Despite all of the problems surrounding consumer credit, the credit card industry is in a position to benefit over the long run, as the public continues to make the transition from paper to plastic. Additionally, consumer spending, although it has hit a speed bump, will rise over time. Indeed, late payments on credit cards hit a record high in January and defaults are likely to worsen until the economy makes a turn around. Although the commercial banks, such as J.P Morgan (JPM) and Bank of America (BAC), saw net losses in their credit card divisions last quarter, credit card companies like MasterCard and Visa fared better. Visa and MasterCard are unique in that they operate the electronic payments networks the cards are processed on but do not have direct credit risk due to lending. The following is a run down of companies that are part of the credit card industry and how consumer spending is going to affect the industry in the future.
Visa & MasterCard
Visa (V) and MasterCard (MA) are the two companies that I believe will outperform the industry in the long run. Don’t be fooled; the next two quarters still pose risk for a their stock prices as the economy continues to contract and consumers spend less money. However, that could present a more attractive buy-in point. Many trends that these companies will be able to capitalize on are the same, as their business models are extremely similar. For example, both will want to concentrate on their debit -card businesses, as this is seen as the quickest growing electronic payment option going forward. It makes sense that debit will be more likely to beat out cash and checks than credit, especially in these economic times as consumers try to borrow less.
Visa, which operates the world’s largest electronic payments network, makes money from serving, processing, and transactions fees rather than issuing credit cards, which is one reason why it is poised to excel. Payment volume and transactions are the drivers for Visa’s revenue, as it benefits every time a card is swiped, and more cards are being swiped every year. Operating in over 170 countries, Visa is also in a great place to expand abroad. Visa may seek to acquire Visa Europe in the coming years to geographically diversify their revenues. The company will rely primarily on growth in emerging markets to offset some of the slowdown in developed countries. Many investors might think expanding abroad is not smart during a global financials crisis, however, this is a great opportunity for the company to grow in countries with large populations and very low penetration of credit and debit cards. This means the relative growth rate in these nations is much better than in more mature and currently struggling economies. The company recently launched its first global marketing campaign, entitled “More people go with Visa,” which perpetuates the idea of a single global company.
MasterCard generates its revenues from operations fees and assessments. Furthermore, not only does the company processes payment transactions but it also offers consulting services to customers. Similar to Visa, I expect transactions volumes to increase for MA due to a shift toward greater credit usage, despite a slowdown in consumer spending in the near term. The other positive to MA’s business model, just like Visa’s, is that it does not have the same credit risks that lenders like commercial banks have.
