came into place, quarter by quarter, there are just a whole series of things that impact where a merchant wants to route to. People give them incentives when they whose incentives they think they're going to hit or not hit, help them decide where they want to route to and route away from. And so, the interlinked volumes that we see and we look at it regularly are very volatile. And so just keep in mind that the numbers that I talked about, which have that decrease, they're 2 weeks.
And so someone can make a change in a routing table, we can see a very big impact. That can also change 2 or 3 weeks from now based upon what we do relative to incentives and things like that. And that's just that is the way the business works. And I think that's the way Durbin intend the Durbin amendment intended it to work.
Next question, operator?
Thank you. Our next question is from Bill Carcache of Nomura. Your line is now open.
Thank you. Charlie, I wanted to follow-up on your comment about Visa issuers having, I believe you said 12 months of exclusivity to promote their brands on PayPal. Do you have a sense for what would lead issuers to want to take advantage of that period of exclusivity? And do you expect you touched on this earlier, but maybe a different way of asking the question is, do you expect that the partnership agreement is going to drive a little bit more of a shift in the mix of PayPal volumes funded by Visa products?
Yes. Listen, I guess, go ahead and put it as I think so first of all, it's completely up to the issuers on whether or not they want to proactively work with ourselves and or PayPal. Again, we're not telling any issuer they have to do anything. But what we've heard consistently from issuers, and I certainly experienced it when I was at 1, is that, ACH is a really bad thing. You're disintermediated.
It's a bad customer experience. They don't understand the process to dispute things. Call centers don't understand information and things like that. And so given a choice, you'd rather have a transaction run over a Visa debit or credit product rather than ACH. So I would assume that most issuers would choose to want to actively engage, to try and move those transactions onto cards, which quite frankly, consumers know, love, understand and are very comfortable with how those products work.
And so during this period of time, PayPal wants to work actively with us because to the extent that consumers want to do this, it's again, I can't speak for them, but consumer choice was an important part of the discussion in the press release and that's what this actually provides. So, again, the way we look at just as the network, but the way we look at what we've done in this agreement is we've taken we've tried to work with PayPal and partnership to take away the things that discourage people from working together and take away the things that create bad customer experiences. And just when you do that in anything, hopefully, you wind up with a position where people actually work together. And if you don't even just get back to, it should produce a higher level of growth coming from someplace else. And whether that comes from other networks, cash, check, any alternatives out there, we don't know.
But that's what this agreement is. It's about taking those bad things out, providing a better consumer experience, and then the consumers will ultimately choose what they want to use. And again, as I said, we feel very comfortable that we'll do quite well in an environment like that as our clients will.
Thanks, Bill. Operator, next question?
Next question is from Don Fendetti of Citigroup. Your line is now open.
Yes, Charlie, Mastercard is buying VocaLink. I was curious if that has any incremental impact to you. Obviously, you dominate debit in the UK. I want to get your thoughts there. And also related to that, any early views on PSD2 and what that might mean to your debit volumes?
Yes. Listen, I mean, obviously, they just announced it this morning, so it's very early. I just so I would say and I honestly haven't had a chance to read what they've actually written, but I guess I'd just say a couple of things. And I think the same goes true for PSD2, which is, we as a network are successful not because we offer extremely low priced commodity services with very little value add. It's the exact opposite of that.
And the ability for us to have grown the business that we've grown around the world, is all about delivering value added services, whether it's fraud protection, risk scoring, work on marketing, all those things, that's ultimately why people choose networks. And as I've said, that's something that we need to deliver both, not just to issuers, but ultimately, to merchants either directly or through the acquiring community. And so to the extent that we do that, whoever we compete with, because remember, we've competed as we've competed with PayPal, which has had another way of doing business here. And in the physical world, we've done quite well, and felt very comfortable with our ability to compete in the online world as we've developed these solutions. So, for us, it's about creating that value, delivering on innovation, and I wouldn't underestimate the work that we have done at Visa on fast funds, push payments and things that we're doing both in developed parts of the world and emerging parts of the world.
And so regardless of who buys what out there, those are activities that we had underway because there's tremendous opportunity. And I think those are the things that will allow us to compete not just with an acquisition out there, but the types of people that will be able to insert themselves into the payment flow because of PSD2.
Thanks, Don. Operator, next question?
Next question is from Lisa Ellis of Bernstein. Your line is now open.
Hi. Good afternoon, guys. It looks like Visa Europe's volume growth decelerated again this quarter and has on top of I think a deceleration last quarter. Can you just talk about now that you've seen under the hood a bit, what's been driving the deceleration in their volume growth and how you expect that to look going forward both now that you own the asset well as in the wake of the regulatory changes in Europe? Thanks.
Yes. Lisa, VISIONAVE's growth has generally tracked well with what we had anticipated. The business is performing pretty much exactly as we expected, if not a little better. And we've seen some it's very early to assess the impact of Brexit. We haven't seen much change.
We've seen other than the exchange rate impacts, which I talked to you about earlier, we've seen some modest impacts on the cross border business. As you would expect, inbound commerce into Europe and the UK in particular is picking up as a result of the exchange rate moves most likely, especially from Asia. Outbound from the UK is relatively stable in transaction terms. But as you would expect, when the currency moves, there is an impact on the ticket itself. But other than that, the business is performing almost exactly in line with expectations.
Operator, next question please.
Next question is from Sanjay Sakhrani of KBW. Your line is now open.
Thank you. Good evening. Quick question on PayPal again. Is it safe to assume that you guys had conversations with the banks and that they were involved in kind of the framework of a potential deal with them? And then just maybe my follow-up related is, if the issuer tokens aren't used by the banks or applied by the banks, does that change the economic incentives part of the agreement?
Thanks.
So on the second question, no. And on the first question, listen, I just we have like any business, we have clients and we talk to them. And our clients have been very, very vocal, not in private to us, but publicly about what they've liked and what they haven't liked about the interactions historically with PayPal, as I've been. And so when asked, I've been very, very clear about what it is we don't like about PayPal and I've also been very clear that we think that they've developed some great capabilities, have enormous respect for what they've created and if we could fix the bad things, we'd be very excited about working together. And so the things that we went about, from our standpoint wanting to change are exactly those things.
And so I don't think anyone should be I'd be surprised if anyone here is surprised about what those things are. And there were some things that were important to PayPal. But as I said, ultimately, this is about taking the roadblocks out and creating the opportunity for people to work together. But again, we're not putting anyone in a position where they
have to. Thanks, Sanjay. Next question, operator?
Next question is from Bryan Keane of Deutsche Bank. Your line is now open.
Hi, guys. Just two questions. I guess, first on looking at one of the headwinds, it was market entry costs. So I guess I'm assuming that's China. And in June, China announced their rules for the network standard of the market.
So I guess I'm curious, have you guys submitted your application yet and kind of the next steps in China? And then just secondly, Vasant, what is Visa Europe been growing at constant currency? And then what is your expectation in the Q4 guidance for vis a Europe constant currency year over year growth in 4Q? Thanks.
So on China, I would say the clarity that we need to finalize all the information and submit all the pieces is still coming together. We have submitted pieces of what's required, but there are also some new things that have come forth that we're working through that relate to national security with reviews that are going to be necessary as well as encryption standards, which was something that was new that was added. So these are active conversations that we're having with the Chinese government and we continue to do all of our planning, so that when we do have clarity, we'll be able to submit everything that
we need to. In terms
of Visa Europe's growth, if you look, there's a schedule in our operational data package. I think it's on Page 6. That gives you some historical data on Visa Europe's performance. So if you're talking about volume, payment volume, over the past, let's say, the last quarter, constant dollar payment volume growth was 6.6%. And then over the last year, constant dollar payment volume growth was a little over 7%.
So and it's been fairly stable if you look at the numbers for the past several quarters, swings up and down a bit along the way. We're not expecting anything different. I mean, we're clearly monitoring the impact of Brexit to see if there's any impact. It's really not evident at this point. It's minor.
We'll have to keep watching it. But as far as it relates to the Q4, we're not assuming any change in trend. And in terms of its specific impact on us, you see that in the guidance we provided where we told you that the revenue impact of vis a Europe on the quarter, if you go to the table we have, was 13 points to 14 points of additional dollar revenue growth that would be added to our reported numbers because of Visa Europe, 3 points to 4 points of additional revenue growth on a full year basis. And as far as the income impact, we had told you last quarter and we're reiterating that that VIVI Europe's income will offset the debt interest we had. So essentially, it will make up for the debt interest in the quarter.
So that's pretty much it. Thanks, Brian. Operator, next question?
Next question is from Craig Maurer of Autonomous. Your line is now open.
Yes. Hi. Thanks and congratulations for closing Visa Europe. I did have a quick question on the PayPal release. Just I was hoping you could explain how the VDAP portion works and tokenization, how that will enable brick and mortar point of sale should an issue opt in?
I mean, are you just basically saying that PayPal has the opportunity to wrap a Visa token within the PayPal wallet and then pass it through to a merchant like any like an Apple Pay would for Visa card acceptance? Yes. Okay. So this is this in no way is enabling Visa to wrap any other type of funding mechanism in a larger Visa token for acceptance?
I'm not sure I understand what you're asking, but what you described is exactly, what's contemplated. By making we will to the extent that PayPal chooses to create an experience at the physical point of sale if they can get the issuer to agree. Just as in Apple Pay or Samsung Pay or Android Pay, there can be a token provisioned to a device, and it will be the transaction will take place as these other wallet transactions that use tokens.
Right. And so this would need to be a bespoke agreement between PayPal and Issuer. Okay, I understand. Thank you.
Thanks, Greg. Operator, we have time for one more question.
Thank you. Our next question is from Tien tsin Huang of JPMorgan. Your line is now open.
Great. Thanks. Thanks, Jack. Yes, well, kudos for the for getting this PayPal deal done. I was curious, Charlie, you said, I think at our conference that PayPal can't be friend and so.
So I was wondering, does this deal mean PayPal is now 100% friend to Visa? Are there outs or end term dates in the agreement to call out? And then also does the deal change in any way your Visa checkout strategy? Thanks.
So the answer is, I mean, it's a long term agreement. We feel like we've addressed everything that we wanted to address, and it was a great conversation. We were both trying to get to again, as I said earlier, what we both wanted to get to was a point that PayPal, ourselves and the issuers would look at it and say, it's something that makes sense for all of us to work together. And that's based upon the fact that we're providing a better experience and the opportunities are greater than ever for consumers and merchants. So having everyone aligned is what we were after and that's what we think we've done here.
And so we feel very good that we're in a position, as I said, where this is a framework where we can work happily together, hopefully, for a very long period of time because it's going to drive more growth. That's what it's all about. It does not change our Visa Checkout strategy. Here too, I've been very consistent in saying that one of the things that we don't know is we don't know ultimately what experiences are going to win at the point of sale, either online or at the physical point of sale. And so given the fact that we are the global acceptance mark that's recognized more than any in the world, That's something where we should have a solution that leverages that acceptance and allows consumers to pay quickly and easily and securely in a manner that they're accustomed.
And that's what Visa Checkout is designed to be. But there are other payment solutions out there. We've talked about a bunch of them on this call as is PayPal. And so what we want to do is ensure that if we're working together under principles that we're happy with, which is what we've achieved here and what we have in the other ones that we support, then we want to enable multiple experiences and ultimately consumers and merchants will choose which will win in the marketplace. And so we're happy with the progress that we're making in Visa Checkout.
We're glad we're doing it. Ultimately, what we're going to look at for success is how Visa usage is doing in the physical point of world, online and in mobile. Secondarily, where it's coming from and ultimately that will help us make resource allocation decisions. But we want to be the enabler. We want the volume.
We're doing lots of different things and Visa Checkout is one of those things, but it's not the only thing.
Thank you, Tien Tsin, and thank you all for joining us today. If anybody has any follow-up questions, feel free to give Investor Relations a call.
Thanks, everyone.
Thank you. And that concludes today's conference. Thank you for participating. You may now disconnect.