There may come a day when the referee will flip a plastic card
on the soccer field to decide which team gets the ball first.
We are becoming a cashless society, paying with prepaid cards
and digital wallets that could send checks, coins and bills into
The embrace of plastic like prepaid cards and the trend toward
digital payment methods are key drivers for credit card firms and
Other important factors are growth in emerging markets, share
buybacks and tight business lending that's pushing some smaller
firms toward plastic.
This Industry Snapshot provides an overview of these five
catalysts that are driving the 24 companies in IBD's
Finance-Credit Card/Payment Processing group.
The group ranked in the top 20 among IBD's 197 groups in
recent weeks, though it's slipped lately.
It includes heavyweightsVisa (
) andMasterCard (
), which only process transactions, as well asAmerican Express (
) andDiscover Financial Services (
), which issue cards and lend money.
Among the smaller players in the group areWright Express (
) andFleetCor Technologies (FLT), which provide fuel cards for
fleets, andAlliance Data Systems (ADS), which issues
private-label credit cards.
Building Businesses On Plastic
During his 28 years in the financial services industry, Jim
Angleton has owned a mortgage financing company and a bank. Never
has he seen bank lending as anemic as it has been in the wake of
the 2008 financial crisis. Startups, mom-and-pop shops and
midsize businesses must resort to credit cards to grow, says
Angleton, president of Aegis FinServ Corp., a
business-to-business firm that issues debit and credit cards.
"Over the past year, corporate credit debt has increased by
50%, making it popular to accept credit cards to move forward
with business expansion or as emergency credit," said Angleton.
"The average small-business credit debt is $55,000. For
medium-sized companies, it's about $100,000."
With about 100,000 clients, Angleton's business issued 1,300
credit cards in June. Busier than ever, he expects to issue 60%
more credit cards this year over last. About 60% of clients were
Europeans -- mainly Greeks, Italians and Spaniards -- funneling
money into the U.S. for fear they won't be able to access savings
or get credit should the euro collapse. Foreign clients also opt
for prepaid cards, which can be loaded with any currency.
Innovating Virtual Wallets
It's still early in the digital wallets game, so players from
a range of industries have jumped in and hope to win.
Visa and MasterCard unveiled digital wallet platforms in the
past year, months after offerings fromGoogle (GOOG) and Isis, a
consortium involving wireless carriers.
MasterCard's PayPass service was unveiled in May. It will
allow customers to buy products online just by clicking an icon
or, when at a store, tapping a cell phone against a reader.
PayPass is set to roll out in the third quarter in the U.S.,
Canada, the U.K. and Australia.
Meanwhile, Visa plans to roll out its V.me digital wallet this
fall in the U.K., France and Spain. A U.S. launch date is
expected in 2013. Plus Visa's payWave service is offered as a
traditional card, a mini card or a small tag clipped to a key
Those behind the digital wallet push expect the new offerings
will catch on and help providers grow. With these new platforms,
consumers benefit from a speedier checkout, while merchants rack
up sales because shoppers tend to spend more when not using
Analysts see each big credit card firm's existing network
giving it an advantage in this field, just as it's provided an
edge in other areas.
"There are high barriers to entry provided by the
well-established network effects," said Brent Loder, a research
analyst for Franklin Equity Group, which owns both MasterCard and
Visa. "As a result of these network effects, the companies have
Prepaid cards are a bright spot among financial products. The
market for such cards grew 24% to $184.1 billion in 2011 from
$148.4 billion in 2010, according to Mercator Advisory Group.
It's grown nearly 37-fold since 2003, but there's still room
to run. Only about 13% of consumers use prepaid cards compared
with nearly two-thirds for credit cards.
Prepaid cards have become increasingly popular with
low-income, underbanked consumers.
Nearly one in five underbanked consumers use prepaid cards as
an alternative to checking accounts with fees. The cards are also
popular with college students, who are now off limits for some
credit card solicitations.
The burgeoning middle class in emerging markets presents huge
potential for electronic payments. On average, only 7% of
consumers in these markets have a credit card vs. 50% in
developed markets, according to a Gallup/World Bank study.
Adoption rates range from 18% in Latin America to 2% in
The total number of credit cards in China grew almost sixfold
to 230 million between 2002 and 2010, according to Lafferty
Group's World Cards Intelligence research service. Card volume
rocketed 156 times from $4.8 billion to $748 billion in the same
period. Lafferty Group projects China will become the world's
largest credit card market by 2015.
"As emerging market consumers climb the social ladder, they
adopt the spending habits of their American and European
counterparts," said Charles Sizemore, chief investment officer of
Sizemore Capital Management, based in Dallas. With more than $10
million in assets under management, Sizemore believes Visa hails
as the best investment for the next 10 years.
Share-Buyback Shopping Spree
Swimming in cash, credit companies are buying back their own
shares to return money to shareholders. American Express said in
a March filing it could buy as much as $5 billion in shares,
amounting to nearly 8% of its market value, through first-quarter
So long as AmEx keeps growing earnings, buying back shares and
raising the dividend, Robert Luna plans to hang on to his
position which he's owned since 2008.
The CEO and chief investment officer at SureVest Capital
Management in Phoenix manages about $120 million in assets with
about 2% of it invested in Amex. The stock offers exposure to
financials without risks from mortgages and complicated trading
schemes, Luna said.
Meanwhile, Discover announced in March that it could
repurchase up to $2 billion in stock through March 2014, and Visa
announced a $1 billion buyback program when it reported
second-quarter results July 25.
In June, MasterCard's board authorized a new $1.5 billion
share repurchase program. This program will go into effect after
the company completes its current $2 billion buyback program,
which has about $270 million to go.
New regulations that limit late fees and interest rates could
dampen profits. Sen. Bob Menendez, D-N.J., introduced legislation
in December that would prohibit some prepaid debit card fees and
include a wallet-sized summary of fees with the cards.
In addition, collecting on delinquent debtors has become
harder. Courts have ruled against card issuers for false
documents, incomplete records and poor witness testimony.
"Collections and enforcement of collections could be in the
cross hairs of new laws and regulations," said Angleton of Aegis.
"It will dramatically change the way cards are underwritten and
The industry faces stiff competition from startups and other
tech firms developing mobile wallets.
"Twenty five large retailers recently joined together to
create their own mobile payments company," Sterne Agee analysts
Greg Smith and Jennifer Dugan wrote in a June report. "While
mobile payments have yet to gain broad consumer traction at the
point of sale, battle plans are still being drawn and we will
soon see more aggressive attacks coming from all sides."
Another risk: deterioration in consumer spending would dampen
card volume and transactions.