10-K 1 v09301410-k.htm 10-K V 093014 10-K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2014
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number 001-33977
VISA INC.
(Exact name of Registrant as specified in its charter)
Delaware
 
26-0267673
(State or other jurisdiction
of incorporation or organization)
 
(IRS Employer
Identification No.)
 
 
 
P.O. Box 8999
San Francisco, California
 
94128-8999
(Address of principal executive offices)
 
(Zip Code)
(650) 432-3200
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:    
Class A common stock, par value $0.0001 per share
  
New York Stock Exchange
(Title of each Class)
  
(Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:

Class B common stock, par value $0.0001 per share
Class C common stock, par value $0.0001 per share
(Title of each Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  þ    No  ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.    Yes  ¨    No  þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See the definitions of “large accelerated filer” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer  þ
 
Accelerated filer  o
Non-accelerated filer  o
 
Smaller reporting company  o
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  þ
The aggregate market value of the registrant’s class A common stock, par value $0.0001 per share, held by non-affiliates (using the New York Stock Exchange closing price as of March 31, 2014, the last business day of the registrant’s most recently completed second fiscal quarter) was approximately $107.6 billion. There is currently no established public trading market for the registrant’s class B common stock, par value $0.0001 per share, or the registrant’s class C common stock, par value $0.0001 per share.
As of November 14, 2014, there were 493,201,965 shares outstanding of the registrant’s class A common stock, par value $0.0001 per share, 245,513,385 shares outstanding of the registrant’s class B common stock, par value $0.0001 per share, and 23,876,238 shares outstanding of the registrant’s class C common stock, par value $0.0001 per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s Proxy Statement for the 2014 Annual Meeting of Stockholders are incorporated herein by reference in Part III of this Annual Report on Form 10-K to the extent stated herein. Such Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the Registrant’s fiscal year ended September 30, 2014.



TABLE OF CONTENTS
 
 
 
 
 
 
Page
 
 
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
 
 
 
 
 
Item 5
Item 6
Item 7
Item 7A
Item 8
Item 9
Item 9A
Item 9B
 
 
 
 
 
Item 10
Item 11
Item 12
Item 13
Item 14
 
 
 
Item 15
Unless the context indicates otherwise, reference to "Visa," "Company," "we," "us" or "our" refers to Visa Inc. and its subsidiaries.
"Visa" and our other trademarks referenced in this report are Visa's property. This report may contain additional trade names and trademarks of other companies. The use or display of other companies' trade names or trademarks does not imply our endorsement or sponsorship of, or a relationship with these companies.
    

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Forward-Looking Statements:
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements generally are identified by words such as "believes," "estimates," "expects," "intends," "may," "projects," "could," "should," "will," "will continue" and other similar expressions. Examples of forward-looking statements include, but are not limited to, statements we make about our revenue, client incentives, operating margin, tax rate, earnings per share, free cash flow, and the growth of those items.
By their nature, forward-looking statements: (i) speak only as of the date they are made; (ii) are not statements of historical fact or guarantees of future performance; and (iii) are subject to risks, uncertainties, assumptions or changes in circumstances that are difficult to predict or quantify. Therefore, actual results could differ materially and adversely from our forward-looking statements due to a variety of factors, including the following:
the impact of laws, regulations and marketplace barriers, including:
rules capping debit interchange reimbursement rates and expanding financial institutions' and merchants' choices among debit payments networks promulgated under the Dodd-Frank Wall Street Reform and Consumer Protection Act;
increased regulation in jurisdictions outside of the United States and in other product categories;
increased government support of national payments networks outside the United States; and
increased regulation on consumer privacy, data use and security;
developments in litigation and government enforcement, including those affecting interchange reimbursement fees, antitrust and tax;
new lawsuits, investigations or proceedings, or changes to our potential exposure in connection with pending lawsuits, investigations or proceedings;
economic factors, such as:
economic fragility in the Eurozone and the United States;
general economic, political and social conditions in mature and emerging markets globally;
general stock market fluctuations which may impact consumer spending;
material changes in cross-border activity, foreign exchange controls and fluctuations in currency exchange rates; and
material changes in our financial institution clients' performance compared to our estimates;
industry developments, such as competitive pressure, rapid technological developments and disintermediation from our payments network;
system developments, such as:
disruption of our transaction processing systems or the inability to process transactions efficiently;
account data breaches or increased fraudulent or other illegal activities involving Visa-branded cards or payment products; and
failure to maintain systems interoperability with Visa Europe;
costs arising if Visa Europe were to exercise its right to require us to acquire all of its outstanding stock;
the loss of organizational effectiveness or key employees;
the failure to integrate acquisitions successfully or to effectively develop new products and businesses;
natural disasters, terrorist attacks, military or political conflicts, and public health emergencies; and
various other factors discussed throughout this report, including but not limited to, Item 1—Business, Item1A—Risk Factors and Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations. You should not place undue reliance on such statements. Except as required by law, we do not intend to update or revise any forward-looking statements as a result of new information, future developments or otherwise.

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PART I
 
ITEM 1.    Business
General Business Developments
Visa Inc., which we refer to as Visa or the Company, is a global payments technology company that connects consumers, businesses, financial institutions and governments in more than 200 countries and territories to fast, secure and reliable electronic payments. We operate one of the world's most advanced processing networks VisaNet which facilitates authorization, clearing and settlement of payment transactions worldwide. It also offers fraud protection for account holders and rapid payment for merchants. Visa is not a bank and does not issue cards, extend credit or set rates and fees for account holders on Visa-branded cards and payment products. In most cases, account holder and merchant relationships belong to, and are managed by, our financial institution clients.
Visa Inc. was incorporated in the State of Delaware in May 2007. In October 2007, we undertook a reorganization in which Visa U.S.A. Inc., Visa International Service Association, Visa Canada Corporation and Inovant LLC became direct or indirect subsidiaries of Visa Inc. Visa Europe Limited remains owned and governed by its European member financial institutions and is not a subsidiary of Visa Inc. Visa Inc. completed its initial public offering ("IPO") in March 2008.
Since fiscal 2010, we have completed several acquisitions to accelerate the growth of Visa's digital, eCommerce and mobile commerce offerings. These include: CyberSource Corporation, a leading provider of electronic payment, risk management and payment security solutions to online merchants; PlaySpan Inc., a leading provider of digital goods transactions in online games, digital media and social networks; and Fundamo, a leading provider of mobile financial services for mobile network operators and financial institutions in developing economies.
General business developments in fiscal 2014 included the following:

Product innovation. Visa’s fundamental approach to innovation focuses on: (i) supporting an evolving payments ecosystem; (ii) enhancing Visa’s network security through innovation; and (iii) developing new platforms, products and services.
i.
Evolving payments ecosystem. By providing new and existing financial institution clients and partners greater access to Visa’s network and payment capabilities, Visa is contributing to the evolving payments ecosystem. In 2014, Visa announced a developer center, which will enable software developers, financial institutions and new entrants to more easily access Visa payment capabilities through programing interfaces and software developer kits beginning in 2015. We also launched the Visa Ready program to enable our partners to quickly deploy Visa-compliant devices, software and services to consumers, thereby significantly accelerating the pace of innovation in payments. Finally, we established an innovation center at our San Francisco Bay Area headquarters to facilitate collaboration among Visa, our financial institution clients, other partners and the Bay Area technology community to develop the next generation of global commerce solutions.
ii.
Network security through innovation. In 2014, Visa made strides to enhance its network security by implementing the following programs:
a.
Visa Token Service: Visa Token Service replaces account numbers with digital tokens for online and mobile payments. This benefits merchants and issuers by removing sensitive account information from online and mobile payments and significantly reduces fraud risk.
b.
EMV-chip payment technology: Visa is addressing fraud at the physical point-of-sale by working with merchants and issuers in the United States to introduce EMV-chip payment technology.
c.
Fraud and data analytics: As an industry leader in payment security, we enhanced our real-time data analytics capabilities. When combined with Visa’s centralized network structure, these capabilities allow financial institution clients and merchants to identify and address fraud.

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iii.
New platforms, products and services. Visa continues to develop new platforms, products and services to benefit financial institution clients, merchants and consumers.
a.
Visa Checkout: Visa Checkout is a fast, simple and intuitive payment experience that allows consumers to pay for goods online, on any device, in just a few clicks. This service is presently available to eCommerce merchants and financial institutions in the United States, Canada and Australia.
b.
Visa payWave: With Visa payWave technology, consumers are able to pay for products and services via smart phone and by using their contactless cards at physical retailers.Visa Direct:
c.
Visa Direct: Visa Direct simplifies the way people send and receive money both domestically and across borders. In 2014, this service had a rapid growth in use, particularly in emerging markets where there is a high demand for person-to-person payments. Visa Direct is offered through financial institutions, and takes advantage of Visa’s global network of 14,000 financial institutions and 2.2 billion accounts to facilitate fast and secure money transfers.
 
Regulation. Rules were implemented in the United States during 2011 and 2012 with respect to debit products under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"), which regulates, among other things, debit interchange reimbursements rates, the availability of debit networks, financial institutions' and merchants' choices among these networks, and transaction routing. As a result, we have significantly modified our debit strategy and continue to renegotiate some portions of our contracts with our financial institution clients. On March 21, 2014, the Court of Appeals for the D.C. Circuit reversed a district court ruling invalidating these rules. The appeals court agreed with the Federal Reserve, except for a single issue related to the interchange cost calculation which was referred back to the Federal Reserve for reconsideration. On August 18, 2014, the plaintiff merchants filed a petition for review of the appeals court's decision in the U.S. Supreme Court, seeking review of a portion of the rules pertaining to the interchange cost calculation. The current rules remain in place while the case is ongoing. See Government Regulation below.

Fiscal 2014 developments in Russia. U.S. and EU sanctions targeting Russia’s financial sector in response to the conflict in Ukraine restrict the ability of U.S. based companies, including payments networks, to supply services to certain Russian individuals and companies. On September 12, the United States, in coordination with the European Union, broadened existing sanctions on Russian financial institutions, expanded sanctions in Russia’s energy sector, and targeted additional energy and defense-related entities. In the financial sector, the U.S. government has imposed sectoral sanctions on the six largest Russian state banks. These sectoral measures restrict the maturity period for new debt issued by the six Russian state banks to 30 days. In 2014, they have not restricted Visa’s ability to supply electronic payment services to Russian banks. However, in response to the U.S. and EU sanctions, the Russian government has modified its National Payments Systems laws that will in essence require international payments networks to process Russian domestic transactions on the government-owned payment system in 2015. See Government RegulationGovernment-imposed market participation influences and restrictions below.

Interchange multidistrict litigation settlement. In fiscal 2014, we obtained final court approval of a settlement in the interchange multidistrict litigation, subject to any appeals. We believe that this settlement supports the long-term health and competitiveness of the payments industry in the United States. A number of objectors to the settlement, however, have appealed the final judgment, and a number of opt-out cases have been filed by merchants. See Item 1ARisk FactorsOur retrospective responsibility plan may not adequately insulate us from the impact of settlements or final judgments and Item 8—Financial Statements and Supplementary DataNote 20—Legal Matters included elsewhere in this report.
Nature of Operations
Visa's mission is to accelerate the electronification of commerce. We operate an open-loop payments network, VisaNet, through which Visa connects and manages the exchange of information and value between: (i) issuers financial institutions that issue Visa-branded cards or payment products to account holders, and (ii) acquirers financial institutions that contract with merchants to accept Visa-branded cards or payment products. We do not earn revenues from, or bear credit risk with respect to, interest or fees paid by account holders on Visa-branded cards or payment products. The issuers have the responsibility for issuing cards and other payment products, and determining the interest rates and fees paid by the account holders.

5


Interchange reimbursement fees represent a transfer of value between the financial institutions participating in our open-loop payments network. On purchase transactions, interchange reimbursement fees are paid by the acquirers to the issuers. We generally do not receive any revenue related to interchange reimbursement fees. In addition, we generally do not earn any revenue from the fees that merchants are charged for acceptance by the acquirers, including the merchant discount rate. The acquirers are typically responsible for soliciting merchants, and establishing and earning these fees.
A typical Visa transaction begins when the account holder presents his or her Visa-branded card or payment product to a merchant as payment for goods or services. The transaction information is then transmitted electronically to the acquirer and routed through VisaNet to the issuer for authorization. Following authorization, a clearing file containing the final transaction data is submitted from the acquirer and processed for final settlement between the issuer and acquirer. The following diagram illustrates the processing steps involved in a typical transaction on VisaNet.


Our operating revenues are comprised principally of service revenues, data processing revenues and international transaction revenues, and are reduced by costs incurred under client incentive arrangements. The Company has one reportable segment, Payment Services.

Service revenues. Service revenues consist of revenues earned for providing financial institution clients with support services for the delivery of Visa-branded payment products and solutions. Service revenues are primarily generated from payments volume on Visa-branded cards and payment products for purchased goods and services.

Data processing revenues. Data processing revenues consist of revenues earned for authorization, clearing, settlement, network access and other maintenance and support services that facilitate transaction and information processing among our clients globally and with Visa Europe. Data processing revenues are primarily generated from the number of transactions we process.

International transaction revenues. International transaction revenues consist of revenues earned for cross-border transaction processing and currency conversion activities. Cross-border transactions arise when the country of origin of the issuer is different from that of the merchant. International transaction revenues are primarily generated by cross-border payments and cash volume.

Client incentives. Client incentives consist of long-term contracts with financial institution clients and other business partners for various programs designed to build payments volume, increase Visa-branded card

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and product acceptance and win merchant routing transactions over our network. These incentives are primarily accounted for as reductions to operating revenues.
U.S. dollar settlements with our financial institution clients are typically settled within the same day and do not result in a receivable or payable balance. Settlement currencies other than the U.S. dollar generally remain outstanding for one to two business days, resulting in amounts due from and to financial institution clients. These amounts are presented as settlement receivable and settlement payable on our consolidated balance sheets, respectively.
In order to maintain the integrity of and minimize disruptions to our payments network, we indemnify our financial institution clients for settlement losses suffered due to the failure of any other client to fund its settlement obligations in accordance with our operating regulations. The settlement indemnification applies to the amount of Visa payment transactions that have occurred, but have not yet settled. We maintain and regularly review global settlement risk policies and procedures to manage settlement exposure, which may require clients to post collateral if certain credit standards are not met. Cash equivalents collateral is reflected in customer collateral on our consolidated balance sheets as it is held in escrow in our name. All other collateral is excluded from the consolidated balance sheets. We have incurred no material loss related to settlement risk in recent years.
Core Products and Services
Visa provides a wide variety of payment solutions that support payment products that issuers can offer to their account holders: (i) pay now with debit; (ii) pay ahead with prepaid; or (iii) pay later with credit products. Visa also offers a growing suite of innovative digital, eCommerce and mobile products and services. These services facilitate transactions on our network among account holders, merchants, financial institutions and governments in mature and emerging markets globally.
Debit. Our debit payment solutions support issuers' payment products that draw on demand deposit accounts, such as checking accounts.

Prepaid. Our prepaid payment solutions support issuers' payment products that access a pre-funded amount, allowing account holders to enjoy the convenience and security of a payment card in lieu of cash or checks.

Credit. Our credit payment solutions support issuers' deferred payment and customized financing products.
Our core processing services involve the routing of payment information and related data to facilitate the authorization, clearing and settlement of transactions between our issuers and acquirers. VisaNet is built on a centralized architecture, enabling us to view and analyze each authorization transaction we process in real time and to provide value-added services, including information products, such as risk scoring and loyalty applications, while the transaction data is being routed through our network.
Visa's processing services continue to expand to address the needs of all participants in the evolving payments ecosystem, through such offerings as our merchant gateway and Visa Debit Processing Services ("DPS"). Merchant gateway services provided through our CyberSource subsidiaries enable gateway routing and other services that make it easier for eCommerce merchants to accept, process and reconcile payments, manage fraud and safeguard payment security online. DPS provides comprehensive issuer processing services for participating issuers of Visa debit, prepaid and ATM payment products. These and other services support our financial institution clients and their use of our products, and promote the growth and security of our payments network.
Processing Infrastructure
VisaNet consists of multiple synchronized processing centers, including two data centers in the United States, which are linked by a global telecommunications network and are engineered for redundancy. In addition, in accordance with the terms of the Framework Agreement among Visa Inc., Visa Europe Limited and others, Visa Europe's processing centers in the United Kingdom must maintain interoperability with Visa's synchronized system. Intelligent access points around the world complete the VisaNet global processing infrastructure and enable merchants and financial institutions worldwide to access our core processing and value-added services.

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Visa also owns and manages additional data centers in the United States and internationally, including those we added with our acquisitions of CyberSource and PlaySpan. These facilities enable transaction services and provide uninterrupted connectivity for account holders, our financial institution clients and our processing partners.
Intellectual Property
Our portfolio of trademarks, in particular our family of Visa marks, our Plus mark and our Dove design mark, are important to our business. Through agreements with our financial institution clients, we authorize the use of our trademarks in connection with their participation in our payments network. We own a number of patents and patent applications relating to payment solutions, transaction processing, security systems and other matters. We rely on a combination of patent, trademark, copyright and trade secret laws in the United States and other jurisdictions, as well as confidentiality procedures and contractual provisions, to protect our proprietary technology.
Seasonality
We generally do not experience any pronounced seasonality in our business. No individual quarter of fiscal 2014 or fiscal 2013 accounted for more than 30% of our operating revenues in those years.
Working Capital
Payments settlement due from and to our financial institution clients can represent a substantial daily working capital requirement. U.S. dollar settlements are typically settled within the same day and do not result in a receivable or payable balance, while settlement currencies other than the U.S. dollar generally remain outstanding for one to two business days, which is consistent with industry practice for such transactions.
Concentration of Business and Financial Information About Geographic Areas
For more information on the concentration of our operating revenues and other financial information, see Item 8—Financial Statements and Supplementary DataNote 13—Enterprise-wide Disclosures and Concentration of Business included elsewhere in this report.
Competition
We compete in the global payment marketplace against all forms of payment. These include:
paper-based payments, principally cash and checks;
card-based payments, including credit, charge, debit, ATM, prepaid and private-label products;
eCommerce and mobile payments; and
other electronic payments, including wire transfers, electronic benefits transfers, automated clearing house ("ACH"), and electronic data interchange.
Based on payments volume, total volume and number of transactions, Visa is the largest retail electronic payments network widely used throughout the world. The following chart compares our network with those of our major general purpose payments network competitors for calendar year 2013:
Company(1)
 
Payments
Volume
 
Total
Volume
 
Total
Transactions
 
Cards
 
 
(billions)
 
(billions)
 
(billions)
 
(millions)
Visa Inc.(2)
 
$
4,383

 
$
6,970

 
89.7

 
2,219

MasterCard(3)
 
$
2,991

 
$
4,103

 
52.7

 
1,281

American Express(3)
 
$
940

 
$
952

 
6.4

 
107

Discover(3)
 
$
127

 
$
136

 
2.2

 
64

JCB(3)
 
$
176

 
$
182

 
1.9

 
83

Diners Club(3)
 
$
26

 
$
27

 
0.2

 
6

(1) 
UnionPay, which operates primarily within the Chinese domestic market, is not included in this table because Visa is not allowed to compete in that market under local law. Although we are uncertain how UnionPay reports certain volumes, reportedly its numbers could approach or exceed some of those listed in this chart.
(2) 
The data presented are provided by our financial institution clients. Previously submitted information may be updated and all data are subject to review by Visa. Visa Europe data are not included.

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(3) 
MasterCard, American Express, JCB, and Diners Club data sourced from The Nilson Report issue 1037 (March 2014) and Discover data sourced from The Nilson Report issue 1034 (February 2014). Includes all consumer and commercial credit, debit and prepaid cards. Some figures are estimates and currency figures are in U.S. dollars. MasterCard excludes Maestro and Cirrus figures. American Express includes figures for third-party issuers. Discover figures consist of U.S. data only and include third-party issuers. JCB figures include third-party issuers and other payment-related products. Certain general purpose payments network competitors are more concentrated in specific geographic regions, such as JCB in Japan and Discover in the United States. Our competitors also have leading positions in certain countries. For example, UnionPay remains the sole processor of domestic transactions and operates the sole domestic acceptance mark in China.
In the global debit network market segment, our Interlink and Visa Electron brands compete with Maestro, owned by MasterCard, and various regional and country-specific debit network brands, including STAR, NYCE and PULSE in the United States, EFTPOS in Australia, NETS in Singapore and Interac in Canada. In addition to our PLUS brand, the primary cash access card brands are Cirrus, owned by MasterCard, and many of the debit network brands referenced above. In many countries, local debit brands provide the primary network, and our brands are used primarily to enable cross-border transactions, which typically constitute a small portion of our overall transaction volume.
The global payments industry continues to undergo dynamic change. We may face increasing competition from emerging players in the payment space, many of which are non-financial institution networks that have departed from the more traditional business model. The emergence of these potentially competitive networks has primarily been via the online channel with a focus on eCommerce and/or mobile technologies. PayPal and Alipay are examples. These providers compete with us directly in some cases, yet may also be significant partners and customers of ours.
We also face increasingly intense competitive pressure on the prices we charge our financial institution clients. We believe our fundamental value proposition of convenience, interoperability, accessibility and security offers us a key competitive advantage. We succeed in part because we understand the needs of the individual markets in which we operate. We do so by partnering with local financial institutions, merchants, governments, non-governmental organizations and business organizations to provide tailored solutions to meet their varied needs. We believe Visa is well-positioned competitively, due to our global brand, our broad set of Visa-branded payment products and our proven track record of processing payment transactions securely and reliably through VisaNet.
Employees
At September 30, 2014, we employed approximately 9,500 persons worldwide. We consider our relationships with our employees to be good.
Government Regulation
Interchange reimbursement fees. We have historically set default debit interchange reimbursement rates in the United States and many other geographies. During fiscal 2012, the Federal Reserve implemented new rules under the Dodd-Frank Act, setting a cap on the maximum U.S. debit interchange reimbursement fee assessed for debit products issued by large financial institutions. These rules continue to have an adverse impact on our pricing, reduce the number and volume of U.S. debit transactions we process and decrease our associated revenues. As a result, we have significantly modified our debit strategy and continue to renegotiate some portions of our contracts with our financial institution clients. In July 2013, a federal court invalidated the newly implemented rules, finding that the Federal Reserve improperly considered certain costs in setting a cap on the maximum debit interchange reimbursement rate and that issuers must make at least two unaffiliated networks available for processing each electronic debit transaction, regardless of authorization method. On March 21, 2014, the Court of Appeals for the D.C. Circuit reversed the district court's ruling and agreed with the Federal Reserve, except for a single issue related to the interchange cost calculation which was referred back to the Federal Reserve for reconsideration. On August 18, 2014, the plaintiff merchants filed a petition for review of the appeals court's decision in the U.S. Supreme Court, seeking review of a portion of the rules pertaining to the interchange cost calculation. The current rules remain in place while the case is ongoing. See Item 1ARisk FactorsThe Dodd-Frank Act may continue to have a material, adverse impact on our financial condition, revenues, results of operations, prospects for future growth and overall business and Item 7—Management's Discussion and Analysis of Financial Condition and Results of OperationsOverview included elsewhere in this report.
Certain jurisdictions outside the United States also regulate debit and credit interchange reimbursement rates in their regions. For example, the Reserve Bank of Australia regulates interchange reimbursement rates. In some jurisdictions, such as India, the governing authorities have begun to regulate other rates or practices such as the

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merchant discount rate. See Item 1ARisk FactorsAdditional regulation of interchange reimbursement rates may have a material, adverse impact on our financial condition, revenues, results of operations, prospects for future growth and overall business and Item 8—Financial Statements and Supplementary DataNote 20—Legal Matters included elsewhere in this report.
Network exclusivity and routing. We have historically had agreements under which issuers received incentives if they agreed to issue Visa-branded cards or payment products that are processed through VisaNet. Historically, issuers of some debit products outside the United States have chosen to include only our network. These various practices are referred to as network exclusivity. The Dodd-Frank Act limits the issuers' and our ability to impose rules for, or choose various forms of, network exclusivity and preferred routing in the U.S. debit network market segment. Other jurisdictions have enacted similar limitations. See Item 1ARisk FactorsThe Dodd-Frank Act may continue to have a material, adverse impact on our financial condition, revenues, results of operations, prospects for future growth and overall business included elsewhere in this report.
U.S. Consumer Financial Protection Bureau. The Dodd-Frank Act created an independent Consumer Financial Protection Bureau (“CFPB”) with responsibility for most federal consumer protection laws in the area of financial services and new authority with respect to consumer protection issues, including those pertaining to us to some extent. The CFPB’s future actions may make payment card or product transactions generally less attractive to issuers, acquirers, consumers and merchants.
No-surcharge rules. We have historically implemented rules that prohibit merchants from charging higher prices to consumers who pay using their Visa-branded card or payment product instead of other means. As part of the settlement reached in the interchange multidistrict litigation, however, Visa has agreed to modify our rules to permit surcharging on credit transactions under certain circumstances. See Item 8—Financial Statements and Supplementary DataNote 20—Legal Matters included elsewhere in this report. Ten U.S. states as well as certain jurisdictions outside the United States have taken steps to prohibit surcharging. In October 2013, a federal court granted declaratory relief and issued an order permanently enjoining the enforcement of New York's no-surcharge law, N.Y. Gen. Bus. Law section 518, in a case brought by five retailers challenging the constitutionality of that law.
Data protection and information security. In accordance with governing law, we devote substantial resources to maintain and continually refine our information security program in order to safeguard account holder information and under certain circumstances, to provide account holder notification in the event of a security breach. In addition, the U.S. Federal Financial Institutions Examination Council periodically reviews aspects of our operations in the United States to examine our compliance with data integrity, security and operational requirements and standards, as well as other requirements applicable to us because of our role as a service provider to financial institutions.
Anti-money laundering, anti-terrorism and sanctioned countries. We are subject to anti-money laundering laws and regulations, including the U.S. Bank Secrecy Act, as amended, including the USA PATRIOT Act of 2001. In addition, we are also subject to the economic and trade sanctions programs administered by the U.S. Department of the Treasury, Office of Foreign Assets Controls (“OFAC”) that prohibit or restrict dealings with certain countries, their governments and, in certain circumstances, their nationals, as well as with specifically-designated individuals and entities such as narcotics traffickers, terrorists and terrorist organizations. We have policies, procedures, systems and controls designed to identify and address potentially impermissible transactions.
Government-imposed market participation influences and restrictions. Our market reach remains limited by certain governments' influence on their domestic payments competition and/or their protection of domestic issuers or payments network processors. Regulators in an increasing number of countries around the world have received statutory authority to regulate certain aspects of the payments systems in these countries. For instance, in response to the U.S. and EU sanctions, the Russian government has modified their National Payments Systems laws to require, among other things: (i) on-shore processing for transactions between Russian cardholders and merchants; (ii) a material guarantee deposit and significant fines for domestic transactions not processed by a nationally significant payment system; and (iii) the creation of a new domestic payment processor. As a result, international payment brands are mandated to process Russian domestic transactions on the government-owned payment system.
Regulation of Internet, mobile payment and other types of transactions. Many jurisdictions have adopted or are considering regulations that require payments system participants, including our financial institution clients and us, to monitor, identify, filter, restrict or take other specific actions with regard to certain types of payment transactions. For example, U.S. federal legislation has been enacted that requires payment system operators to implement a system that allows issuers to identify Internet gambling transactions so they have the option to decline such

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transaction requests. State governments have been interested in the potential blocking of Internet interstate sales of cigarettes and alcohol, or the collection of state and local sales taxes on such Internet purchases. Implementing such systems increases costs for our financial institution clients and us, and may reduce merchant acceptance of Visa-branded cards and payment products for these purchases.
The U.S. Congress continues to consider regulatory initiatives in the areas of Internet prescription drug purchases, copyright and trademark infringement and privacy, among others, that could impose additional compliance burdens on our financial institution clients and us. Some U.S. states are considering a variety of similar legislation. Various regulatory agencies also continue to examine a wide variety of issues, including mobile payment transactions, money transfer, identity theft, account management guidelines, privacy, disclosure rules, security and marketing that could affect our financial institution clients directly. These new requirements and developments may affect our financial institution clients' ability to offer existing products and services, extend credit via payment cards and products, and offer new types of payment programs, which could decrease our transaction volumes and revenues.
Available Information
We are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and its rules and regulations. The Exchange Act requires us to file periodic reports, proxy statements and other information with the U.S. Securities and Exchange Commission (the "SEC"). Copies of these reports, proxy statements and other information can be viewed at http://www.sec.gov or at the SEC Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.
Our corporate website is accessible at http://corporate.visa.com. We make available, free of charge, on our investor relations website at http://investor.visa.com our annual reports on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and any amendments to those reports as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC. We also may include supplemental financial information on our investor relations website at http://investor.visa.com and may use this website as a means of disclosing material, non-public information and for complying with our disclosure obligations under Regulation FD. Accordingly, investors should monitor such portions of our investor relations website, in addition to following SEC filings and publicly available conference calls. The information contained on our corporate website, including the information contained on our investor relations website, is not incorporated by reference into this report or any other report filed with, or furnished to, the SEC.
ITEM 1A. Risk Factors
Regulatory Risks
Additional regulation of interchange reimbursement rates may have a material, adverse impact on our financial condition, revenues, results of operations, prospects for future growth and overall business.
We generally do not receive any revenue related to interchange reimbursement fees in a purchase transaction as those fees are paid by the acquirers to the issuers. They are, however, a factor on which we compete with other payments providers and are therefore an important determinant of the volume of transactions we process. Consequently, changes to these fees can substantially affect our revenues and overall payments volume.
We have historically set default debit interchange reimbursement rates in the United States and many other geographies. In the United States, the Dodd-Frank Act has limited our ability to establish default debit interchange reimbursement rates. See The Dodd-Frank Act may continue to have a material, adverse impact on our financial condition, revenues, results of operations, prospects for future growth and overall business. Interchange reimbursement rates have also become subject to continued or increased government regulation elsewhere, and regulatory authorities and central banks in a number of jurisdictions have reviewed or are reviewing these rates. In certain jurisdictions, interchange reimbursement rates, our operating regulations and related practices, are subject to continuing or increased government regulation. These jurisdictions include, for example, Australia, Canada, Brazil, Europe, India, Mexico, Malaysia, Russia and South Africa.
When we cannot set default interchange reimbursement rates at optimal levels, issuers and acquirers may find our payments system less attractive. It may increase the attractiveness of other payments systems like competitors' closed-loop payments systems with direct connections to both merchants and consumers. In addition, as a result of such regulations, we believe some issuers are charging new or higher fees to consumers. In certain instances,

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some acquirers elect to charge higher discount rates to merchants, regardless of the level of Visa interchange reimbursement rate, leading merchants not to accept Visa-branded cards or payment products or to steer account holders to alternate payment systems or forms of payment. In addition, some issuers and acquirers have obtained, and may continue to obtain, incentives from us and reductions in the rates that we charge in an effort to reduce the expense of their card programs. For these reasons, additional regulation of interchange reimbursement rates may make Visa-branded cards and payment products less desirable, reduce our overall transaction volumes, and have a material, adverse impact on our financial condition, revenues, results of operations, prospects for future growth and overall business.
Additional regulations that prohibit us from contracting with clients or requiring them to use only our network, or that deny them the option of selecting only our network, may decrease the number of transactions we process, and materially and adversely affect our financial condition, revenues, results of operations, prospects for future growth and overall business.
In order to provide account holders a consistent experience and transparency into VisaNet, we promote certain practices to ensure that Visa-branded cards are processed over our network. We have historically had agreements with some issuers under which they agree to issue certain payment cards that use only the Visa network or receive incentives if they do so. In addition, certain issuers of some products have historically chosen to include only our network. We refer to these various practices as network exclusivity.
In addition, certain network or issuer rules or practices may be viewed as limiting the routing options of merchants when multiple debit networks co-reside on Visa debit cards. For example, Visa's operating regulations require that all authorization, clearance and settlement of international transactions must be done through VisaNet. These are commonly referred to as routing rules.
The Dodd-Frank Act already limits our and issuers' ability to adopt network exclusivity and preferred routing in the debit area. See The Dodd-Frank Act may continue to have a material, adverse impact on our financial condition, revenues, results of operations, prospects for future growth and overall business. Additional regulations like the Dodd-Frank Act in the United States and elsewhere could materially decrease the number of transactions we process. In order to retain that transaction volume, we may reduce the fees we charge to issuers or acquirers or increase the payments and other incentives we provide to issuers, acquirers or merchants. Any of these outcomes could have a material, adverse effect on our financial condition, revenues, results of operations, prospects for future growth and overall business.
The Dodd-Frank Act may continue to have a material, adverse impact on our financial condition, revenues, results of operations, prospects for future growth and overall business.
As of October 1, 2011, in accordance with the Dodd-Frank Act, the Federal Reserve capped the maximum U.S. debit interchange reimbursement rate charged by large financial institutions at twenty-one cents plus five basis points, before applying an interim fraud adjustment up to an additional one cent. This amounted to a significant reduction from the average system-wide fees charged previously. The Federal Reserve also issued regulations requiring issuers to make at least two unaffiliated networks available for processing debit transactions on each debit card. The rules also prohibit us and issuers from restricting a merchant's ability to direct the routing of electronic debit transactions over any of the networks that an issuer has enabled to process those transactions.
On March 21, 2014, the Court of Appeals for the D.C. Circuit reversed a district court ruling invalidating these rules and agreed with the Federal Reserve, except for a single issue related to the interchange cost calculation which was referred back to the Federal Reserve for reconsideration. On August 18, 2014, the plaintiff merchants filed a petition for review of the appeals court's decision in the U.S. Supreme Court, seeking review of a portion of the rules pertaining to the interchange cost calculation. The rules, described above, remain in place while the case is ongoing. These regulations have adversely affected our U.S. debit business and associated revenues by creating negative pressure on our pricing, reduced the volume and number of U.S. debit payments we process, and diminished associated revenues. Although we believe we have absorbed the principal impact of the regulations as issued in October 2011, our business could continue to be affected, including if the Federal Reserve issues new regulations.
These pressures have arisen through various channels. Other debit networks may become more aggressive in offering merchant cost reductions to win routing preference, which in turn puts more pressure on the business terms offered by Visa. A number of our clients obtained fee reductions or increased incentives from us to offset their own lost revenue. Some clients elected to issue fewer cards enabled with Visa-affiliated networks or reduced the number of debit cards they issued and investments they made in marketing and rewards programs, while others

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imposed new or higher fees on debit cards or demand deposit account relationships. Many merchants have used the routing regulations to redirect transactions or steer account holders to other debit networks based on lower cost or other factors. Other clients and merchants are likely to take similar actions in the future.
The Dodd-Frank Act created an independent Consumer Financial Protection Bureau, with responsibility for most federal consumer protection laws in the area of financial services and new authority with respect to consumer protection issues, including those pertaining to us to some extent. These actions may make payment card transactions less attractive to issuers, consumers and merchants by further regulating disclosures, payment card practices, fees, routing and other matters with respect to credit, debit and prepaid cards.
Some elements of the Dodd-Frank Act lack definition and create the potential for networks to pursue different strategies subject to their interpretation of the rules. Our interpretation may result in a pursuit of strategies that may be less effective than those of our competitors. Overall, the regulations and developments arising from the Dodd-Frank Act could have a material, adverse effect on our financial condition, revenues, results of operations, prospects for future growth and overall business.
New laws or regulations in one jurisdiction or of one product offering may lead to new laws or regulations in other jurisdictions or of other product offerings.
Regulators around the world increasingly note each other's approaches to the regulation of the payments industry. Consequently, a development in one country, state or region may influence regulatory approaches in another. The Dodd-Frank Act and the European Union Commission's draft interchange regulation are developments with such potential. See Note 20Legal Matters to our consolidated financial statements included in Item 8 of this report. Similarly, new laws and regulations involving one product offering may cause lawmakers there to extend the regulations to other product offerings. For example, regulations affecting debit payments could eventually spread to credit payments.
The risks created by a new law or regulation have the potential to be replicated and to negatively affect our business in another region or in other product offerings. As a result, we may face differing rules and regulations in matters like interchange reimbursement rates, network exclusivity, preferred routing, dynamic currency conversion, point of sale transaction rules and practices, and operating regulations that may differ from country to country or by product offering.
If widely varying regulations come into existence worldwide, we may have difficulty rapidly adjusting our product offerings, services and fees, and other important aspects of our business in the various regions. In addition, adverse developments, regulations and litigation with respect to our industry or another industry may also, by association, negatively impact our reputation, or result in greater regulatory or legislative scrutiny or litigation against us. Any of these factors could materially and adversely affect our business, financial condition and results of operations.
Government actions may prevent us from competing effectively against providers of domestic payments services in certain countries, which may materially and adversely affect our ability to maintain or increase our revenues and extend our global brands.
Governments in some countries provide resources to or protection for their domestic payment card networks, brands and processors. These governments may impose regulatory requirements that favor domestic providers or that mandate domestic payments processing be done entirely in that country. In China, for example, UnionPay continues to enjoy advantages over international networks, remains the sole processor of domestic transactions and operates the sole domestic acceptance mark. In light of the U.S. and EU sanctions targeting Russias financial sector, the Russian government has modified its National Payments Systems laws that require, among other things, the creation of a national payment system and local storage of certain transaction data. As a result, international payment brands could be mandated to process Russian domestic transactions on the government-owned payment system. Additional laws or mandates may be put into place without sufficient notice which may increase our costs and decrease the number of Visa-branded cards issued or processed in Russia. These actions could impede us from utilizing our global processing capabilities for our financial institution clients in those countries and substantially restrict our activities there. These actions could also force us to leave countries where we presently have activity and keep us from entering new markets. Although we are trying to effect change in these countries, we may not succeed. This could adversely affect our ability to maintain or increase our revenues and extend our global brands.

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Regulation in the areas of consumer privacy and data use and security could decrease the number of Visa-branded cards issued, our payments volume and our revenues.
Privacy, data use and security continue to receive heightened legislative and regulatory focus in the United States and elsewhere. For example, in many jurisdictions consumers must be notified in the event of a data breach and those jurisdictions who have these laws are continuing to increase the circumstances and the breadth of these notices. Our failure or the failure of our clients to comply with these laws and regulations could result in fines, sanctions, litigation and damage to our global reputation and our brands. These measures may increase Visas and our clients' costs, decrease the number of Visa-branded cards our clients issue, and decrease our payments volume and revenue.
Evolving and increased global regulatory focus on the payments industry may result in costly new compliance burdens on our clients and on us, leading to increased costs, decreased payments volume and a material, adverse impact on our financial condition, revenues, results of operations, prospects for further growth and overall business.
Regulation of the payments industry has evolved and increased significantly. Examples include:

Data protection and information securityAspects of our operations and business are subject to privacy and data protection regulation in the United States and elsewhere. Our financial institution clients around the globe are subject to similar requirements under privacy laws and bank regulatory regimes. In addition, many U.S. states have enacted legislation requiring consumer notification in the event of a security breach.

Regulatory compliance. We are subject to anti-money laundering laws and regulations, including the U.S. Bank Secrecy Act, as amended, including the USA PATRIOT Act of 2001. In addition, we are also subject to the economic and trade sanctions programs administered by OFAC that prohibit or restrict dealings with certain countries, their governments and, in certain circumstances, their nationals, as well as with specifically-designated individuals and entities such as narcotics traffickers, terrorists and terrorist organizations. An increase in the number of OFAC sanctions, such as those issued in connection with the Russia-Ukraine conflict, may affect the issuance, acceptance, reputation, and revenues of Visa-branded cards. In addition, some of our clients located outside of the United States may not be subject to these same laws, regulations and sanctions, and, as a result, may initiate transactions that, while permissible in their countries, are not permissible in the United States. We have policies, procedures, systems and controls designed to identify and address potentially impermissible transactions. Regulation of the price of credit. Many jurisdictions in which Visa-branded cards are used have regulations that could increase the costs of card issuance or decrease the flexibility of issuers to charge market-based interest rates and fees on credit card accounts. These include the Credit CARD Act of 2009 in the United States and other proposed regulations under it, and proposed changes to regulations under the Truth in Lending Act of 1968.

Increased CFPB scrutiny. The Consumer Financial Protection Bureau (the "CFPB") has primary oversight and rule-writing authority over consumer financial products in the United States, including the regulations that apply to credit, debit, and prepaid cards. Regulatory changes that impose new requirements on or restrict the terms under which financial products can be offered could increase our clients costs and decrease the number of Visa-branded payment cards our clients issue. The CFPB also has supervisory and independent examination authority as well as enforcement authority over certain financial institutions, their service providers, and other entities, which could include us due to our processing of credit, debit, and prepaid transactions. 

Increased central bank oversight. Several central banks around the world have increased, or are seeking to increase, their formal oversight of the electronic payments industry, in some cases considering designating them as "systemically important payment systems" or "critical infrastructure." Any such oversight may lead to additional regulations by central banks and other government regulators. These could include new settlement procedures, cyber security requirements or other operational rules to address credit and operational risks. They could also include new criteria for financial institution client participation and merchant access to our payments system.


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Safety and soundness regulation. Recent banking regulations enacted in the United States and elsewhere may make some financial institutions less likely to become an issuer of Visa-branded cards, because they may be subject to increased risk management or higher capital requirements.

Regulation of Internet and mobile transactions. Proposed legislation in various jurisdictions may make it less desirable or more costly to complete Internet transactions using Visa-branded cards by affecting the legality of those transactions, the laws that govern the transactions, their taxation or the allocation of various intellectual property rights. In addition, new mobile regulatory requirements could impact our business practices.

Money transfer regulations. As we expand our product offerings, we may become subject to U.S. state money transfer regulations, as well as international payments laws, which could increase our regulatory oversight and compliance costs.
Complying with these and other regulations increases our costs and can reduce our revenue opportunities. Our programs and policies are designed to comply with anti-money laundering, anti-terrorism, sanctions regulations, and other laws, and we continue to enhance them. But, as regulations continue to evolve and regulatory oversight continues to increase, we cannot guarantee that our programs and policies will be deemed compliant by all applicable regulatory authorities. In the event our controls should fail or are found to be out of compliance for other reasons, we could be subject to monetary damages, civil and criminal money penalties, litigation and damage to our global brand reputation. The impact of such regulations on our clients and on us may increase compliance costs and reduce the volume of payments we process. Moreover, such regulations can limit the types of products and services that we offer, the countries in which Visa-branded cards are used and the types of account holders and merchants who can obtain or accept Visa-branded cards. Any of these occurrences could materially and adversely affect our overall business, revenues, prospects for future growth, financial condition and results of operations.
Litigation Risks
Our retrospective responsibility plan may not adequately insulate us from the impact of settlements or final judgments.
Our retrospective responsibility plan addresses monetary liabilities from settlements of, or final judgments in, the covered litigation, which is described in Note 3Retrospective Responsibility Plan to our consolidated financial statements included in Item 8 of this report. The retrospective responsibility plan consists of several related mechanisms to fund settlements or judgments in the covered litigation. These include an escrow account funded with a portion of the net proceeds of our IPO and any subsequent offerings of our shares of class A common stock (or deposits of cash into the escrow account in lieu of such offerings). They also include a loss sharing agreement, a judgment sharing agreement and an omnibus agreement, as amended. In addition, our U.S. financial institution clients are obligated to indemnify us pursuant to Visa U.S.A. Inc.'s certificate of incorporation and bylaws and in accordance with their membership agreements. These mechanisms are unique, complicated and tiered, and if we cannot use one or more of them, this could have a material adverse effect on our financial condition and cash flows, or even cause us to become insolvent.
The principal remaining covered litigation involves interchange reimbursement rates. See Note 20Legal Matters to our consolidated financial statements included in Item 8 of this report. Beginning in 2005, a series of complaints (the majority of which were styled as class actions) were filed on behalf of merchants against us, MasterCard and/or other defendants, including certain Visa member financial institutions. We refer to this as the interchange multidistrict litigation or MDL 1720. Among other allegations, the plaintiffs alleged that Visa's setting of default interchange reimbursement rates violated federal antitrust laws and, in some cases, certain state unfair competition laws. The lawsuits were transferred to a multidistrict litigation in the U.S. District Court for the Eastern District of New York.
The plaintiffs in MDL 1720 seek damages for alleged overcharges in merchant discount rates as well as injunctive and other relief. The consolidated class action complaint alleges that estimated damages will range in the tens of billions of dollars. Because these lawsuits were brought under the U.S. federal antitrust laws, any actual damages would be trebled.
The allocation of any monetary judgment or a settlement among the defendants is governed by an omnibus agreement dated February 7, 2011, and amended August 26, 2014. See Note 3Retrospective Responsibility Plan to our consolidated financial statements included in Item 8 of this report. Visa's portion of a settlement or judgment

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covered by the omnibus agreement would be allocated in accordance with specified provisions of our retrospective responsibility plan.
We signed settlement agreements in connection with MDL 1720, which included an agreement to pay approximately $4.0 billion to the class plaintiffs. On January 14, 2014, the court entered a final judgment order approving the settlement, from which a number of objectors have appealed. Until the appeals are finally adjudicated, no assurance can be provided that we will be able to resolve the class plaintiffs' claims as contemplated by the Settlement Agreement.
A number of merchants have filed opt-out cases in various federal district courts. All of the cases filed in federal court have been either assigned to the judge presiding over MDL 1720, or have been transferred by the Judicial Panel on Multidistrict Litigation for inclusion in MDL 1720. The court has entered an order confirming that MDL 1720 includes: (i) all current and future actions transferred to MDL 1720 by the Judicial Panel on Multidistrict Litigation or other order of any court for inclusion in coordinated or pretrial proceedings; and (ii) all actions filed in the Eastern District of New York that arise out of operative facts as alleged in the cases subject to the transfer orders of the Judicial Panel on Multidistrict Litigation. Cases that are transferred to or otherwise included in MDL 1720 are covered litigation for purposes of the retrospective responsibility plan. It is possible that some opt-out cases may not be transferred or otherwise included in MDL 1720 and will not be covered litigation.
Failure of our retrospective responsibility plan to insulate us adequately from the impact of such settlements or judgments could result in a material adverse effect on our financial condition and cash flows. Such a failure could even cause us to become insolvent. The retrospective responsibility plan addresses only the covered litigation. The plan generally does not cover other pending litigation or any litigation that we may face in the future, except for cases that include claims for damages relating to the period prior to our IPO that are transferred for pre-trial proceedings or otherwise included in the interchange multidistrict litigation. See If we are found liable in other pending or future lawsuits, we may have to pay substantial damages. In addition, non-monetary settlement terms and judgments in the covered litigation may require us to modify the way we do business. See Limitations on our business resulting from litigation may materially and adversely affect our revenues and profitability. Therefore, even if our retrospective responsibility plan provides us with adequate funding to satisfy our obligations with respect to monetary liabilities from settlements of, and judgments in, the covered litigation, it will not insulate us from the monetary impact of pending or future litigation.
If we are found liable in other pending or future lawsuits, we may have to pay substantial damages.
Like many other large companies, we are a defendant in a number of civil actions and investigations alleging violations of competition/antitrust law, consumer protection law or intellectual property law, among others. Examples of such claims are described more fully in Note 20Legal Matters to our consolidated financial statements included in Item 8 of this report. Some lawsuits involve complex claims that are subject to substantial uncertainties and unspecified damages; therefore, we cannot ascertain the probability of loss or estimate our liability. Accordingly, we have not established allowances for such legal proceedings.
Particularly in cases involving merchants and consumers, private plaintiffs often seek class action certification in cases against us due to the size and scope of our business. If we are found liable in a large class action lawsuit, such as the U.S. or Canadian merchant class action lawsuits, monetary damages could be significant. See Note 20Legal Matters to our consolidated financial statements included in Item 8 of this report.
If we are unsuccessful in our defense against any material pending or future legal proceedings, we may have to pay substantial damages. This could result in a material and adverse effect on our results of operations, cash flow and financial condition and could even cause us to become insolvent.
Limitations on our business resulting from litigation may materially and adversely affect our revenues and profitability.
Certain limitations have been placed on our business in recent years because of litigation. We may also have to change our business practices in response to pending or future litigation. For example, under the settlement agreement in the interchange multidistrict litigation, we have agreed, among other things, to permit merchants to add surcharges to credit transactions in certain circumstances.
These and other settlements of, or judgments in, past, pending and future litigation could force us to limit the rates we charge, revise our rules about rates charged to consumers who use Visa-branded payment products, or

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make other modifications to our business. These modifications could materially and adversely affect our payments volume, revenues, operating results, prospects for future growth and overall business.
Tax examinations or disputes, or changes in the tax laws applicable to us, could materially increase our tax payments.
We exercise significant judgment in calculating our worldwide provision for income taxes and other tax liabilities. Although we believe our tax estimates are reasonable, many factors may decrease their accuracy. We are currently under examination by, or in disputes with, the U.S. Internal Revenue Service and other tax authorities, and we may be subject to additional examinations or disputes in the future. Relevant tax authorities may disagree with our tax treatment of certain material items and thereby increase our tax liability. Failure to sustain our position in these matters could result in a material, adverse effect on our cash flow and financial position. In addition, changes in existing laws, such as recent proposals for fundamental U.S. and international tax reform, may also increase our effective tax rate. A substantial increase in our tax burden could have a material, adverse effect on our financial results. See also Note 19Income Taxes to our consolidated financial statements included in Item 8 of this report.
We have limited rights to enforce our agreement with Visa Europe, which includes indemnity obligations that could expose us to significant liabilities.
The relationship between Visa and Visa Europe is governed by the Framework Agreement. In the event Visa Europe fails to meet its obligations under the Framework Agreement, our remedies are limited. We are unable to terminate the agreement even upon Visa Europe's material, uncured breach. We also have a call option to acquire Visa Europe, which can be triggered only under extremely limited circumstances. See Note 2Visa Europe to our consolidated financial statements included in Item 8 of this report.
Under the Framework Agreement, we may be required to indemnify Visa Europe for losses resulting from all claims outside its region arising from our or their actions relating to the payments business. This obligation applies even if neither we nor any of our related parties or agents engaged in the actions giving rise to such claims. The indemnity obligation could expose us to significant liabilities for activities over which we have little or no control. Our retrospective responsibility plan would not cover these liabilities.
Visa Europe is obligated to indemnify Visa Inc. and Visa International Service Association (Visa International) in connection with the European Competition Proceedings, in our opinion, including payment of any fines or damages that may be imposed. However, Visa Europe has informed us of its position that it is not obligated to indemnify us or Visa International for any claim in the European Competition Proceedings, including claims asserted in either the European Commission matter or the filed or unfiled claims in the U.K. Merchant Litigation. If Visa Europe continues in its refusal to indemnify us and we cannot enforce the indemnity, we could be exposed to significant liabilities which would not be covered under our retrospective responsibility plan. See Note 20Legal Matters to our consolidated financial statements included in Item 8 of this report.
Business Risks
The intense pressure we face on client pricing may materially and adversely affect our revenues and profits.
Pressure on client pricing poses challenges for our business. In order to stay competitive, we offer incentives to our clients to increase payments volume, enter new market segments and expand their Visa-branded card base. These include up-front cash payments, fee discounts, credits, performance-based incentives, marketing and other support payments. We have continued to increase the use of incentives such as up-front cash payments and fee discounts in many countries, including the United States. In addition, we offer incentives to certain merchants or acquirers to win routing preference in situations where our products co-reside with other networks and merchants have a choice of network routing options. The economic pressures on our clients arising from the Dodd-Frank Act have also increased our use of incentives. See The Dodd-Frank Act may continue to have a material, adverse impact on our financial condition, revenues, results of operations, prospects for future growth and overall business. As a result, the provision of certain products and services may be less profitable or unprofitable, which may materially and adversely affect our revenues and profits.
If we continue to increase incentives to our clients, we will need to find ways to offset the financial impact by increasing payments volume, increasing the amount of fee-based services we provide or both. We may not succeed in doing so, particularly, in the current regulatory environment. In addition, we benefit from long-term contracts with certain clients, including those that are large contributors to our revenue. Continued pressure on our fees could prevent us from maintaining such agreements in the future on the same or favorable terms. We may also

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have to modify existing agreements in order to maintain relationships or comply with regulations. While we may implement cost containment and productivity initiatives in areas other than those surrounding client incentives, we may not be successful in our efforts or they may not offset the decreases in our revenues.
Intense competition in our industry may cause our business, financial condition, results of operations and prospects for future growth to suffer.
The global payments industry is intensely competitive and, as a result, our payment programs compete against all forms of payment. These include cash, checks, electronic, eCommerce, and mobile payments, as well as traditional general purpose card networks. In addition, our open-loop payments network competes against other alternate payment systems such as closed-loop payment systems. The Dodd-Frank Act increased this competitive pressure.
Some of our competitors may develop substantially better technology or have greater financial resources. They may offer a wider range of programs, products and services than we do, including more innovative ones. They may use advertising and marketing strategies that are more effective than ours, achieving broader brand recognition and merchant acceptance. They may also develop better security solutions or more favorable pricing arrangements.
Certain of our competitors operate with different business models, have different cost structures or participate selectively in different market segments. These include domestic networks in the United States, China, Canada and Australia. They may ultimately prove more successful or more adaptable to new regulatory, technological and other developments. In many cases, these competitors have the support of government mandates that prohibit, limit or otherwise hinder our ability to compete for or otherwise secure transactions within those countries and regions.
Traditional or nontraditional competitors may put us at a competitive disadvantage by leveraging services or products in areas in which we do not directly compete to win business in areas where we do compete. Our clients can reassess their commitments to us at any time or develop their own competitive services. The risk to maintaining or securing our clients' long-term commitments to our products increased with the Dodd-Frank Act's restrictions on network exclusivity in the debit sector. We do not have exclusivity with our largest clients such as JPMorgan Chase and Bank of America. In certain circumstances, our clients may terminate these relationships on relatively short notice without significant early termination fees. Because a significant portion of our operating revenues is concentrated among our largest clients, our operating revenues would decline significantly if we lost one or more of these clients. This could have a material adverse impact on our business, financial condition and results of operations. See Note 13Enterprise-wide Disclosures and Concentration of Business to our consolidated financial statements included in Item 8 of this report.
We expect there to be changes in the competitive landscape in the future. For example:

competitors, clients and others may develop products that compete with, impair or replace the value-added services we provide to support our transaction processing;

parties that process our transactions in certain countries may try to eliminate our position in the payments value chain;

we may be asked to develop or customize certain aspects of our payment services for use by our customers, processors or other third parties;

participants in the payments industry may merge, form joint ventures or enter into other business combinations that strengthen their existing business propositions or create new, competing payment services;

competition may increase from alternate types of payment services, such as mobile payment services, eCommerce payment services and services that permit direct debit of consumer checking accounts or ACH payments;

new players and intermediaries in the payments value chain may redirect transactions or steer account holders away from our network; or


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new services and technologies that we develop may be impacted by industry-wide solutions and standards set by organizations such as EMVCo, related to EMV-chip payment technology, tokenization, or other technologies.
Our failure to compete effectively in light of any such developments could materially and adversely affect our business, financial condition, revenues, results of operations and prospects for future growth.
Disintermediation from the payments value chain could harm our business.
Our position in the payments value chain is key to our business. Some of our competitors, including American Express, Discover, private-label card networks and certain alternate payments systems, operate closed-loop payments systems, with direct connections to both merchants and consumers without any intermediaries. These competitors seek to derive competitive advantages from this business model. Regulatory actions such as the Dodd-Frank Act may provide them with increased opportunity to do so. In addition, although other competitors are pursuing similar lines of business or adopting similar commercial models, they have not attracted the same level of legal or regulatory scrutiny of their pricing and business practices as operators of multi-party payments systems such as ours.
We also run the risk of disintermediation by virtue of increasing bilateral agreements between entities that prefer not to use our payments network for processing payments. For example, merchants could process transactions directly with issuers, or processors could process transactions directly between issuers and acquirers.
Additional consolidation in the banking industry could result in us losing business and create pressure on the fees we charge our clients, which could materially and adversely affect our business, revenues, results of operations and prospects for future growth.
Additional consolidation in the banking industry may result in the acquisition of one or more of our largest clients by an institution with a strong relationship with one of our competitors or with one of our competitors directly. This could result in the acquired financial institution's Visa business shifting to a competitor, resulting in a substantial loss of business to us.
Additional consolidation in the banking industry could also reduce the overall number of new and existing clients, who may seek and obtain greater pricing discounts or other incentives from us. In addition, more consolidation could prompt our existing clients to seek to renegotiate their pricing agreements with us to obtain more favorable terms. We may also be adversely affected by price compression should one of our clients absorb another financial institution and qualify for higher volume-based discounts on the combined volumes of the merged businesses. Pressure on the fees we charge our clients caused by such consolidation could materially and adversely affect our business, revenues, results of operations and prospects for future growth.
Merchants' continued focus on the costs associated with payment card acceptance may result in more litigation, regulation, regulatory enforcement, incentive arrangements and other initiatives.
We rely in part on merchants and their relationships with our clients to maintain and expand the acceptance of Visa-branded payment cards. Consolidation in the retail industry is producing a group of larger merchants that is having a significant impact on all participants in the global payments industry. Some merchants have sought to reduce their costs associated with payment card acceptance by lobbying for new legislation and regulatory enforcement and by filing lawsuits. If they continue, we may face increased compliance and litigation expenses.
We also face competitive pressures on pricing. We and our clients negotiate pricing discounts and other incentive arrangements with certain large merchants to increase acceptance and usage of Visa-branded payment cards. If merchants continue to consolidate, we and our clients may have to increase the incentives provided to certain large merchants. Some merchants also continue to invest in their own payment solutions, using both traditional and new technology platforms. Examples include closed-loop payment systems that are specific to a single merchant or multi-merchant solutions like the Merchant Customer Exchange, which is designed for a mobile platform and has many merchant participants. Such programs may offer unique or specialized benefits to consumers, including discounts or customized offers. If merchants are able to drive broad consumer adoption and usage, it could adversely impact our transaction volume.
All of these factors could materially and adversely affect our revenues, results of operations, prospects for future growth and overall business. Competitive and regulatory pressures on pricing could make it difficult to offset the cost of these incentives.

19


Certain financial institutions or merchants have exclusive, or nearly exclusive, relationships with our competitors to issue or accept payment cards, and these relationships may adversely affect our ability to maintain or increase our revenues.
Certain financial institutions or merchants have longstanding exclusive, or nearly exclusive, relationships with our competitors to issue or accept payment cards. These relationships may make it difficult or cost-prohibitive for us to conduct material amounts of business with them. In addition, these financial institutions or merchants may be more successful and may grow more quickly than our existing clients or merchants, which could put us at a competitive disadvantage and prevent us from growing our business and revenues.
Failure to maintain relationships with issuers, acquirers, merchants and account holders, and the failure of our financial institution clients or third parties to provide services on our behalf could materially and adversely affect our business.
We depend and will continue to depend significantly on relationships with our financial institution clients and on their relationships with account holders and merchants to support and to compete effectively for our programs and services. We do not issue cards, extend credit to account holders or determine the interest rates or other fees charged to account holders using cards that carry our brands. Each issuer determines these competitive card features for their customers.
As a result of the Dodd-Frank Act's changes to the network exclusivity rules, we have engaged and will continue to engage in significantly more discussions with merchants, acquirers and processors. We already engage in many co-branding efforts, in which we contract with merchants, who directly receive incentives from us. We also engage with merchants, acquirers and processors and provide incentives to promote routing preference and acceptance growth. As these and other relationships become more prevalent and take on a greater importance to our business, our success will increasingly depend on our ability to sustain and grow these relationships.
Outside the United States, some governments only permit local providers to complete domestic processing, which prohibits us from overseeing the end-to-end processing of the transactions. Therefore, we depend on our close working relationships with our clients in these regions to effectively manage the processing of transactions involving Visa-branded cards. Our inability to oversee the end-to-end processing for cards carrying our brands in these countries may put us at a competitive disadvantage by limiting our ability to ensure the quality of the services supporting our brands.
In addition, we depend on third parties and our financial institution clients to provide various services associated with our payments network on our behalf, and to the extent that such third-party vendors or our financial institution clients fail to perform or deliver adequate services, our business and reputation could be impaired.
Negative perception of our company in the marketplace may affect our brands and reputation, which are key assets of our business.
Our brands and their attributes are key assets of our business. The ability to attract and retain account holders and financial institution clients to Visa-branded products depends highly upon the external perceptions of our company and our industry's quality of service, use and protection of account holder data, regulatory compliance, financial condition, corporate responsibility and other factors. Negative perception or publicity, particularly in light of the rapid, widespread use of social media channels, could cause damage to our brands and reputation. Our business may also be affected by actions taken by our clients or other third parties, or by circumstances that are outside of our control:
Our clients may take actions that we do not believe to be in the best interests of our brands, such as aggressive creditor practices.

Our limited control over the quality of service and promotion of our brands in Europe could affect our brands and reputation globally. While Visa Europe has very broad latitude to use our brands and technology within its region, Visa Europe is not required to spend any minimum amount of money conducting research on brand performance, promoting or maintaining the strength of our brands.

We may be associated with adverse developments with respect to our industry, and with new rules and regulations concerning human rights conditions, our corporate responsibility regarding those conditions and resulting disclosure requirements.


20


Any negative perception of the United States arising from its political, economic, social or other positions could harm the perception of our company and our brands globally by associating Visa with those positions.
Any of these factors could turn clients and consumers away from our brand and products, require us to take on additional liabilities and costs, result in greater regulatory or legislative scrutiny, and materially and adversely affect our revenues, operating results, prospects for future growth and overall business.
Unprecedented economic events in financial markets around the world have affected and are likely to continue to affect our clients, merchants and account holders, and may potentially impact our financial condition, revenues, results of operations, prospects for future growth and overall business.
The current threats to global economic growth include geopolitical instability in Russia, Ukraine, the Middle East and other oil producing countries, which could affect oil prices, economic fragility in the Eurozone and in the United States, higher interest rates hurting the housing market, sluggish job creation, political discord, spending cuts and debt defaults. While there continues to be some improvements in advanced economies, emerging economies continue to suffer with slower growth. Consumer spending continues to be impacted from consumer debt levels, elevated housing inventory, deflation, changes in savings rates, continued equity market volatility, decreased export activity, lowered government spending and additional government intervention. Furthermore, continued challenges in the credit environment, bank instability, downgrades of sovereign, bank and commercial debt, political issues affecting the handling of national debt, and the uncertainty arising from new government policies could also impact our clients, merchants and account holders.
The fragility of the current situation would be exacerbated if additional negative economic developments or crises were to arise around the world. These include defaults on government debt, exhaustion of national economic stimulus packages, significant increases in oil prices, tax increases, a significant decline in the commercial real estate market and policy missteps. Most recently, the economic situations in various countries in Europe have been particularly unstable, arising from the real prospect of debt defaults. If such defaults occur, or if the measures taken to avert such defaults create their own instability, economic turmoil is likely to result, and the impact is likely to be global and highly significant.
The volatility of the current economic environment in advanced and emerging economies and the responses by financial institutions and governments may create new risks or increase the impact of existing ones. These include the following:
Depressed consumer and business confidence may continue to decrease account holder spending.

Uncertainty and volatility in the performance of our clients' businesses may reduce the accuracy of our estimates of our revenues, rebates, incentives and realization of prepaid assets.

Our clients may implement cost-reduction initiatives that reduce or eliminate payment card marketing budgets or increase requests for greater incentives or reduced fees from us.

Our clients may decrease spending for optional or enhanced services, which could reduce account holders' desire to use these products.

Our clients may increase account holder fees as a cost-recovery initiative, or as a result of regulatory action, decreasing their value proposition to consumers and reducing consumers' desire to use our products.

Government intervention or investments in our clients may negatively affect our business in those regions with our financial institution clients.

Tightening of credit availability could affect the ability of participating financial institutions to lend to us under the terms of our credit facility.
 
The U.S. government's inability to meet its obligations or a possible further downgrade in the U.S. debt rating could adversely affect the liquidity of our investments, a substantial portion of which are in U.S. treasury and government securities.


21


Our clients may default on their settlement obligations, including for reasons unrelated to payment card activity, such as mortgage loan commitments.

Adverse fluctuations in foreign currency exchange rates could negatively affect the dollar value of our revenues and payments in foreign currencies.

The current economic environment could lead some clients to curtail or postpone near-term investments in growing their card portfolios, limit credit lines, modify fees and loyalty programs, or take other actions that adversely affect the growth of our volume and revenue streams from these clients.

Declines in stock prices or significant instability in the securities markets worldwide could cause consumer spending to decline materially.
Any of these developments could have a material adverse impact on our prospects, growth, revenue, profitability and overall business.
A decline in non-U.S. and cross-border activity and in multi-currency transactions could adversely affect our revenues and profitability, as we generate a significant portion of our revenue from such transactions.
We generate a significant amount of our revenues from cross-border transactions, and our clients pay us fees in connection with them. Cross-border transactions arise when the country of origin of the issuer is different from that of the merchant. Some of these cross-border transaction fees vary depending on whether the transaction currency is different than the account holder's billing currency as provided to Visa by his or her issuer.
In addition, Visa derives revenue from foreign currency exchange activities that result when our clients settle transactions in different currencies. A reduction in multi-currency transactions may reduce the need for foreign currency exchange activities and adversely affect our revenues. Limitations or changes in our ability to set foreign currency exchange rates for multi-currency transactions as a result of regulation, changes to tax policy, litigation, competitive pressures, reduced volatility in currency markets, or other reasons may also adversely affect our revenues.

Cross-border travel may be adversely affected by global geopolitical, economic, social and other conditions. These include the threat of terrorism, social or political instability, natural disasters, effects of climate change and outbreaks of flu, viruses and other diseases. The need for conversion of currencies declines as cross-border travel is impacted.

Moreover, if our financial institution clients decide to change practices (e.g., prohibit certain transactions or increase account holder fees associated with cross-border transactions) there could be a decline in account holder spending because the value proposition to the consumer could be reduced.
Transactions outside the United States represent an increasingly important part of our strategy, which we hope will continue to grow. However, a decline in non-U.S. and cross-border activity and multi-currency transactions will decrease the number of cross-border transactions we process and our revenues and profitability may be materially and adversely affected.
We risk loss or insolvency if our clients fail to fund settlement obligations for which we have provided indemnifications.
We indemnify issuers and acquirers for any settlement loss they suffer due to the failure of another issuer or acquirer to fund its settlement obligations in accordance with our operating regulations. In certain instances, we may indemnify issuers or acquirers even in situations in which a transaction is not processed by our system. This indemnification creates settlement risk for us due to the difference in timing between the date of a payment transaction and the date of subsequent settlement. While the amount of our indemnification obligations has no limit, our exposure under the indemnification is restricted to the amount of unsettled Visa payment transactions at any point in time.
Concurrent settlement failures involving more than one of our largest clients, several of our smaller clients or systemic operational failures lasting more than a single day could cause us to exceed our available financial

22


resources. Any such failure could materially and adversely affect our business, financial condition and results of operations. In addition, even if we have sufficient liquidity to cover a settlement failure, we may be unable to recover the amount of such payment. This could expose us to significant losses, and materially and adversely affect our financial condition, results of operations and cash flow.
We estimate settlement exposure under the indemnity based on the sum of three inputs. The first is average daily volumes during the quarter multiplied by the estimated number of days to settle plus a safety margin. The second is four months of rolling average chargebacks volume. The third is the total balance for outstanding Visa Travelers Cheques. We generally guarantee the payment of any validly issued Visa Travelers Cheque that has been negotiated in good faith and properly presented for payment in the event that the Cheque is not honored by its issuing institution. Additionally, from time to time, we review and revise our risk management methodology and inputs as necessary. See Note 11Settlement Guarantee Management to our consolidated financial statements included in Item 8 of this report.
Some of our clients are considered group members under Visa's operating regulations. As a result, some of these group members have elected to limit their responsibility for settlement losses arising from the failure of their constituent financial institutions in exchange for managing their constituent financial institutions in accordance with our credit risk policy. To the extent that any settlement failure resulting from a constituent financial institution exceeds the limits established by our credit risk policy, we would have to absorb the cost of such settlement failure, which could materially and adversely affect our financial condition, operating results and cash flow.
If we cannot keep pace with rapid technological developments to provide new and innovative payment programs and services or comply with new laws and regulations, the use of our products, our revenues and net income could decline.
Rapid, significant technological changes continue to confront the payments industry. These include developments in smart cards, eCommerce, mobile, and radio frequency and proximity payment devices, such as contactless cards. We cannot predict the effect of technological changes on our business. In addition to our own initiatives and innovations, we work closely with third parties, including some 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 products and services. In addition, our ability to adopt new services and technologies that we develop may be inhibited by industry-wide standards, new laws and regulations, resistance to change from clients or merchants or third parties' intellectual property rights. If we are unable to develop new technologies and adapt to technological changes and evolving industry standards, it could materially and adversely affect the use of our products, our revenues and net income.
If our transaction processing systems are disrupted or compromised, the perception of our brands, and our revenues or operating results could be materially and adversely affected.
Our transaction processing systems may experience service interruptions or degradation because of processing or other technology malfunctions, fires, natural disasters, power losses, disruptions in long-distance or local telecommunications access, fraud, military or political conflicts, terrorist attacks, effects of climate change or other catastrophic events.
In addition, our visibility in the global payments industry may attract terrorists and hackers to conduct physical or computer-based attacks. The latter could include computer viruses, worms or other destructive or disruptive software, process breakdowns, denial-of-service attacks, malicious social engineering or other malicious activities, or any combination of the foregoing. Any of these incidents could result in a degradation or disruption of our services or damage to our properties, equipment and data. They could also compromise data security. See Account data breaches involving card or other data processed, stored or transmitted by third parties or by us could adversely affect our reputation and revenues. If such attacks are not detected immediately, their effect could be compounded. Finally, potential and actual attacks could also result in increased costs, both for recovery and for prevention against future attacks.
Additionally, we rely on service providers for the timely transmission of information across our global data network. If a service provider fails to provide the communications capacity or services we require because of a natural disaster, operational disruption, terrorism or any other reason, the failure could interrupt our services. Because of the centrality of our processing systems to our business, any interruption or degradation could adversely affect the perception of our brands' reliability and materially reduce our revenues or operating results.

23


Account data breaches involving card or other data processed, stored or transmitted by third parties or by us could adversely affect our reputation and revenues.
Our clients, merchants, other service providers and we process, store or transmit account holder information in connection with Visa-branded cards and payment products. In addition, our clients may use third-party processors to process transactions generated by cards carrying our brands. Breach of the systems processing, storing or transmission of sensitive account holder data and other information could lead to fraudulent activity involving Visa-branded cards, reputational damage and claims against us. A breach may subject Visa to governmental or regulatory investigations, which could result in fines or enforcement actions against the company. If we are sued in any lawsuit 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 and profitability. In addition, any reputational damage resulting from an account data breach at one or more of our clients, merchants or other third parties could decrease the use and acceptance of Visa-branded cards, which could have a material adverse impact on our payments volume, revenues and future growth prospects. Finally, any data security breach could result in additional regulation, which could materially increase our compliance costs.
An increase in fraudulent or other illegal activity involving Visa-branded cards or payment products could lead to reputational damage to our brands and reduce the use and acceptance of Visa-branded cards or payment products.
Criminals are using increasingly sophisticated methods to capture account holder information. They use this information to conduct fraudulent transactions and to engage in other forms of illegal activities involving our payment products. Outsourcing and specialization of functions within the payments system are increasing. As a result, more third parties are involved in processing transactions using Visa-branded cards or payment products. A rise in fraud levels and other illegal activities involving Visa-branded cards or payment products could lead to reputational damage to our brands. This could reduce the use and acceptance of Visa-branded cards and payment products, or lead to greater regulation, which could increase our compliance costs and materially and adversely affect our payments volume and revenues.

Failure to maintain interoperability with Visa Europe's systems could damage the business and global perception of the Visa brands.
Visa and Visa Europe maintain mostly separate authorization, clearing and settlement systems. As a result, we have to ensure that the two systems can process every transaction involving both of our territories, regardless of where it originates. Visa Europe's independent system operations could present challenges to our business due to increasing costs and difficulty in maintaining the interoperability of our respective systems. Any inconsistency in the payment processing services and products between Visa Europe and us could negatively affect account holders from Visa Europe using payment products in the countries we serve or our account holders using payment products in Visa Europe's region. Failure to authorize, clear and settle inter-territory transactions quickly and accurately could harm our business and impair the global perception of our brands.
Structural and Organizational Risks
Due to the nature of our relationship and the terms we have agreed to with Visa Europe, we have little ability to control its operations in its region, and as a result, we may experience added costs and challenges in operating our business.
Visa Europe's exclusive license of our trademarks and technologies under the Framework Agreement gives us little ability to control and oversee Visa Europe's operations in its region. If we want to change a global rule or to implement certain changes that may be viewed as unfavorable to Visa Europe and its members, Visa Europe is not required to implement the changes unless we agree to pay for the associated implementation costs. This may result in added costs and expenses to our business. Furthermore, the licenses granted under the Framework Agreement may raise licensing, payment and associated tax treatment concerns.
Visa Europe may hinder our ability to acquire new businesses or to operate them effectively in its region. If the acquired business has operations in Visa Europe's region, Visa Europe may play a significant part in influencing our ongoing operational decisions and costs there. Finally, Visa Europe may undertake operational and litigation strategies, including, but not limited to, our ongoing litigation in the U.K. and our ongoing case with the European Commission, that may adversely impact our business and reputation globally.

24


If Visa Europe makes us acquire all of its outstanding stock under its put option, we are likely to incur substantial costs and may suffer a material and adverse effect on our operations and net income.
We have granted Visa Europe a put option, which Visa Europe can exercise at any time and which would require us to purchase all outstanding capital stock from Visa Europe's members within 285 days. Given current economic conditions, the purchase price under the terms of the put option could likely be in excess of $10 billion dollars and we may need to obtain third-party financing in order to meet our obligation through the issuance of either debt or equity. An equity offering, or the payment of part of the exercise price with our stock, would dilute the ownership interests of our stockholders. See Future sales of our class A common stock, or the end of transfer restrictions on our class B common stock, could result in dilution to holders of our existing class A common stock, which could adversely affect their rights and depress the market price of our class A common stock.
    Sufficient financing might not be available to us within that time on reasonable terms. See Note 2Visa Europe to our consolidated financial statements included in Item 8 of this report. In addition, we are required to assess any change in the fair value of the put option on a quarterly basis and record adjustments as necessary on our consolidated statements of operations. Consequently, the adjustments affect our reported net income and earnings per share. These quarterly adjustments and their resulting impact on our reported statements of operations could be significant. The existence of these changes in the fair value of the put option could adversely affect our ability to raise capital and increase any associated costs.
If we acquire Visa Europe, we may also encounter difficulties in integrating Visa Europe's business and systems into our existing operations. If we cannot do so quickly and cost-effectively, the integration could divert the time and resources of senior management and other key resources, disrupt our current operations and adversely affect our results of operations. In addition, we would become subject to any ongoing or future regulatory disputes as a result of EU regulations that govern the operations of Visa Europe. We may also be required to assume any ongoing or future litigation involving Visa Europe.
If we cannot remain organizationally effective, we will be unable to address the opportunities and challenges presented by our strategy and the increasingly dynamic, competitive, economic and regulatory environment.
For us to remain organizationally effective, we must effectively empower and deploy our management and operational resources, and incorporate both global and local perspectives into our decisions and processes. If we fail to do so, we may be unable to expand quickly, and the results of our expansion may be unsatisfactory.
In addition, if we are unable to make decisions quickly, assess our opportunities and risks, execute our strategy, and implement new governance, managerial and organizational processes, as needed, we may not be successful in this increasingly dynamic, competitive, economic and regulatory environment.
We may be unable to attract and retain key management and other key employees.
Our employees, particularly our key management, are vital to our success. Our senior management team has significant industry experience and would be difficult to replace. We may be unable to retain them or to attract other highly qualified employees, particularly if we do not offer employment terms that are competitive with the rest of the market. Failure to attract, motivate and retain highly qualified employees, or failure to develop and implement a viable succession plan, could adversely affect our business and our future success.
Acquisitions, strategic investments and entries into new businesses could disrupt our business and harm our financial condition and results of operations.
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. We are also subject to the terms of the exclusive license granted to Visa Europe in most acquisitions and major investments that involve countries in Visa Europe's territory, which will impact our ability to expand or conduct business in those regions. Regulatory constraints, particularly competition regulations, may also affect the extent to which we can maximize the value of our acquisitions or investments.
Furthermore, the integration of any acquisition or investment will take time and resources from our core business and disrupt our operations. We may spend time and money on acquisitions or investments that do not increase our revenues. Although we periodically evaluate potential acquisitions of and investments in businesses, products and technologies and anticipate continuing to make these evaluations, we cannot guarantee that they will be successful.

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With the evolution of technology and the opening of new market segments, we may choose to participate in areas in which we have not engaged in the past, either through acquisitions or through organic development. These include digital, eCommerce and mobile payments. Our recent entry into these businesses requires additional resources and presents an additional degree of risk, which could materially and adversely affect our financial condition and results of operations.
Future sales of our class A common stock, or the end of transfer restrictions on our class B common stock, could result in dilution to holders of our existing class A common stock, which could adversely affect their rights and depress the market price of our class A common stock.
The market price of our class A common stock could fall as a result of many factors. Under our retrospective responsibility plan, upon final resolution of our covered litigation, all class B common stock will become convertible into class A common stock. Future offerings of our class A common stock or the end of the transfer restrictions on our class B common stock would increase the number of class A common stock outstanding, which could adversely affect the market price and dilute the voting power of our existing class A common stock. The market price of our class A common stock may also suffer from the perception that such an increase in the number of class A common stock outstanding could occur in the future.
If funds are released from escrow after the resolution of the litigation covered by our retrospective responsibility plan, the value of our class A common stock will be diluted.
Under our retrospective responsibility plan, funds still in the escrow account after the resolution of all covered litigation will be released back to us. At that time, each share of class B common stock will become convertible into shares of class A common stock, benefiting the holders of class B common stock. This in turn will result in dilution of the interest of holders of class A common stock. The amount of funds released and the market price of our class A common stock will determine the extent of the dilution.
Holders of our class B and C common stock have voting rights concerning certain significant corporate transactions, and their interests in our business may be different from those of holders of our class A common stock.
Although their voting rights are limited, holders of our class B and C common stock can vote on certain significant transactions. These include a proposed consolidation or merger, a decision to exit our core payments business and any other vote required under Delaware law. The holders of these shares may not have the same incentive to approve a corporate action that may be favorable to the holders of class A common stock, and their interests may otherwise conflict with holders of class A common stock.
Anti-takeover provisions in our governing documents and under Delaware law could delay or prevent a takeover attempt or a change in control.
Provisions contained in our current certificate of incorporation, in our current bylaws and under Delaware law could delay or prevent a merger or acquisition that our stockholders may consider favorable. For instance, except for limited exceptions, no person may beneficially own more than 15% of our class A common stock (or 15% of our total outstanding common stock on an as-converted basis), unless our board of directors approves the acquisition of such shares in advance. In addition, except for common stock previously issued in connection with our reorganization to Visa Members, as defined in our current certificate of incorporation, no competitor or an affiliate of a competitor may hold more than 5% of our total outstanding common stock on an as-converted basis.
Our ability to pay regular dividends to holders of our common stock in the future is subject to the discretion of our board of directors and will be limited by our ability to generate sufficient earnings and cash flows.
Since August 2008, we have paid cash dividends quarterly on our class A, B and C common stock. The payment of dividends, if any, is subject to the discretion of our board of directors after taking into account various factors, including, but not limited to, our financial condition, operating results, capital requirements, covenants in our debt instruments and other factors that our board of directors may deem relevant. If, as a result of these factors, we cannot generate sufficient earnings and cash flows from our business, we may not be able to pay dividends to all of our stockholders. Specifically, if a dividend is declared or paid, an equivalent amount must be paid on each class or series of our common stock.

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ITEM 1B.
Unresolved Staff Comments
Not applicable.
ITEM 2.
Properties
At September 30, 2014, we owned and leased approximately 3.2 million square feet of office and processing center space in 40 countries around the world, of which approximately 1.9 million square feet are owned and the remaining 1.3 million square feet are leased. Our corporate headquarters is located in the San Francisco Bay Area and consists of four buildings that we own, totaling 0.9 million square feet, and 0.1 million square feet of office space that we lease. We also own an office building in Miami, Florida, totaling approximately 0.2 million square feet.
In addition, we own and operate two primary processing centers with adjacent office facilities in the United States, totaling approximately 0.8 million square feet.
We believe that these facilities are suitable and adequate to support our ongoing business needs.
ITEM 3.
Legal Proceedings
Refer to Note 20—Legal Matters to our consolidated financial statements included in Item 8 of this report.
ITEM 4.
Mine Safety Disclosures
Not applicable.

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PART II
 
ITEM 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Price Range of Common Stock
Our class A common stock has been listed on the New York Stock Exchange under the symbol “V” since March 19, 2008. At September 30, 2014, we had 327 stockholders of record of our class A common stock. The number of beneficial owners is substantially greater than the number of record holders, because a large portion of our class A common stock is held in "street name" by banks and brokers. The following table sets forth the intra-day high and low sale prices for our class A common stock in each of our last eight fiscal quarters: 
Fiscal 2014
High
 
Low
First Quarter
$
222.72

 
$
180.11

Second Quarter
$
235.50

 
$
210.52

Third Quarter
$
218.16

 
$
194.84

Fourth Quarter
$
224.75

 
$
208.21

 
 
 
 
Fiscal 2013
High
 
Low
First Quarter
$
152.51

 
$
134.87

Second Quarter
$
170.96

 
$
153.93

Third Quarter
$
185.23

 
$
161.27

Fourth Quarter
$
200.86

 
$
170.99

There is currently no established public trading market for our class B or class C common stock. There were 1,683 and 831 holders of record of our class B common stock and class C common stock, respectively, as of September 30, 2014.
Dividend Declaration and Policy
During the fiscal years ended September 30, 2014 and 2013, we paid the following quarterly cash dividends per share of our class A common stock (determined in the case of class B and C common stock, on an as-converted basis) to all holders of record of our class A, B and C common stock.
Fiscal 2014
Dividend
Per Share
First Quarter
$
0.40

Second Quarter
$
0.40

Third Quarter
$
0.40

Fourth Quarter
$
0.40

 
 
Fiscal 2013
Dividend
Per Share
First Quarter
$
0.33

Second Quarter
$
0.33

Third Quarter
$
0.33

Fourth Quarter
$
0.33

Additionally, in October 2014, our board of directors declared a quarterly cash dividend of $0.48 per share of class A common stock (determined in the case of class B and C common stock, on an as-converted basis) payable on December 2, 2014, to holders of record as of November 14, 2014 of our class A, B and C common stock.
Subject to legally available funds, we expect to continue paying quarterly cash dividends on our outstanding class A, B and C common stock in the future. However, the declaration and payment of future dividends is at the sole

28


discretion of our board of directors after taking into account various factors, including, but not limited to, our financial condition, settlement indemnifications, operating results, available cash and current and anticipated cash needs.
Issuer Purchases of Equity Securities
The table below sets forth the information with respect to purchases of the Company’s common stock made by or on behalf of the Company during the quarter ended September 30, 2014.
Period
 
Total
number of
shares
purchased (1)
 
Average
price paid
per share
 
Total
number of
shares
purchased
as part of
publicly
announced
plans or
programs (2)
 
Approximate
dollar value
of shares that
may yet be 
purchased
 under the plans or
programs (2)
 
July 1-31, 2014
 
957,475

 
$
212.97

 
949,538

 
$
1,603,884,208

 
August 1-31, 2014
 
2,225,318

 
$
210.74

 
2,225,087

 
$
1,134,930,868

 
September 1-30, 2014
 
11,609

 
$
212.96

 
11,609

 
$
682,458,392

(3) 
Total
 
3,194,402

 
$
211.42

 
3,186,234

 
 
 
(1) 
Includes 8,168 shares of class A common stock withheld at an average price of $211.22 per share (per the terms of grants under the Visa 2007 Equity Incentive Compensation Plan) to offset tax withholding obligations that occur upon vesting and release of restricted shares.
(2) 
The figures in the table reflect transactions according to the trade dates. For purposes of our consolidated financial statements included in this Form 10-K, the impact of these repurchases is recorded according to the settlement dates.
(3) 
Remaining authorized funds are reduced by the fiscal 2014 cash deposit of $450 million into the litigation escrow account under the retrospective responsibility plan. See Note 3—Retrospective Responsibility Plan. In October 2014, the Company's board of directors authorized an additional $5.0 billion share repurchase program.
EQUITY COMPENSATION PLAN INFORMATION
The table below presents information as of September 30, 2014, for the Visa 2007 Equity Incentive Compensation Plan, or the EIP, which was approved by our stockholders. We do not have any equity compensation plans that have not been approved by our stockholders, except as noted in note (2) in the table below. For a description of the awards issued under the EIP, see Note 16—Share-based Compensation to our consolidated financial statements included in Item 8—Financial Statements and Supplementary Data of this report.
Plan Category
(a)
Number of shares
of class A
common stock issuable upon exercise of
outstanding options
 
Weighted-average
exercise price of
outstanding options
 
Number of shares of
class A
common stock
remaining available for
future issuance under
equity compensation
plans (excluding shares
reflected in column (a))
Equity compensation plans approved by stockholders
2,732,493

(1) 
$
92.89

 
39,165,266

Equity compensation plans not approved by stockholders
179,933

(2) 
$
47.50

 

Total
2,912,426

 
$
90.08

 
39,165,266

 
 

 
 
 
.
(1) 
In addition to options, the EIP authorizes the issuance of restricted stock, restricted stock units, performance shares and other stock-based awards. The maximum number of shares issuable as of September 30, 2014, pursuant to outstanding restricted stock units and performance shares totals 466,733 and 518,810, respectively.
(2) 
These shares may be issued upon the exercise of options issued by Visa replacing certain CyberSource options outstanding at the time of the fiscal 2010 acquisition. These options were issued under certain provisions of the EIP, which permit Visa to issue options in connection with certain acquisition transactions.

29


ITEM 6.
Selected Financial Data
The following table presents selected Visa Inc. financial data for fiscal 2014, 2013, 2012, 2011 and 2010. The data below should be read in conjunction with Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations and Item 8—Financial Statements and Supplementary Data of this report.
Selected Financial Data
 
 
Fiscal Year Ended September 30,
Statement of Operations Data:
 
2014 (1)
 
2013
 
2012 (2)
 
2011
 
2010
 
 
(in millions, except per share data)
Operating revenues
 
$
12,702

 
$
11,778

 
$
10,421

 
$
9,188

 
$
8,065

Operating expenses
 
$
5,005

 
$
4,539

 
$
8,282

 
$
3,732

 
$
3,476

Operating income
 
$
7,697

 
$
7,239

 
$
2,139

 
$
5,456

 
$
4,589

Net income attributable to Visa Inc.
 
$
5,438

 
$
4,980

 
$
2,144

 
$
3,650

 
$
2,966

Basic earnings per share—class A common stock
 
$
8.65

 
$
7.61

 
$
3.17

 
$
5.18

 
$
4.03

Diluted earnings per share—class A common stock
 
$
8.62

 
$
7.59

 
$
3.16

 
$
5.16

 
$
4.01


 
 
At September 30,
Balance Sheet Data:
 
2014 (1)
 
2013
 
2012 (2)
 
2011
 
2010
 
 
(in millions, except per share data)
Total assets
 
$
38,569

 
$
35,956

 
$
40,013

 
$
34,760

 
$
33,408

Current portion of long-term debt
 
$

 
$

 
$

 
$

 
$
12

Current portion of accrued litigation
 
$
1,456

 
$
5

(1) 
$
4,386

 
$
425

 
$
631

Long-term debt
 
$

 
$

 
$

 
$

 
$
32

Long-term accrued litigation
 
$

 
$

 
$

 
$

 
$
66

Total equity
 
$
27,413

 
$
26,870

 
$
27,630

 
$
26,437

 
$
25,014

Dividend declared and paid per common share
 
$
1.60

 
$
1.32

 
$
0.88

 
$
0.60

 
$
0.50

(1) 
During fiscal 2013, we made payments from the litigation escrow account totaling $4.4 billion in connection with the covered litigation. During fiscal 2014, the court entered the final judgment order approving the settlement with the class plaintiffs in the interchange multidistrict litigation proceedings, which is subject to the adjudication of any appeals. Certain merchants in the settlement classes, however, have objected to the settlement and a number of merchants have filed opt-out claims. Takedown payments of approximately $1.1 billion related to the opt-out merchants were received and deposited into the litigation escrow account.The deposit into the litigation escrow account and a related increase in accrued litigation to address opt-out claims were recorded in the second quarter of fiscal 2014. In the fourth quarter of fiscal 2014, an additional accrual of $450 million associated with these opt-out claims was recorded and payments totaling $57 million were made from the litigation escrow account reflecting settlements with a number of individual opt-out merchants, resulting in an accrued balance of $1.4 billion related to covered litigation as of September 30, 2014. See Note 3—Retrospective Responsibility Plan and Note 20—Legal Matters to our consolidated financial statements included in Item 8—Financial Statements and Supplementary Data of this report.
(2) 
During fiscal 2012, we recorded: a one-time, non-cash tax benefit of $208 million related to the remeasurement of our net deferred tax liabilities; a covered litigation provision of $4.1 billion and related tax benefits; and the reversal of previously recorded tax reserves and interest, which increased net income by $326 million.

30


ITEM 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
This management’s discussion and analysis provides a review of the results of operations, financial condition and liquidity and capital resources of Visa Inc. and its subsidiaries (“Visa,” “we,” “our” and the “Company”) on a historical basis and outlines the factors that have affected recent earnings, as well as those factors that may affect future earnings. The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes included in Item 8 of this report.
Overview
Visa is a global payments technology company that connects consumers, businesses, financial institutions and governments in more than 200 countries and territories to fast, secure and reliable electronic payments. We provide our financial institution clients with a global payments infrastructure and support services for the delivery of Visa-branded payment products, including credit, debit and prepaid. We facilitate global commerce through the transfer of value and information among financial institutions, merchants, consumers, businesses and government entities. Each of these constituencies has played a key role in the ongoing worldwide migration from paper-based to electronic forms of payment, and we believe that this transformation continues to yield significant growth opportunities, particularly outside the United States. We continue to explore additional opportunities to enhance our competitive position by expanding the scope of payment solutions we provide.
Overall economic conditions. Our business is affected by overall economic conditions and consumer spending. Our business performance during fiscal 2014 reflects the impacts of a modest global economic recovery.
Financial highlights. During fiscal 2014, we recorded net income of $5.4 billion or $8.62 diluted earnings per share, an increase of 9% and 14% over the prior year, respectively. For fiscal 2014, 2013 and 2012, we recorded adjusted net income and diluted earnings per share as follows:
 
Fiscal Year ended
September 30,
 
% Change(1)
 
2014
 
2013
 
2012
 
2014
vs.
2013
 
2013
vs.
2012
 
(in millions, except percentages)
Net income, as adjusted(2)
$
5,721

 
$
4,980

 
$
4,203

 
15
%
 
18
%
Diluted earnings per share, as adjusted(2)
$
9.07

 
$
7.59

 
$
6.20

 
19
%
 
23
%
(1) 
Figures in the tables may not recalculate exactly due to rounding. Percentage changes are calculated based on unrounded numbers.
(2) 
Adjusted net income and diluted earnings per share in fiscal 2014 and 2012 exclude the impact of several significant items that we believe are not indicative of our operating performance, as they are either non-recurring, have no cash impact or are related to amounts covered by the retrospective responsibility plan. For a full reconciliation of our adjusted financial results, see tables in Adjusted financial results below. There were no comparable adjustments recorded during fiscal 2013.
We recorded net operating revenues of $12.7 billion for fiscal 2014, an increase of 8% over the prior year driven by continued growth in our underlying business drivers: nominal payments volume; processed transactions; and cross-border volume. The general strengthening of the U.S. dollar during the year resulted in a two percentage point decline in total operating revenue growth.
Total operating expenses for fiscal 2014 were $5.0 billion, and included $450 million of litigation provision related to the interchange multidistrict litigation. Excluding this provision, adjusted operating expenses remained flat at $4.6 billion over prior year operating expenses, primarily due to a reduction in professional fees and personnel expenses, offset by continued investments in infrastructure, technology and network processing to support our global growth initiatives.
Adjusted financial results. Our financial results for fiscal 2014 and 2012 reflect the impact of several significant items that we believe are not indicative of our operating performance in the prior or future years, as they are either non-recurring, have no cash impact or are related to amounts covered by the retrospective responsibility plan. As such, we believe the presentation of adjusted financial results excluding the following amounts provides a clearer understanding of our operating performance for the periods presented.

31


The following tables present our adjusted financial results for fiscal 2014 and 2012. There were no comparable adjustments recorded during fiscal 2013.
 
Fiscal 2014
(in millions, except for percentages and per share data)
Operating Expenses
 
Operating Margin
(1),(2)
 
Net Income Attributable to Visa Inc.
 
Diluted Earnings Per Share
(2)
As reported
$
5,005

 
61
%
 
$
5,438

 
$
8.62

Litigation provision(3)
(450
)
 
4
%
 
283

(3 
) 
0.45

As adjusted
$
4,555

 
64
%
 
$
5,721

 
$
9.07

Diluted weighted-average shares outstanding, as reported
 
 
 
 
 
 
631

 
Fiscal 2013
(in millions, except for percentages and per share data)
Operating Expenses
 
Operating Margin
(1),(2)
 
Net Income Attributable to Visa Inc.
 
Diluted Earnings Per Share
(2)
As reported
$
4,539

 
61
%
 
$
4,980

 
$
7.59

Diluted weighted-average shares outstanding, as reported
 
 
 
 
 
 
656

 
Fiscal 2012
(in millions, except for percentages and per share data)
Operating Expenses
 
Operating Margin
(1),(2)
 
Net Income Attributable to Visa Inc.
 
Diluted Earnings Per Share
(2)
As reported
$
8,282

 
21
%
 
$
2,144

 
$
3.16

Litigation provision(3)
(4,098
)
 
39
%
 
2,593

(3 
) 
3.82

Reversal of tax reserves(4)

 

 
(326
)
 
(0.48
)
Impact of deferred tax adjustment(4)

 

 
(208
)
 
(0.31
)
As adjusted
$
4,184

 
60
%
 
$
4,203

 
$
6.20

Diluted weighted-average shares outstanding, as reported
 
 
 
 
 
 
678

(1) 
Operating margin is calculated as operating income divided by total operating revenues.
(2) 
Figures in the table may not recalculate exactly due to rounding. Operating margin and diluted earnings per share figures are calculated based on unrounded numbers, not the rounded numbers presented.
(3) 
During fiscal 2014 and 2012, we recorded litigation provisions of $450 million and $4.1 billion, respectively, and related tax benefits, associated with the interchange multidistrict litigation. The tax impact is determined by applying applicable federal and state tax rates to the litigation provision. Monetary liabilities from settlements of, or judgments in, the covered litigation will be paid from the litigation escrow account. See Note 3—Retrospective Responsibility Plan and Note 20—Legal Matters to our consolidated financial statements.
(4) 
During fiscal 2012, we reversed all previously recorded tax reserves and accrued interest associated with uncertainties related to the deductibility of covered litigation expense recorded in fiscal 2007 through fiscal 2011. This resulted in a non-recurring increase in net income for fiscal 2012 by $326 million. Additionally, our reported financial results benefited from a non-recurring, non-cash adjustment of $208 million related to the remeasurement of our net deferred tax liabilities attributable to changes in the California state apportionment rules. See Note 19—Income Taxes to our consolidated financial statements.
Interchange multidistrict litigation. On October 19, 2012, Visa, MasterCard, various U.S. financial institution defendants and the class plaintiffs signed a settlement agreement to resolve the class plaintiffs' claims in the interchange multidistrict litigation. On December 10, 2012, Visa paid approximately $4.0 billion from the litigation escrow account into a settlement fund established pursuant to the definitive class settlement agreement. On January 14, 2014, the court entered the final judgment order approving the settlement with the class plaintiffs, which is subject to the adjudication of any appeals. Certain merchants in the proposed settlement classes, however, have objected to the settlement and a number of merchants have filed opt-out claims. Takedown payments of approximately $1.1 billion related to the opt-out merchants were received on January 27, 2014, and deposited into the litigation escrow account. The deposit into the litigation escrow account and a related increase in accrued

32


litigation to address opt-out claims were recorded in the second quarter of fiscal 2014. In the fourth quarter of fiscal 2014, we deposited $450 million of operating cash into the litigation escrow account and recorded an additional accrual of $450 million associated with the opt-out claims, resulting in an accrued litigation balance related to covered litigation of $1.4 billion at September 30, 2014. See Note 3—Retrospective Responsibility Plan and Note 20—Legal Matters to our consolidated financial statements.
Reduction in as-converted shares. During fiscal 2014, total as-converted class A common stock was reduced by 22 million shares, at an average price of $209.15 per share, using $4.6 billion of operating cash on hand. Of the $4.6 billion, $4.1 billion was used to repurchase class A common stock in the open market. In addition, we deposited $450 million of operating cash into the litigation escrow account previously established under the retrospective responsibility plan. The deposit has the same economic effect on earnings per share as repurchasing our class A common stock, because it reduces the class B conversion rate and consequently the as-converted class A common stock share count. See Note 3—Retrospective Responsibility Plan and Note 14—Stockholders' Equity to our consolidated financial statements.
The stock repurchases and litigation escrow deposit discussed above reduced the funds from the $5.0 billion share repurchase program authorized by our board of directors in October 2013. As of September 30, 2014, the program had remaining authorized funds of $682 million. All share repurchase programs authorized prior to October 2013 have been completed. In October 2014, our board of directors authorized an additional $5.0 billion share repurchase program. See Note 14—Stockholders' Equity to our consolidated financial statements.
Nominal payments volume and transaction counts. Payments volume is the primary driver for our service revenues, and the number of processed transactions is the primary driver for our data processing revenues. Nominal payments volume growth in the United States gained momentum over the prior year, with sustained double-digit growth in consumer credit, elevated growth in consumer debit, which had been negatively impacted by the Dodd-Frank Act beginning April 1, 2012, and double-digit growth in commercial products. Nominal international payments volume growth was negatively impacted by the overall strengthening of the U.S. dollar. On a constant-dollar basis, which excludes the impact of exchange rate movements, our international payments volume growth rate for the 12 months ended June 30, 2014 is 15% compared to 14% for the prior year comparable period. Continued double-digit growth in the number of processed transactions accelerated modestly over the prior year, reflecting the ongoing worldwide shift to electronic currency.

33


The following tables present nominal payments volume.(1) 
 
United States
 
International
 
Visa Inc.
 
12 months
ended
June 30,
2014
(2)
 
12 months
ended
June 30,
2013
(2) 
 
%
Change 
 
12 months
ended
June 30,
2014
(2)
 
12 months
ended
June 30,
2013
(2)
 
%
Change 
 
12 months
ended
June 30,
2014
(2)
 
12 months
ended
June 30,
2013
(2)
 
%
Change 
 
(in billions, except percentages)
Nominal payments volume
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer credit
$
872

 
$
786

 
11
%
 
$
1,600

 
$
1,498

 
7
%
 
$
2,471

 
$
2,284

 
8
%
Consumer debit(3)
1,127

 
1,046

 
8
%
 
454

 
392

 
16
%
 
1,581

 
1,438

 
10
%
Commercial(4)
370

 
334

 
11
%
 
145

 
140

 
3
%
 
515

 
474

 
9
%
Total nominal payments volume
$
2,369

 
$
2,167

 
9
%
 
$
2,198

 
$
2,030

 
8
%
 
$
4,567

 
$
4,196

 
9
%
Cash volume
468

 
446

 
5
%
 
2,122

 
2,083

 
2
%
 
2,590

 
2,529

 
2
%
Total nominal volume(5)
$
2,837

 
$
2,613

 
9
%
 
$
4,320

 
$
4,113

 
5
%
 
$
7,157

 
$
6,726

 
6
%
 
United States
 
International
 
Visa Inc.
 
12 months
ended
June 30,
2013
(2)
 
12 months
ended
June 30,
2012
(2)
 
%
Change 
 
12 months
ended
June 30,
2013
(2)
 
12 months
ended
June 30,
2012
(2)
 
%
Change 
 
12 months
ended
June 30,
2013
(2)
 
12 months
ended
June 30,
2012
(2)
 
%
Change 
 
(in billions, except percentages)
Nominal payments volume
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer credit
$
786

 
$
710

 
11
%
 
$
1,498

 
$
1,374

 
9
%
 
$
2,284

 
$
2,085

 
10
%
Consumer debit(3)
1,046

 
1,045

 
%
 
392

 
329

 
19
%
 
1,438

 
1,375

 
5
%
Commercial(4)
334

 
311

 
8
%
 
140

 
130

 
8
%
 
474

 
440

 
8
%
Total nominal payments volume
$
2,167

 
$
2,066

 
5
%
 
$
2,030

 
$
1,833

 
11
%
 
$
4,196

 
$
3,900

 
8
%
Cash volume
446

 
437

 
2
%
 
2,083

 
1,920

 
8
%
 
2,529

 
2,357

 
7
%
Total nominal volume(5)
$
2,613

 
$
2,503

 
4
%
 
$
4,113

 
$
3,754

 
10
%
 
$
6,726

 
$
6,257

 
7
%
The following table presents nominal and constant payments volume growth.(1) 
 
International
 
Visa Inc.
 
12 months
ended
June 30,
2014 vs 2013
 
12 months
ended
June 30,
2013 vs 2012
 
12 months
ended
June 30,
2014 vs 2013
 
12 months
ended
June 30,
2013 vs 2012
 
Nominal(2)
 
Constant(6)
 
Nominal(2)
 
Constant(6)
 
Nominal(2)
 
Constant(6)
 
Nominal(2)
 
Constant(6)
Payments volume growth
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer credit
7
%
 
13
%
 
9
%
 
12
%
 
8
%
 
12
%
 
10
%
 
12
%
Consumer debit(3)
16
%
 
24
%
 
19
%
 
24
%
 
10
%
 
12
%
 
5
%
 
5
%
Commercial(4)
3
%
 
10
%
 
8
%
 
11
%
 
9
%
 
11
%
 
8
%
 
8
%
Total payments volume growth
8
%
 
15
%
 
11
%
 
14
%
 
9
%
 
12
%
 
8
%
 
9
%
Cash volume growth
2
%
 
9
%
 
8
%
 
12
%
 
2
%
 
8
%
 
7
%
 
10
%
Total volume growth
5
%
 
12
%
 
10
%
 
13
%
 
6
%
 
11
%
 
7
%
 
9
%
(1) 
Figures in the tables may not recalculate exactly due to rounding. Percentage changes are calculated based on unrounded numbers.

34


(2) 
Service revenues in a given quarter are assessed based on nominal payments volume in the prior quarter. Therefore, service revenues reported for the twelve months ended September 30, 2014, 2013 and 2012, were based on nominal payments volume reported by our financial institution clients for the twelve months ended June 30, 2014, 2013 and 2012, respectively.
(3) 
Includes prepaid volume.
(4) 
Includes large, middle and small business credit and debit, as well as prepaid volume.
(5) 
Total nominal volume is the sum of total nominal payments volume and cash volume. Total nominal payments volume is the total monetary value of transactions for goods and services that are purchased on Visa-branded cards and payment products. Cash volume generally consists of cash access transactions, balance access transactions, balance transfers and convenience checks. Total nominal volume is provided by our financial institution clients, subject to review by Visa. From time to time, previously submitted volume information may be updated. Prior period updates are not material.
(6)
Growth on a constant-dollar basis excludes the impact of foreign currency fluctuations against the U.S. dollar.
The table below provides the number of transactions processed by our VisaNet system, and billable transactions processed by CyberSource's network during the fiscal periods presented.(1)  
 
2014
 
2013
 
2012
 
2014 vs. 2013
% Change
 
2013 vs. 2012
% Change
 
(in millions, except percentages)
Visa processed transactions(2)
64,944

 
58,472

 
53,324

 
11
%
 
10
%
CyberSource billable transactions(3)
7,549

 
6,533

 
5,182

 
16
%
 
26
%
(1) 
Figures in the table may not recalculate exactly due to rounding. Percentage changes are calculated based on unrounded numbers.
(2) 
Represents transactions involving Visa, Visa Electron, Interlink and PLUS cards processed on Visa's networks.
(3) 
Transactions include, but are not limited to, authorization, settlement payments network connectivity, fraud management, payment security management, tax services and delivery address verification.
Results of Operations
Operating Revenues
Our operating revenues are primarily generated from payments volume on Visa-branded cards and payment products for purchased goods and services, as well as the number of transactions processed on our network. We do not earn revenues from, or bear credit risk with respect to, interest or fees paid by account holders on Visa-branded cards or payment products. Our issuing clients have the responsibility for issuing cards and other payment products, and determining the interest rates and fees paid by account holders. We generally do not earn revenues from the fees that merchants are charged for acceptance by the acquirers, including the merchant discount rate. Our acquiring clients are generally responsible for soliciting merchants, and establishing and earning these fees.
The following sets forth the components of our operating revenues:
Service revenues consist mainly of revenues earned for providing financial institution clients with support services for the delivery of Visa-branded payment products and solutions. Current quarter service revenues are primarily assessed using a calculation of current pricing applied to the prior quarter's payments volume. Service revenues also include assessments designed to support ongoing acceptance and volume growth initiatives, which are recognized in the same period the related volume is transacted.
Data processing revenues are earned for authorization, clearing, settlement, network access and other maintenance and support services that facilitate transaction and information processing among our clients globally and with Visa Europe. Data processing revenues are also earned for transactions processed by CyberSource's online payment gateway platform. Data processing revenues are recognized in the same period the related transactions occur or services are rendered.
International transaction revenues are earned for cross-border transaction processing and currency conversion activities. Cross-border transactions arise when the country of origin of the issuer is different from that of the merchant. International transaction revenues are primarily generated by cross-border payments and cash volume.

35


Other revenues consist mainly of license fees for use of the Visa brand, revenues earned from Visa Europe in connection with the Visa Europe Framework Agreement, fees from account holder services, licensing and certification, and other activities related to our acquired entities. Other revenues also include optional service or product enhancements, such as extended account holder protection and concierge services.
Client incentives consist of long-term contracts with financial institution clients and other business partners for various programs designed to build payments volume, increase Visa-branded card and product acceptance and win merchant routing transactions over our network. These incentives are primarily accounted for as reductions to operating revenues.
Operating Expenses
Personnel includes salaries, employee benefits, incentive compensation, share-based compensation and contractor expense.
Network and processing mainly represents expenses for the operation of our processing network, including maintenance, equipment rental and fees for other data processing services.
Marketing includes expenses associated with advertising and marketing campaigns, sponsorships and other related promotions of the Visa brand.
Professional fees mainly consist of fees for consulting, legal and other professional services.
Depreciation and amortization includes depreciation expense for property and equipment, as well as amortization of purchased and internally developed software. Also included in this amount is amortization of finite-lived intangible assets primarily obtained through acquisitions.
General and administrative mainly consists of facilities costs, travel activities, foreign exchange gains and losses and other corporate expenses in support of our business.
Litigation provision is an estimate of litigation expense and is based on management's understanding of our litigation profile, the specifics of the cases, advice of counsel to the extent appropriate and management's best estimate of incurred loss as of the balance sheet date.
Non-operating Income
Non-operating income mainly includes income, gains and losses earned on investments, accrued interest and penalties related to reserves for uncertain tax positions and the change in the fair value of the Visa Europe put option.
Visa Inc. Fiscal 2014, 2013 and 2012
Operating Revenues
The following table sets forth our operating revenues earned in the United States, internationally and from Visa Europe. Revenues earned from Visa Europe are a result of our contractual arrangement with Visa Europe, as governed by the Framework Agreement that provides for trademark and technology licenses and bilateral services. See Note 2—Visa Europe to our consolidated financial statements.
 
Fiscal Year ended
September 30,
 
$ Change
 
% Change(1)
 
2014
 
2013
 
2012
 
2014
vs.
2013
 
2013
vs.
2012
 
2014
vs.
2013
 
2013
vs.
2012
 
(in millions, except percentages)
United States
$
6,847

 
$
6,379

 
$
5,720

 
$
468

 
$
659

 
7
%
 
12
%
International
5,629

 
5,177

 
4,478

 
452

 
699

 
9
%
 
16
%
Visa Europe
226

 
222

 
223

 
4

 
(1
)
 
2
%
 
%
Total operating revenues
$
12,702

 
$
11,778

 
$
10,421

 
$
924

 
$
1,357

 
8
%
 
13
%
(1) 
Figures in the table may not recalculate exactly due to rounding. Percentage changes are calculated based on unrounded numbers.

36


The increase in operating revenues mainly reflects continued growth in our underlying business drivers: nominal payments volume; processed transactions; and cross-border volume. These benefits were partially offset by increases in client incentives. Overall revenue growth decreased in fiscal 2014 compared to prior year due to the negative impact of lower foreign currency exchange volatility on international transaction revenues and the general strengthening of the U.S. dollar in fiscal 2014, combined with the absence of pricing modifications that benefited fiscal 2013.
Our operating revenues, primarily service revenues and international transaction revenues, are impacted by the overall strengthening or weakening of the U.S. dollar as payments volume and related revenues denominated in local currencies are converted to U.S. dollars. The effect of exchange rate movements in fiscal 2014, as partially mitigated by our hedging program, resulted in an overall decline of about two percentage points in total operating revenue growth compared to fiscal 2013. While we expect our hedging program to continue to mitigate this risk during fiscal 2015, a general strengthening of the U.S. dollar is expected to reduce total operating revenue growth by about two percentage points for fiscal 2015, net of offsetting hedges. See Note 12—Derivative Financial Instruments to our consolidated financial statements.
The following table sets forth the components of our total operating revenues.
 
Fiscal Year ended
September 30,
 
$ Change
 
% Change(1)
 
2014
 
2013
 
2012
 
2014
vs.
2013
 
2013
vs.
2012
 
2014
vs.
2013
 
2013
vs.
2012
 
(in millions, except percentages)
Service revenues
$
5,797

 
$
5,352

 
$
4,872

 
$
445

 
$
480

 
8
%
 
10
%
Data processing revenues
5,167

 
4,642

 
3,975

 
525

 
667

 
11
%
 
17
%
International transaction revenues
3,560

 
3,389

 
3,025

 
171

 
364

 
5
%
 
12
%
Other revenues
770

 
716

 
704

 
54

 
12

 
7
%
 
2
%
Client incentives
(2,592
)
 
(2,321
)
 
(2,155
)
 
(271
)
 
(166
)
 
12
%
 
8
%
Total operating revenues
$
12,702

 
$
11,778

 
$
10,421

 
$
924

 
$
1,357

 
8
%
 
13
%
(1) 
Figures in the table may not recalculate exactly due to rounding. Percentage changes are calculated based on unrounded numbers.
Service revenues increased in fiscal 2014 and 2013 primarily due to 9% and 8% growth in nominal payments volume, respectively.
Data processing revenues increased in fiscal 2014 and 2013 due to overall growth in processed transactions of 11% and 10%, respectively. Fiscal 2013 also benefited from the full-year impact of pricing modifications that became effective in the third quarter of fiscal 2012 as part of our strategy to mitigate the impacts from the Dodd-Frank Act.
International transaction revenues increased in fiscal 2014 and 2013 primarily reflecting 8% and 10% growth in nominal cross-border payments volume, respectively. The fiscal 2014 growth in international transaction revenues was slower than the growth in nominal cross-border payments volume for the comparable period mainly due to lower volatility in a broad range of currencies.
Other revenues increased in fiscal 2014 and 2013 due to an increase in license fees as well as increases in optional service or product enhancements.
Client incentives increased in fiscal 2014 and 2013, reflecting incentives incurred on long-term client contracts that were initiated or renewed during fiscal 2014 and 2013, as well as overall growth in global payments volume. The amount of client incentives we record in future periods will vary based on changes in performance expectations, actual client performance, amendments to existing contracts or the execution of new contracts. We expect incentives as a percentage of gross revenues to be in the range of 17.5% to 18.5% for the full 2015 fiscal year.

37


Operating Expenses
The following table sets forth the components of our total operating expenses.
 
Fiscal Year ended
September 30,
 
$ Change
 
% Change(1)
 
2014
 
2013
 
2012
 
2014
vs.
2013
 
2013
vs.
2012
 
2014
vs.
2013
 
2013
vs.
2012
 
(in millions, except percentages)
Personnel
$
1,875

 
$
1,932

 
$
1,726

 
$
(57
)
 
$
206

 
(3
)%
 
12
 %
Marketing
900

 
876

 
873

 
24

 
3

 
3
 %
 
 %
Network and processing
507

 
468

 
414

 
39

 
54

 
8
 %
 
13
 %
Professional fees
328

 
412

 
385

 
(84
)
 
27

 
(20
)%
 
7
 %
Depreciation and amortization
435

 
397

 
333

 
38

 
64

 
10
 %
 
19
 %
General and administrative
507

 
451

 
451

 
56

 

 
12
 %
 
 %
Litigation provision
453

 
3

 
4,100

 
450

 
(4,097
)
 
NM

 
NM

Total operating expenses(2)
$
5,005

 
$
4,539

 
$
8,282

 
$
466

 
$
(3,743
)
 
10
 %
 
(45
)%
(1) 
Figures in the table may not recalculate exactly due to rounding. Percentage changes are calculated based on unrounded numbers.
(2) 
Excluding the litigation provisions of $450 million recorded in fiscal 2014 and $4.1 billion recorded in fiscal 2012 associated with litigation covered by the retrospective responsibility plan, operating expenses for fiscal 2014 and 2012 were $4.6 billion and $4.2 billion, respectively. On an adjusted basis, the percentage change of fiscal 2014 over fiscal 2013 is flat and fiscal 2013 over fiscal 2012 is an increase of 8%.
Personnel decreased in fiscal 2014 mainly due to lower incentive compensation and severance charges, reductions in our net periodic pension cost and the absence of one-time share-based compensation expenses previously recognized in fiscal 2013. These decreases were partially offset by a continued increase in headcount throughout the organization reflecting our strategy to invest for future growth. The increase in fiscal 2013 is primarily due to increases in headcount and higher severance charges as a result of organizational restructuring that aligns with our strategic priorities.
Marketing increased in fiscal 2014 mainly due to elevated spend supporting the 2014 Sochi Winter Olympics and the 2014 FIFA World Cup campaigns, combined with increased spend in the second half of the year to support our growth strategies and new product initiatives, such as Visa Checkout. Marketing in fiscal 2013 remained relatively flat compared to fiscal 2012 reflecting strategies to promote our products in each of those years and spend on specific campaigns, such as the 2013 FIFA Confederation Cup and preparation for the 2014 Sochi Winter Olympics in fiscal 2013 and the 2012 London Summer Olympics in fiscal 2012.
Network and processing in fiscal 2014 and 2013 increased mainly due to continued technology and processing network investments to support growth.
Professional fees decreased in fiscal 2014 mainly due to the absence of certain project costs incurred in fiscal 2013 as part of our effort to align resources with our strategic priorities.
Depreciation and amortization increased in fiscal 2014 and 2013, primarily due to additional depreciation from our ongoing investments in technology assets and infrastructure to support our digital solutions and core business initiatives.
General and administrative increased in fiscal 2014 mainly due to facilities costs and other corporate expenses in support of our business growth and the disposal of obsolete technology assets, partially offset by a decrease in travel activities. General and administrative remained flat in fiscal 2013 compared to fiscal 2012.
Litigation provision in fiscal 2014 and 2012 reflects $450 million and $4.1 billion accruals, respectively, related to the covered litigation. See Note 3—Retrospective Responsibility Plan and Note 20—Legal Matters to our consolidated financial statements.

38


Non-operating Income
Non-operating income in fiscal 2014 of $27 million increased from $18 million in fiscal 2013 primarily due to the absence of a $15 million other-than-temporary impairment loss recognized during fiscal 2013. See Note 4—Fair Value Measurements and Investments to our consolidated financial statements. The decrease in fiscal 2013 from $68 million in fiscal 2012 was primarily due to the reversal in fiscal 2012 of previously accrued interest expense associated with tax reserves for uncertainties related to the deductibility of covered litigation expense. See Note 19—Income Taxes and Note 20—Legal Matters to our consolidated financial statements.
Effective Income Tax Rate
The effective income tax rate of 30% in fiscal 2014 differs from the effective income tax rate of 31% in fiscal 2013 mainly due to:
a $264 million tax benefit related to a deduction for U.S. domestic production activities, of which $191 million related to prior fiscal years, as a result of the completion of a study in the second quarter of fiscal 2014; and
the absence of the following in fiscal 2014:
a tax benefit recognized in fiscal 2013 as a result of new guidance issued by the state of California regarding apportionment rules for years prior to fiscal 2012; and
certain foreign tax credit benefits related to prior years recognized in fiscal 2013.
The effective income tax rate of 31% in fiscal 2013 differs from the effective income tax rate of 3% in fiscal 2012 mainly due to:
the aforementioned tax benefit recognized in fiscal 2013 as a result of new guidance issued by the state of California regarding apportionment rules for years prior to fiscal 2012;
certain foreign tax credit benefits related to prior years recognized in fiscal 2013, as mentioned above; and
the absence of the following in fiscal 2013:
the fiscal 2012 reversal of previously recorded tax reserves associated with uncertainties related to the deductibility of covered litigation expense;
a fiscal 2012 one-time, non-cash benefit from the remeasurement of existing net deferred tax liabilities due to the changes in California apportionment rules adopted in that year; and
the effect of applying the aforementioned fiscal 2012 tax benefits to a fiscal 2012 pre-tax income that was reduced by the $4.1 billion covered litigation provision.    

Adjusted effective income tax rate for fiscal 2012. Our financial results for fiscal 2012 reflected the impact of several significant items that we believe are not indicative of our operating performance in that or future years, as they were either non-recurring, had no cash impact or were related to amounts covered by the retrospective responsibility plan. As such, we have presented our fiscal 2012 adjusted effective income tax rate in the table below, which we believe provides a clearer understanding of our operating performance for the fiscal year. Our adjusted effective income tax rate for fiscal 2012 excludes: the reversal of previously recorded tax reserves and accrued interest associated with uncertainties related to the deductibility of covered litigation expense; additional covered litigation provision recorded; and a one-time, non-cash benefit from the remeasurement of existing net deferred tax liabilities attributable to changes in the California state apportionment rules.
 
Fiscal Year Ended September 30, 2012
 
Income Before Income Taxes
 
Income Tax Provision
 
Effective Income Tax Rate
 
(in millions, except for percentages)
As reported
$
2,207

 
$
65

 
3
%
Reversal of tax reserves
(43
)
 
283

 
 
Litigation provision
4,098

 
1,505

 
 
Remeasurement of net deferred tax liabilities

 
208

 
 
Adjusted
$
6,262

 
$
2,061

 
33
%

39


We expect our effective tax rate for the full 2015 fiscal year to be in the low 30s.
Liquidity and Capital Resources
Management of Our Liquidity
We regularly evaluate cash requirements for current operations, commitments, development activities and capital expenditures, and we may elect to raise additional funds for these purposes in the future through the issuance of either debt or equity. Our treasury policies provide management with the guidelines and authority to manage liquidity risk in a manner consistent with our corporate objectives.
The objectives of our treasury policies are to:
provide adequate liquidity to cover operating expenditures and liquidity contingency scenarios;
ensure timely completion of payments settlement activities;
ensure payments on required litigation settlements;
make planned capital investments in our business;
pay dividends and repurchase our shares at the discretion of our board of directors; and
optimize income earned by investing excess cash in securities that enable us to meet our working capital and liquidity needs.
Based on our current cash flow budgets and forecasts of our short-term and long-term liquidity needs, we believe that our projected sources of liquidity will be sufficient to meet our projected liquidity needs for more than the next 12 months. We will continue to assess our liquidity position and potential sources of supplemental liquidity in view of our operating performance, current economic and capital market conditions, and other relevant circumstances.
Cash Flow Data
The following table summarizes our cash flow activity for the fiscal years presented:
 
 
2014
 
2013
 
2012
 
(in millions)
Total cash provided by (used in):
 
 
 
 
 
Operating activities
$
7,205

 
$
3,022

 
$
5,009

Investing activities
(941
)
 
(1,164
)
 
(2,414
)
Financing activities
(6,478
)
 
(1,746
)
 
(2,655
)
Effect of exchange rate changes on cash and cash equivalents
(1
)
 

 
7

(Decrease) increase in cash and cash equivalents
$
(215
)
 
$
112

 
$
(53
)
Operating activities. Reported cash provided by operating activities in fiscal 2014 and 2013 was significantly impacted by cash flows related to the interchange multidistrict litigation, including:
the return of $1.1 billion in takedown payments in fiscal 2014 and related increase of $368 million in income taxes paid; and
payments of $4.4 billion made in fiscal 2013 from the litigation escrow account and a related decrease of $1.5 billion in overall income taxes paid.
The cash inflows and outflows related to the litigation escrow account are also reflected as offsetting cash flows within financing activities for their respective years as they are covered by the retrospective responsibility plan.
Absent the above impacts, cash provided by operating activities increased in both fiscal 2014 and 2013 to approximately $6.5 billion and $5.9 billion, respectively, reflecting growth in total operating revenues in both years. See Note 3—Retrospective Responsibility Plan and Note 20—Legal Matters to our consolidated financial statements. We believe that cash flow generated from operating activities will be more than sufficient to meet our ongoing operational needs.
Investing activities. Cash used in investing activities was lower during fiscal 2014 compared to the prior year, reflecting a decrease in purchases of available-for-sale investment securities, offset by a decrease in proceeds received from maturities and sales of available-for-sale investment securities. We also used cash on hand to acquire a business in which we previously held a minority interest ownership. Cash used in investing activities was

40


lower during fiscal 2013 compared to fiscal 2012, reflecting a decrease in purchases of available-for-sale investment securities, combined with greater proceeds received from maturities and sales of available-for-sale investment securities. See Note 4—Fair Value Measurements and Investments to our consolidated financial statements.
Financing activities. Reported financing activities reflect significant cash flows in connection with the interchange multidistrict litigation that offset the impacts discussed above under operating activities as they are covered by the retrospective responsibility plan. Additionally, reported financing activities include deposits into the litigation escrow account of $450 million and $1.7 billion in fiscal 2014 and 2012, respectively. Absent all of the above impacts, which are related to the interchange litigation, cash used in financing activities was $5.0 billion, $6.1 billion and $940 million in fiscal 2014, 2013 and 2012, respectively. The decrease in fiscal 2014 and increase in fiscal 2013 are primarily due to changes in cash used to repurchase shares of our class A common stock in the open market. See Note 3—Retrospective Responsibility Plan, Note 14—Stockholders' Equity and Note 20—Legal Matters to our consolidated financial statements.
Sources of Liquidity
Our primary sources of liquidity are cash on hand, cash flow from our operations, our investment portfolio and access to various equity and borrowing arrangements. Funds from operations are maintained in cash and cash equivalents and short-term or long-term available-for-sale investment securities based upon our funding requirements, access to liquidity from these holdings, and the return that these holdings provide. We believe that cash flow generated from operations, in conjunction with access to our other sources of liquidity, will be more than sufficient to meet our ongoing operational needs.
Cash and cash equivalents and short-term and long-term available-for-sale investment securities held by our foreign subsidiaries totaled $5.5 billion at September 30, 2014. If it were necessary to repatriate these funds for use in the United States, we would be required to pay U.S. taxes on the amount of undistributed earnings in those subsidiaries. It is our intent to indefinitely reinvest the majority of these funds outside of the United States. As such, we have not accrued U.S. income tax provision in our financial results related to approximately $5.0 billion of undistributed earnings included in these funds. The amount of income taxes that would have resulted had such earnings been repatriated is not practicably determinable.
Available-for-sale investment securities. Our investment portfolio is designed to invest excess cash in securities which enables us to meet our working capital and liquidity needs. Our investment portfolio primarily consists of debt securities issued by the U.S. Treasury or U.S. government-sponsored agencies. The majority of these investments, $3.0 billion, are classified as non-current as they have stated maturities of more than one year from the balance sheet date. However, these investments are generally available to meet short-term liquidity needs.
Factors that may impact the liquidity of our investment portfolio include, but are not limited to, changes to credit ratings of the securities, uncertainty related to regulatory developments, actions by central banks and other monetary authorities, and the ongoing strength and quality of credit markets. We will continue to review our portfolio in light of evolving market and economic conditions. However, if current market conditions deteriorate, the liquidity of our investment portfolio may be impacted and we could determine that some of our investments are impaired, which could adversely impact our financial results. We have policies that limit the amount of credit exposure to any one financial institution or type of investment. See Item 1A—Risk Factors included elsewhere in this report.
Commercial paper program. We maintain a commercial paper program to support our working capital requirements and for other general corporate purposes. Under the program, we are authorized to issue up to $3.0 billion in outstanding notes, with maturities up to 397 days from the date of issuance. We had no outstanding obligations under the program at September 30, 2014. See Note 9—Debt to our consolidated financial statements.
Credit facility. On January 29, 2014, we entered into an unsecured $3.0 billion revolving credit facility. The credit facility, which expires on January 28, 2015, replaced our previous $3.0 billion credit facility, which terminated on January 29, 2014. The new credit facility contains covenants and events of default customary for facilities of this type. There were no borrowings under either facility and we were in compliance with all related covenants during the year ended September 30, 2014. See Note 9—Debt to our consolidated financial statements.
Universal shelf registration statement. In July 2012, we filed a registration statement with the SEC using a shelf registration process. As permitted by the registration statement, we may, from time to time, sell shares of debt or equity securities in one or more transactions. This registration statement expires in July 2015.

41


Litigation escrow account. Pursuant to the terms of the retrospective responsibility plan, we maintain a litigation escrow account from which monetary liabilities from settlements of, or judgments in, the covered litigation will be payable. When we fund the litigation escrow account, the shares of class B common stock held by our stockholders are subject to dilution through an adjustment to the conversion rate of the shares of class B common stock to shares of class A common stock. See Note 3—Retrospective Responsibility Plan and Note 20—Legal Matters to our consolidated financial statements. The balance in this account at September 30, 2014, was $1.5 billion and is reflected as restricted cash in our consolidated balance sheet. As these funds are restricted for the sole purpose of making payments related to the covered litigation matters, as described below under Uses of Liquidity, we do not rely on them for other operational needs.
Credit Ratings
At September 30, 2014, our credit ratings by Standard and Poor’s and Moody’s were as follows:
 
Standard and Poor’s
 
Moody’s
Debt type
Rating
 
Outlook
 
Rating
 
Outlook
Short-term unsecured debt
A-1
 
Stable
 
P-1
 
Stable
Long-term unsecured debt
A+
 
Stable
 
A1
 
Stable
Various factors affect our credit ratings, including changes in our operating performance, the economic environment, conditions in the electronic payment industry, our financial position and changes in our business strategy. We do not currently foresee any reasonable circumstances under which our credit ratings would be significantly downgraded. If a downgrade were to occur, it could adversely impact, among other things, our future borrowing costs and access to capital markets.
Uses of Liquidity
Payments settlement. Payments settlement due from and to our financial institution clients can represent a substantial daily liquidity requirement. U.S. dollar settlements are typically settled within the same day and do not result in a net receivable or payable balance, while settlement currencies other than the U.S. dollar generally remain outstanding for one to two business days, which is consistent with industry practice for such transactions. During fiscal 2014, we were not required to fund settlement-related working capital. Our average daily net settlement position was a payable of $261 million.
Covered litigation. We are parties to legal and regulatory proceedings with respect to a variety of matters, including certain litigation that we refer to as the covered litigation. As noted above, monetary liabilities from settlements of, or judgments in, the covered litigation are payable from the litigation escrow account. During fiscal 2013, we made $4.4 billion in covered litigation payments that were funded from the litigation escrow account, of which, $4.0 billion was paid into a settlement fund established pursuant to the definitive class settlement agreement in the interchange multidistrict litigation. On January 14, 2014, the court entered the final judgment order approving the settlement with the class plaintiffs, which is subject to the adjudication of any appeals. Certain merchants in the settlement classes, however, have objected to the settlement and a number of merchants have filed opt-out claims. Takedown payments of approximately $1.1 billion related to the opt-out merchants was received in January 2014, and deposited into the litigation escrow account. Receipt of the takedown payments increases our current taxable income by approximately $1.1 billion, and income tax payable by about $368 million, which was fully paid by the end of fiscal 2014. At September 30, 2014, the litigation escrow account had an available balance of $1.5 billion. See Note 3—Retrospective Responsibility Plan and Note 20—Legal Matters to our consolidated financial statements.
Other litigation. Judgments in and settlements of litigation, other than the covered litigation, could give rise to future liquidity needs.
Reduction in as-converted shares. During fiscal 2014, total as-converted class A common stock was reduced by 22 million shares, at an average price of $209.15 per share, using $4.6 billion of operating cash on hand. Of the $4.6 billion, $4.1 billion was used to repurchase class A common stock in the open market. In addition, we deposited $450 million of operating cash into the litigation escrow account previously established under the retrospective responsibility plan. The deposit has the same economic effect on earnings per share as repurchasing our class A common stock, because it reduces the class B conversion rate and consequently the as-converted class A common stock share count. See Note 3—Retrospective Responsibility Plan and Note 14—Stockholders' Equity to our consolidated financial statements.

42


The stock repurchases and litigation escrow deposit discussed above reduced the funds from the $5.0 billion share repurchase program authorized by our board of directors in October 2013. As of September 30, 2014, the program had remaining authorized funds of $682 million. All share repurchase programs authorized prior to October 2013 have been completed. In October 2014, our board of directors authorized an additional $5.0 billion share repurchase program. See Note 14—Stockholders' Equity to our consolidated financial statements.
Dividends. During fiscal 2014, we paid $1.0 billion in dividends. In October 2014, our board of directors declared a quarterly dividend in the aggregate amount of $0.48 per share of class A common stock (determined in the case of class B and class C common stock on an as-converted basis). We expect to pay approximately $297 million in connection with this dividend on December 2, 2014. See Note 14—Stockholders' Equity to our consolidated financial statements. We expect to continue paying quarterly dividends in cash, subject to approval by the board of directors. Classes of B and C common stock will share ratably on an as-converted basis in such future dividends.
Visa Europe put option. We have granted Visa Europe a perpetual put option which, if exercised, will require us to purchase all of the outstanding shares of capital stock of Visa Europe from its members. Visa Europe may exercise the put option at any time. The put option provides a formula for determining the purchase price of the Visa Europe shares, which subject to certain adjustments, applies Visa Inc.'s forward price-to-earnings multiple, or the "P/E ratio" (as defined in the option agreement) at the time the option is exercised to Visa Europe's adjusted sustainable income for the forward 12-month period, or the "adjusted sustainable income" (as defined in the option agreement). The calculation of Visa Europe's adjusted sustainable income under the terms of the put option agreement includes potentially material adjustments for cost synergies and other negotiated items. Upon exercise, the key inputs to this formula, including Visa Europe's adjusted sustainable income, will be the result of negotiation between us and Visa Europe. The put option provides an arbitration mechanism in the event that the two parties are unable to agree on the ultimate purchase price.
The fair value of the put option represents the value of Visa Europe's option, which, under certain conditions, could obligate us to purchase its member equity interest for an amount above fair value. At September 30, 2014, we determined the fair value of the put option liability to be approximately $145 million. While this amount represents the fair value of the put option at September 30, 2014, it does not represent the actual purchase price that we may be required to pay if the option is exercised. The purchase price we could be obligated to pay 285 days after exercise will represent a substantial financial obligation. Given current economic conditions, the purchase price under the terms of the put option would likely be in excess of $10 billion. We may need to obtain third-party financing, either by borrowing funds or undertaking a subsequent equity offering in order to fund this payment. The amount of that potential obligation could vary dramatically based on, among other things, Visa Europe's adjusted sustainable income and our P/E ratio, in each case, as negotiated at the time the put option is exercised.
Given the perpetual nature of the put option and the various economic conditions which could be present at the time of exercise, our ultimate obligation in the event of exercise cannot be reliably estimated. The following table calculates our total obligation assuming, for illustrative purposes only, a range of P/E ratios for Visa Inc. and assuming that Visa Europe demonstrates $500 million of adjusted sustainable income at the date of exercise. The $500 million of assumed adjusted sustainable income provided below is for illustrative purposes only. This does not represent an estimate of the amount of adjusted sustainable income Visa Europe would have been able to demonstrate at September 30, 2014, or will be able to demonstrate at any point in time in the future. Should Visa Europe elect to exercise its option, we believe it is likely that it will implement changes in its business operations to move to a for-profit model in order to maximize its adjusted sustainable income and, as a result, to increase the purchase price. The table also provides the amount of increase or decrease in the payout, assuming the same range of estimated P/E ratios, for each $100 million of adjusted sustainable income above or below the assumed $500 million demonstrated at the time of exercise. At September 30, 2014, our estimated long-term P/E ratio was 16.9x and the long-term P/E differential, the difference between this ratio and the estimated ratio applicable to Visa Europe, was 1.9x. At September 30, 2014, the spot P/E ratio was 20.6x and the spot P/E differential, the difference between this ratio and the estimated spot ratio applicable to Visa Europe, was 2.0x. These ratios are for reference purposes only and are not necessarily indicative of the ratio or differential that could be applicable if the put option were exercised at any point in the future.

43


 
Visa Inc’s Forward
Price-to-Earnings Ratio
 
Payout Assuming
Adjusted Sustainable
Income of $500 million(1)
 
Increase/Decrease in Payout
for Each $100 million of
Adjusted Sustainable
Income Above/Below $500 million
 
 
 
 
(in millions)
 
(in millions)
 
 
25
 
$12,500
 
$2,500
 
 
20
 
$10,000
 
$2,000
 
 
15
 
$7,500
 
$1,500
 
(1) 
Given current economic conditions, the purchase price under the terms of the put option would likely be in excess of $10 billion.
Pension and other postretirement benefits. We sponsor various qualified and non-qualified defined benefit pension plans that generally provide benefits based on years of service, age and eligible compensation. We also sponsor a postretirement benefit plan that provides postretirement medical benefits for retirees and dependents upon meeting minimum age and service requirements. Our policy with respect to our qualified pension plan is to contribute annually not less than the minimum required under the Employee Retirement Income Security Act. Our non-qualified pension and other postretirement benefit plans are funded on a current basis. We typically fund our qualified pension plan in September of each year. In fiscal 2014, 2013 and 2012, we made contributions to our pension and other postretirement plans of $14 million, $4 million, and $88 million, respectively. The lower contributions in fiscal 2014 and 2013, as compared to fiscal 2012, were driven by a higher-than-expected rate of return on our plan assets and an increase in the discount rate. In fiscal 2015, given current projections and assumptions, we anticipate funding our defined benefit pension plans and other postretirement plan by approximately $10 million. The actual contribution amount will vary depending upon the funded status of the pension plan, movements in the discount rate, performance of the plan assets, and related tax consequences. See Note 10—Pension, Postretirement and Other Benefits to our consolidated financial statements.
Capital expenditures. Our capital expenditures increased during fiscal 2014 due to investments in technology, infrastructure and growth initiatives. We expect to continue investing in technology assets and payments system infrastructure to support our digital solutions and core business initiatives.
Acquisitions. During fiscal 2014, we acquired a business in which we previously held a minority interest using $134 million of cash on hand. This amount primarily reflects the purchase price of $170 million less cash received. The acquisition extends our processing capabilities internationally. There were no material acquisitions during fiscal 2013 and 2012.
Fair Value Measurements—Financial Instruments
The assessment of fair value of our financial instruments is based on a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs are obtained from independent sources and can be validated by a third party, whereas unobservable inputs reflect assumptions regarding what a third party would use in pricing an asset or liability. As of September 30, 2014, our financial instruments measured at fair value on a recurring basis included approximately $7.3 billion of assets and $151 million of liabilities. Of these instruments, $152 million had significant unobservable inputs, including the Visa Europe put option liability of $145 million, and $7 million of auction rate securities. See Note 4—Fair Value Measurements and Investments to our consolidated financial statements.
Off-Balance Sheet Arrangements
Our off-balance sheet arrangements are primarily comprised of guarantees and indemnifications. Visa has no off-balance sheet debt, other than lease and purchase order commitments, as discussed below and reflected in our contractual obligations table.
Indemnifications
We indemnify our financial institution clients for settlement losses suffered due to the failure of any other client to fund its settlement obligations in accordance with our operating regulations. The amount of the indemnification is limited to the amount of unsettled Visa payment transactions at any point in time. We maintain global credit settlement risk policies and procedures to manage settlement risk, which may require clients to post collateral if

44


certain credit standards are not met. See Note 1—Summary of Significant Accounting Policies and Note 11—Settlement Guarantee Management to our consolidated financial statements.
In the ordinary course of business, we enter into contractual arrangements with financial institutions and other clients under which we may agree to indemnify the client for certain types of losses incurred relating to the services we provide or otherwise relating to our performance under the applicable agreement.
Contractual Obligations
Our contractual commitments will have an impact on our future liquidity. The contractual obligations identified in the table below include both on- and off-balance sheet transactions that represent a material, expected or contractually committed future obligation as of September 30, 2014. We believe that we will be able to fund these obligations through cash generated from our operations and available credit facilities.
 
Payments Due by Period
 
Less than
1 Year
 
1-3
Years
 
3-5
Years
 
More than
5 Years
 
Total
 
(in millions)
Purchase orders(1)
$
832

 
$
165

 
$
41

 
$

 
$
1,038

Leases(2)
76

 
97

 
62

 
118

 
353

Client incentives(3)
3,444

 
4,613

 
2,875

 
1,487

 
12,419

Marketing and sponsorship(4)
83

 
125

 
120

 
130

 
458

Dividends(5)
297

 

 

 

 
297

Total(6,7,8)
$
4,732

 
$
5,000

 
$
3,098

 
$
1,735

 
$
14,565

(1) 
Represents agreements to purchase goods and services that specify significant terms, including: fixed or minimum quantities to be purchased and fixed, minimum or variable price provisions, and the approximate timing of the transaction.
(2) 
Includes operating leases for premises, equipment and software licenses, which range in terms from one to eighteen years.
(3) 
Represents future cash payments for long-term contracts with financial institution clients and other business partners for various programs designed to build payments volume, increase Visa-branded card and product acceptance and win merchant routing transactions over our network. These agreements, which range in terms from one to fifteen years, can provide card issuance and/or conversion support, volume/growth targets and marketing and program support based on specific performance requirements. Payments under these agreements will generally be offset by revenues earned from higher corresponding payments and transaction volumes. These payment amounts are estimates and will change based on client performance, amendments to existing contracts or execution of new contracts. Related amounts disclosed in Note 17—Commitments and Contingencies to our consolidated financial statements represent the associated expected reduction of revenue related to these agreements that we estimate we will record.
(4) 
Visa is a party to contractual sponsorship agreements ranging from approximately two to sixteen years. These contracts are designed to increase Visa brand recognition, drive Visa-branded product usage, and differentiate Visa against competition. Over the life of these contracts, Visa is required to make payments in exchange for certain advertising and promotional rights. In connection with these contractual commitments, Visa has an obligation to spend certain minimum amounts for advertising and marketing promotion over the life of the contract. For obligations where the individual years of spend are not specified in the contract, we have estimated the timing of when these amounts will be spent.
(5) 
Includes expected dividend amount of $297 million as dividends were declared in October 2014 and will be paid on December 2, 2014 to all holders of record of Visa's common stock as of November 14, 2014.
(6) 
We have liabilities for uncertain tax positions of $855 million. At September 30, 2014, we had also accrued $39 million of interest and $5 million of penalties associated with our uncertain tax positions. We cannot determine the range of cash payments that will be made and the timing of the cash settlements, if any, associated with our uncertain tax positions. Therefore, no amounts related to these obligations have been included in the table.
(7) 
Visa granted a perpetual put option to Visa Europe, which if exercised, will require us to purchase all of the outstanding shares of capital stock of Visa Europe from its members. Due to the perpetual nature of the instrument and the various economic conditions, which could exist when the put is exercised, the ultimate amount and timing of Visa's obligation, if any, cannot be reliably estimated. Therefore, no amounts related to this obligation have been included in the table. However, given the current economic conditions and circumstances under which Visa Europe could exercise its option, the purchase price under the terms of the put option would

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likely be in excess of $10 billion. The fair value of the Visa Europe put option itself totaling $145 million at September 30, 2014 has also been excluded from this table as it does not represent the amount, or an estimate of the amount, of Visa's obligation in the event of exercise. See the Liquidity and Capital Resources and Critical Accounting Estimates sections of this Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 2—Visa Europe to our consolidated financial statements.
(8) 
We evaluate the need to make contributions to our pension plan after considering the funded status of the pension plan, movements in the discount rate, performance of the plan assets and related tax consequences. Expected contributions to our pension plan have not been included in the table as such amounts are dependent upon the considerations discussed above, and may result in a wide range of amounts. See Note 10—Pension, Postretirement and Other Benefits to our consolidated financial statements and the Liquidity and Capital Resources section of this Management's Discussion and Analysis of Financial Condition and Results of Operations.
Critical Accounting Estimates
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America which require us to make judgments, assumptions and estimates that affect the amounts reported. See Note 1—Summary of Significant Accounting Policies to our consolidated financial statements. We have established policies and control procedures which seek to ensure that estimates and assumptions are appropriately governed and applied consistently from period to period. However, actual results could differ from our assumptions and estimates, and such differences could be material.
We believe that the following accounting estimates are the most critical to fully understand and evaluate our reported financial results, as they require our most subjective or complex management judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain and unpredictable.
Revenue RecognitionClient Incentives
Critical estimates. We enter into incentive agreements with financial institution clients and other business partners for various programs designed to build payments volume, increase Visa-branded card and product acceptance and win merchant routing transactions over our network. These incentives are primarily accounted for as reductions to operating revenues; however, if a separate identifiable benefit at fair value can be established, they are accounted for as operating expenses. We generally capitalize advance incentive payments under these agreements if select criteria are met. The capitalization criteria include the existence of future economic benefits to Visa, the existence of legally enforceable recoverability language (e.g., early termination clauses), management's ability and intent to enforce the recoverability language and the ability to generate future earnings from the agreement in excess of amounts deferred. Capitalized amounts are amortized over the shorter of the period of contractual recoverability or the corresponding period of economic benefit. Incentives not yet paid are accrued systematically and rationally based on management's estimate of each client's performance. These accruals are regularly reviewed and estimates of performance are adjusted as appropriate, based on changes in performance expectations, actual client performance, amendments to existing contracts or the execution of new contracts.
Assumptions and judgment. Estimation of client incentives relies on forecasts of payments volume, card issuance and card conversion. Performance is estimated using customer-reported information, transactional information accumulated from our systems, historical information and discussions with our clients.
Impact if actual results differ from assumptions. If our clients' actual performance or recoverable cash flows are not consistent with our estimates, client incentives may be materially different than initially recorded. Increases in incentive payments are generally driven by increased payments and transaction volume, which drive our net revenues. As a result, in the event incentive payments exceed estimates, such payments are not expected to have a material effect on our financial condition, results of operations or cash flows. The cumulative impact of a revision in estimates is recorded in the period such revisions become probable and estimable. For the year ended September 30, 2014, client incentives represented 17% of gross operating revenues.
Fair ValueVisa Europe Put Option
Critical estimates. We have granted Visa Europe a perpetual put option which, if exercised, will require us to purchase all of the outstanding shares of capital stock of Visa Europe from its members. The put option provides a formula for determining the purchase price of the Visa Europe shares, which, subject to certain adjustments, applies our forward price-to-earnings multiple, or the P/E ratio (as defined in the option agreement), at the time the option is

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exercised to Visa Europe's projected adjusted sustainable income for the forward 12-month period, or the adjusted sustainable income (as defined in the option agreement). The calculation of Visa Europe's adjusted sustainable income under the terms of the put option agreement includes potentially material adjustments for cost synergies and other negotiated items.
Upon exercise, the key inputs to this formula, including Visa Europe's adjusted sustainable income, will be the result of negotiation between us and Visa Europe. The put option provides an arbitration mechanism in the event that the two parties are unable to agree on the ultimate purchase price. See Note 2—Visa Europe to our consolidated financial statements for further detail regarding the calculation of the put exercise price under the agreement.
The fair value of Visa Europe's option was estimated to be approximately $145 million at September 30, 2014. While the put option is in fact non-transferable, this amount, recorded in our financial statements, represents our estimate of the amount we would be required to pay a third-party market participant to transfer the potential obligation in an orderly transaction. The fair value of the put option is computed by comparing the estimated strike price, under the terms of the put agreement, to the estimated fair value of Visa Europe. The fair value of Visa Europe is defined as the estimated amount a third-party market participant might pay in an arm's length transaction under normal business conditions. A probability of exercise assumption is applied to reflect the possibility that Visa Europe will never exercise its option.
While this amount represents the fair value of the put option at September 30, 2014, it does not represent the actual purchase price that we may be required to pay if the option is exercised. Given current economic conditions, the purchase price under the terms of the put option would likely be in excess of $10 billion. See the Liquidity and Capital Resources section of Management's Discussion and Analysis of Financial Condition and Results of Operations for further discussion.
Assumptions and judgment. The most significant estimates used in the valuation of the put option are the assumed probability that Visa Europe will elect to exercise its option and the estimated differential between the forward price-to-earnings multiple applicable to our common stock, as defined in the put option agreement, and that applicable to Visa Europe on a stand-alone basis at the time of exercise, which we refer to as the P/E differential.
Probability of exercise—Exercise of the put option is at the sole discretion of Visa Europe (on behalf of the Visa Europe shareholders pursuant to authority granted to Visa Europe, under its Articles of Association). We estimate the assumed probability of exercise based on reasonably available information including, but not limited to: (i) Visa Europe's stated intentions; (ii) indications that Visa Europe is preparing to exercise as reflected in its reported financial results; (iii) evaluation of market conditions, including the regulatory environment, that could impact the potential future profitability of Visa Europe; and (iv) qualitative factors applicable to Visa Europe's largest members, which could indicate a change in their need or desire to liquidate their investment holdings.
P/E differential—The P/E differential is determined by estimating the relative difference in the forward price-to-earnings multiples applicable to our common stock, as defined in the put option agreement, and that applicable to Visa Europe at the time of exercise. For valuation purposes, the forward price-to-earnings multiple applicable to our common stock at the time of exercise is estimated by evaluating various quantitative measures and qualitative factors. Quantitatively, we estimate our P/E ratio by dividing the average stock price over the preceding 24 months (the “long-term P/E calculation”) and the last 30 trading dates (the “30-day P/E calculation”) prior to the measurement date by the median estimate of our net income per share for the 12 months starting with the next calendar quarter immediately following the reporting date. This median earnings estimate is obtained from the Institutional Brokers' Estimate System. We then determine the best estimate of our long-term price-to-earnings multiple for valuation purposes by qualitatively evaluating the 30-day P/E calculation as compared to the long-term P/E calculation. In this evaluation we examine both measures to determine whether differences, if any, are the result of a fundamental change in our long-term value or the result of short-term market volatility or other non-Company specific market factors that may not be indicative of our long-term forward P/E. We believe, given the perpetual nature of the put option, that a market participant would more heavily weigh long-term value indicators, as opposed to short-term indicators.
Factors that might indicate a fundamental change in long-term value include, but are not limited to, changes in the regulatory environment, client portfolios, long-term growth rates or new product innovations. A consistent methodology is applied to a group of comparable public companies used to estimate the forward price-to-earnings multiple applicable to Visa Europe. These estimates, therefore, are impacted by changes in stock prices and the financial market's expectations of our future earnings and those of comparable companies.

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Other estimates of lesser significance include growth rates and foreign currency exchange rates applied in the calculation of Visa Europe's adjusted sustainable income. The valuation model assumes a large range of annual growth rates, reflecting the different economic environments and circumstances under which Visa Europe could decide to exercise its option. The lowest growth rates assumed reflect Visa Europe's current business model as an association, owned by its member banks, while the highest reflect a successful shift to a for-profit model in anticipation of its exercise. The scenarios with higher growth rates are assigned a significantly higher probability in the valuation model, as we believe a market participant would more heavily weigh these scenarios as it is likely that, should it choose to exercise its option, Visa Europe will seek to maximize the purchase price by adopting a for-profit business model in advance of exercising the put option. The foreign exchange rate used to translate Visa Europe's results from Euros to U.S. dollars reflects a blend of forward exchange rates observed in the marketplace. The assumed timing of exercise of the put option used in the various modeled scenarios is not an overly significant assumption in the valuation, as obligations calculated in later years are more heavily discounted in the calculation of present value.
Impact if actual results differ from assumptions. In the determination of the fair value of the put option at September 30, 2014, we have assumed a 40% probability of exercise by Visa Europe at some point in the future and an estimated long-term P/E differential at the time of exercise of approximately 1.9x. The use of a probability of exercise that is 5% higher than our estimate would have resulted in an increase of approximately $18 million in the value of the put option. An increase of 1.0x in the assumed P/E differential would have resulted in an increase of approximately $84 million in the value of the put option. The put option is exercisable at any time at the sole discretion of Visa Europe. As such, the put option liability is included in accrued liabilities in our consolidated balance sheet at September 30, 2014. Classification in current liabilities is not an indication of management's expectation of exercise and simply reflects the fact that this obligation could become payable within 12 months.
Legal and Regulatory Matters
Critical estimates. We are currently involved in various legal proceedings, the outcomes of which are not within our complete control or may not be known for prolonged periods of time. Management is required to assess the probability of loss and amount of such loss, if any, in preparing our financial statements.
Assumptions and judgment. We evaluate the likelihood of a potential loss from legal or regulatory proceedings to which we are a party. We record a liability for such claims when a loss is deemed probable and the amount can be reasonably estimated. Significant judgment may be required in the determination of both probability and whether an exposure is reasonably estimable. Our judgments are subjective based on the status of the legal or regulatory proceedings, the merits of our defenses and consultation with in-house and outside legal counsel. As additional information becomes available, we reassess the potential liability related to pending claims and may revise our estimates.
Our retrospective responsibility plan only addresses monetary liabilities from settlements of, or final judgments in, the covered litigation. The plan's mechanisms include the use of the litigation escrow account. The accrual related to the covered litigation could be either higher or lower than the litigation escrow account balance. In fiscal 2014, we recorded litigation accruals totaling $1.5 billion for covered litigation, reflecting $1.1 billion of take-down payments received and an additional provision of $450 million. See Note 3—Retrospective Responsibility Plan and Note 20—Legal Matters to our consolidated financial statements.
Impact if actual results differ from assumptions. Due to the inherent uncertainties of the legal and regulatory processes in the multiple jurisdictions in which we operate, our judgments may be materially different than the actual outcomes, which could have material adverse effects on our business, financial conditions and results of operations. See Note 20—Legal Matters to our consolidated financial statements.
Income Taxes
Critical estimates. In calculating our effective income tax rate, we make judgments regarding certain tax positions, including the timing and amount of deductions and allocations of income among various tax jurisdictions.
Assumptions and judgment. We have various tax filing positions with regard to the timing and amount of deductions and credits, the establishment of liabilities for uncertain tax positions and the allocation of income among various tax jurisdictions. We are also required to inventory, evaluate and measure all uncertain tax positions taken or to be taken on tax returns and to record liabilities for the amount of such positions that may not be sustained, or may only be partially sustained, upon examination by the relevant taxing authorities.

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Impact if actual results differ from assumptions. Although we believe that our estimates and judgments are reasonable, actual results may differ from these estimates. Some or all of these judgments are subject to review by the taxing authorities. If one or more of the taxing authorities were to successfully challenge our right to realize some or all of the tax benefit we have recorded, and we were unable to realize this benefit, it could have a material adverse effect on our financial results and cash flows.
ITEM 7A.
Quantitative and Qualitative Disclosures About Market Risk
Market risk is the potential economic loss arising from adverse changes in market factors. Our exposure to financial market risks results primarily from fluctuations in foreign currency exchange rates, interest rates and equity prices. Aggregate risk exposures are monitored on an ongoing basis.
Foreign Currency Exchange Rate Risk
Although most of our activities are transacted in U.S. dollars, we are exposed to adverse fluctuations in foreign currency exchange rates. Risks from foreign currency exchange rate fluctuations are primarily related to adverse changes in the U.S. dollar value of revenues generated from foreign currency-denominated transactions and adverse changes in the U.S. dollar value of payments in foreign currencies, primarily for expenses at our non-U.S. locations. We manage these risks by entering into foreign currency forward contracts that hedge exposures of the variability in the U.S. dollar equivalent of anticipated non-U.S. dollar denominated cash flows. Our foreign currency exchange rate risk management program reduces, but does not entirely eliminate, the impact of foreign currency exchange rate movements.
The aggregate notional amounts of our foreign currency forward contracts outstanding in our exchange rate risk management program, including contracts not designated for cash flow hedge accounting, were $1.3 billion at September 30, 2014 and 2013. The aggregate notional amount outstanding at September 30, 2014 is fully consistent with our strategy and treasury policy aimed at reducing foreign exchange risk below a predetermined and approved threshold. However, actual results could materially differ from our forecast. The effect of a hypothetical 10% change in the value of the U.S. dollar is estimated to create an additional fair value gain or loss of approximately $90 million on our foreign currency forward contracts outstanding at September 30, 2014. See Note 1—Summary of Significant Accounting Policies and Note 12—Derivative Financial Instruments to our consolidated financial statements.
We are also subject to foreign currency exchange risk in daily settlement activities. This risk arises from the timing of rate setting for settlement with clients relative to the timing of market trades for balancing currency positions. Risk in settlement activities is limited through daily operating procedures, including the utilization of Visa settlement systems and our interaction with foreign exchange trading counterparties.
Interest Rate Risk
Our investment portfolio assets are held in both fixed-rate and adjustable-rate securities. These assets are included in cash equivalents and short-term or long-term available-for-sale investments. Investments in fixed-rate instruments carry a degree of interest rate risk. The fair value of fixed-rate securities may be adversely impacted due to a rise in interest rates. Additionally, a falling-rate environment creates reinvestment risk because as securities mature, the proceeds are reinvested at a lower rate, generating less interest income. Historically, we have been able to hold investments until maturity. Neither our operating results or cash flows have been, nor are expected to be, materially impacted by a sudden change in market interest rates.
The fair value balances of our fixed-rate investment securities at September 30, 2014 and 2013 were $3.0 billion and $3.5 billion, respectively. A hypothetical 100 basis point increase or decrease in interest rates would create an estimated change in fair value of approximately $32 million on our fixed-rate investment securities at September 30, 2014. The fair value balances of our adjustable-rate debt securities were $1.9 billion and $1.1 billion at September 30, 2014 and 2013, respectively.
Visa Europe Put Option
We have a liability related to the put option with Visa Europe, which is recorded at fair value at September 30, 2014. We are required to assess the fair value of the put option on a quarterly basis, and record adjustments as necessary. In the determination of the fair value of the put option at September 30, 2014, we have assumed a 40% probability of exercise by Visa Europe at some point in the future and a P/E differential, at the time of exercise, of approximately 1.9x. The use of a probability of exercise 5% higher than our estimate would have resulted in an

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increase of approximately $18 million in the value of the put option. An increase of 1.0x in the assumed P/E differential would have resulted in an increase of approximately $84 million in the value of the put option. See Liquidity and Capital Resources and Critical Accounting Estimates above.
Pension Plan Risk
At September 30, 2014 and 2013, our U.S. defined benefit pension plan assets were $1.1 billion, and projected benefit obligations were $983 million and $897 million, respectively. A material adverse decline in the value of pension plan assets and/or the discount rate for benefit obligations would result in a decrease in the funded status of the pension plan, an increase in pension cost and an increase in required funding. We will continue to monitor the performance of pension plan assets and market conditions as we evaluate the amount of our contribution to the pension plan for fiscal 2015, if any, which would be made in September 2015.

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