At a time when its bigger competitors are busy defending
themselves from an ever-increasing barrage of lawsuits and are
making significant changes to their business models in a bid to
maintain income figures, U.S. Bancorp (
USB
) continues to expand its business by grabbing any acquisition
opportunity that is coming its way. The fifth-largest U.S. bank is
capitalizing on the strength of its balance sheet and depressed
valuation across all industries owing to the economic slowdown to
fuel its growth strategy. Earlier this week, the bank announced its
decision to acquire prepaid card processing company FSV
Payment Systems - barely a fortnight after its decision to
expand its alternative investments business with the acquisition of
AIS Fund Management
. U.S. Bancorp has announced a total of six acquisitions this year,
including the failed BankEast (see
U.S. Bancorp Snaps Up Regional Banks
).
We maintain a
$35 price estimate for U.S. Bancorp's stock
, which is around 10% ahead of its current market price.
See our complete analysis for U.S. Bancorp
Credit Card & Payment Services Contribute To A Large
Part of U.S. Bancorp's Value
As shown in the chart above, our analysis estimates that nearly
a sixth of U.S. Bancorp's value comes from its cards & payments
business. This emphasizes the importance of the business to the
bank - more so because of U.S. Bancorp's focus on traditional,
low-risk banking services.
But the cards business of all the major banks has been impacted
by a series of regulations in recent years, including the CARD Act.
Limits imposed on interchange fees for debit cards have curtailed
card revenues to a great extent since mid-2011 - something that is
seen clearly in this chart below which represents U.S. Bancorp's
average fee income every time a card is swiped as a percentage of
the transaction value.
Banks have been looking for alternative means to make good their
loss in revenues, including additional charges and monthly/annual
fees on debit cards and even extra per-use charges on cards. But
most of these measures have failed with customers opposing these
fees vehemently as witnessed by Bank of America (
BAC
) earlier this year (see Bank of America Will Find New Fees, Stock
Worth $11).
This Is Where Prepaid Cards Show Potential
Data compiled by the Federal Reserve shows that prepaid card
transactions have grown at an annual rate of 20% between 2006 and
2009, making prepaid cards the fastest growing form of electronic
payment. And the push for prepaid cards by banks and card issuers
has only increased in the recent past as they are not subject to
interchange limits imposed on debit cards.
Prepaid cards are generally marketed as an alternative to
checking accounts, and have gained popularity among businesses
and governments who cut costs by disbursing payroll and benefits
through prepaid cards. And the enthusiasm among banks for
these cards is easily understood from the findings of a
Philadelphia Fed report which calculates gross revenues between $45
and $99 over the life of
each
prepaid card for the issuer. ((Prepaid Cards Report Aug 2012,
Federal Reserve Bank of Philadelphia Website))
U.S. Bancorp has been offering prepaid cards for a while now,
focusing almost entirely on government agencies. The bank ventured
into retail prepaid cards quite recently, and with the acquisition
of FSV Payment Systems, it will not only be able to process these
payments on its own but will also add existing FSV payments
customers like Costco, Walgreen and McDonald's to its payments
business. Besides boosting U.S. Bancorp's card fee revenues in the
years to come, there will also be a notable increase in the total
volume of merchant transactions processed by the bank going
forward. Taken together, the deal sure looks like a great step
forward for U.S. Bancorp.
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