It's an interesting sign of the times: After 20 years of
losing market share to debit cards, credit cards are making a
According to the payment-industry newsletter the Nilson Report
published Tuesday, credit cards accounted for 52.82% of U.S.
card-based spending in 2012, up about 0.2% from the previous
year. Debit-card share declined by a similar amount, to 47.18%.
Granted, 2012 was a while ago, but Nilson projected the trend to
continue, with the credit share seen reaching nearly 55% by
The two formats allegedly aren't fighting for a shrinking pie.
Overall payments through credit, debit and prepaid cards are
forecast to grow 57%, to $7.285 trillion, over the same
So far in 2013, that optimism has certainly been supported by
the stock market. Shares ofMasterCard (
) hit a new lifetime high above 750 on Friday, up 53% from where
it started the year.Visa (
) is up about 33% year to date, andAmerican Express (
) has gained about 44%.
Related stocks are also doing well.Alliance Data Systems (
), which manages store-brand credit cards for retailers, is
currently sporting a highest-possible IBD Composite Rating of
IBD 50 stockFleetCor Technologies (
) is trading just below its high, up 120% so far this year. It
handles credit and financing challenges for corporate vehicle
On the darker side for consumers, debt-collection
specialistPortfolio Recovery Associates (PRAA) is up 59% year to
Overall, these stocks have helped drive IBD's Credit
Card/Payment Processors industry group into the top 30 of 197
Charging Global Markets
Consumers like credit cards for a very simple reason.
According to a statement from Nilson Report publisher David
Robertson, the rising popularity of credit owes to a basic
"Because they can borrow money and pay it back over time, they
can spend more on credit than they have in their own
Of course, spending money you don't have has always been fun.
But that way of life became more difficult after the 2008-2009
financial crisis. In addition to putting many consumers off
credit cards, that event also brought on a host of new
regulations for lenders, the implications of which are still
U.S. consumer spending has been slowly recovering. But
industry watchers say that two longer-term larger trends are
driving the industry.
"I still absolutely love Visa because they sit at the
crossroads of two long-term themes," Charles Sizemore, head of
Sizemore Capital Management, told IBD in an email. "The
transition to a cashless society (which is accelerated by
Internet and mobile commerce) and the rise of the new
emerging-market middle class."
Sizemore says Visa has the most global exposure among the
credit-card stocks, although "MasterCard is quickly closing the
There's an international flavor to the top-rated stocks in the
group, which includes such players asEuronet Worldwide
(EEFT),Global Payments (GPN) andQiwi (QIWI), an
electronic-payments operator in Russia and neighboring
FleetCor saw more than 40% of last year's revenue come from
overseas markets and is rapidly expanding its international
stance. It closed on acquisitions of one fleet credit service
operation in the U.K and two in Brazil since July, and has its
eye on targets spread from Russia to South America.
Big Data Loves Plastic
Alliance Data Systems and Portfolio Recovery Associates have
boomed despite being heavily focused on North America. Both are
taking advantage of other trends.
ADS is riding the increasing popularity of store-brand cards.
The rise of electronic payments has made it easier for customers
to juggle them, say analysts, and stores love them because of
their opportunity to leverage consumer data collected online and
via card use. ADS's work allows it to not only provide services
to customers, but also to gather detailed information on their
"Retailers are increasingly shifting the marketing budget
toward data-driven marketing activities, which now account for
(an average) 25% of the marketing budget," wrote Deutsche Bank
analyst Ashish Sabadra in his June initiation report.
ADS programs collect data on purchases by private-label card
holders, using it in concert with demographic and psychographic
information of about 220 million Americans to allow retailers to
tailor inventories and marketing according to very specific
Also benefiting from the trend toward industry-specific cards
are FleetCor andWEX (WEX), both of which specialize in
Twisting Debt Collectors' Arms
Portfolio Recovery Associates might seem to be in a bad spot
since consumers are still cautious enough about debt that default
rates are at historic lows, and because its industry is under new
Last week the Consumer Financial Protection Bureau, created in
2011 in the wake of the financial crisis, said it's started
working to tighten up laws on debt collectors, after receiving
some 5,000 complaints from consumers alleging harassment tactics
and inaccurate information.
But industry leaders are in a better position to handle those
speed bumps, says analyst Lawrence Berlin of First Analysis.
"The pricing of debt has gone up ... as the CFPB passes more
laws and more rules," Berlin told IBD. "That has a larger effect
on the smaller debt collectors than the larger debt collectors,
but it's had a big effect."
Even when default rates are low, Berlin says, "that's still
billions of dollars."
Debt collectors aren't the only ones in the group dealing with
regulatory pressure. The Durbin Amendment to the 2010 Dodd-Frank
law attempted to cap swipe fees on debit cards, but retailers are
still wrangling with the government in court about exactly where
those caps should be. Meanwhile, last year's settlement between
retailers and card issuers on credit-card fees has fallen through
and is back in federal court. The European Union has also been
considering a law that would cap fees on both credit and debit
Morningstar analyst James Sinegal says it's not clear exactly
how a cap would affect the group because the fees go to the banks
issuing the cards, not to the network operators like Visa and
"When you look back, Durbin was a significant hit to issuers,
but it was a temporary hiccup for the networks," Sinegal told
The View: Not Quite Priceless
What to expect from the near future?
MasterCard CEO Ajay Banga offered a mixed report on consumer
spending around the world during his quarterly conference call
with analysts on Oct. 31. Consumer confidence in the U.S. was
declining (due partly to what Banga delicately called "the recent
circumstances in Washington"), but was improving in Europe and
stayed mostly steady in Asia, he said. Latin America was a mixed
bag, with Brazil on the upswing and Mexico going the other
"I think it's going to be a long time before consumer
confidence returns to peak levels," Sinegal said. "I think it's
generally accepted at this point that the aftermath to financial
crises lasts about a decade."
Analyst Berlin was also cautiously optimistic.
"There are no expectations of anything spectacular this
holiday season," he said. "But I'm always an optimist. So I
expect positive trends to (be) at least good enough to help fuel
results for these companies."