I have recently posted various blog entries regarding "congress investigating interchange fees", "the DOJ putting antitrust pressure on Visa", "the booming growth of debit" as people either cut up or put away their credit cards, along with "Discover and AMEX's antitrust suits against V/MC". There's a lot of turbulence in the air.
There seems to be a perfect storm brewing here.
Interchange Fees are under attack for being too high, while at the same time, the "claimed" reason for the existence of Interchange Fees in the first place is to mitigate the risk if consumers don't pay. Interestingly enough, as I posted yesterday, more and more consumers are having a hard time paying their credit card bills.
Seems to me that during the next 3 years, the "credit card" industry will undergo drastic change..as this "perfect storm" develops. This article from Laurie Kulikowski for "TheStreet.com" paints a very interesting picture indeed.
The downturn in the economy and evidence of slowing consumer spending could put MasterCard and Visa in the hot seat. The financial sector has dropped to lows not seen in two decades. But the payment processing firms, each fairly new to the public markets when compared with banks and brokerages, have been labeled as two bright spots, since they have largely avoided pain from the credit crisis and housing fallout.
However, as the economy deteriorates, some observers are getting nervous. They question whether the two companies' strategy of capitalizing on consumers' increasing reliance on plastic to pay for purchases will be able to withstand the consumer troubles in the U.S. and potentially abroad.
There seems to be a perfect storm brewing here.
Interchange Fees are under attack for being too high, while at the same time, the "claimed" reason for the existence of Interchange Fees in the first place is to mitigate the risk if consumers don't pay. Interestingly enough, as I posted yesterday, more and more consumers are having a hard time paying their credit card bills.
Seems to me that during the next 3 years, the "credit card" industry will undergo drastic change..as this "perfect storm" develops. This article from Laurie Kulikowski for "TheStreet.com" paints a very interesting picture indeed.
The downturn in the economy and evidence of slowing consumer spending could put MasterCard and Visa in the hot seat. The financial sector has dropped to lows not seen in two decades. But the payment processing firms, each fairly new to the public markets when compared with banks and brokerages, have been labeled as two bright spots, since they have largely avoided pain from the credit crisis and housing fallout.However, as the economy deteriorates, some observers are getting nervous. They question whether the two companies' strategy of capitalizing on consumers' increasing reliance on plastic to pay for purchases will be able to withstand the consumer troubles in the U.S. and potentially abroad.
Investors in MasterCard and Visa will be listening to hear how the firms characterize the depth of the downturn in the U.S. and will be on the watch for any forward-looking comments on their businesses, observers say.
"This is the quarter when the resiliency of MasterCard's business model will be tested, as the various data points we monitor all tracked somewhat weaker/slower in the quarter," writes Howard Shapiro, an analyst at Fox-Pitt Kelton Cochran Caronia Waller, in a research note where he trimmed his quarterly earnings estimates on the firm. "These include weak retail sales in the U.S. and slower growth in revolving debt, anecdotal signs of slowing volume growth internationally and a flat dollar versus major currencies.
Adil Moussa, a payments industry analyst at Aite Group, says he is more worried about Visa than about MasterCard because the San Francisco-based firm is more concentrated -- Visa Europe is a separate entity. This leaves Visa "more at risk" and "at the mercy of economic downturn" than MasterCard, he says
On the whole, analysts expect both MasterCard and Visa to post healthy second-quarter profits this week. Visa, which reports late Wednesday, is expected to post 48 cents a share in earnings. It made $314 million, or 39 cents a share in the first quarter -- the only quarter so far when the firm has reported earnings on a GAAP basis since it went public.
MasterCard, set to report Thursday, is expected to post earnings of $2.01 a share, according to average estimates compiled by Thomson Reuters. It recorded a profit of $253 million, or $1.85 a share, in the year-earlier quarter.
Visa's stock is up by roughly one-third since its first day of trading. MasterCard shares, which went public in May 2006, have risen more than fivefold, even as the financial sector has plummeted amid the credit crisis. Both companies, which issue cards to bank partners and collect a fee on each consumer transaction, are aggressively expanding globally as consumers and businesses shift from paper to electronic forms of payment.
The companies also do not extend credit to consumers. Credit delinquencies and defaults from lending to consumers have pressured earnings at two other card companies, American Express AXP and Discover Financial Services DFS, as well as several banks with large credit card market share.
"This is the quarter when the resiliency of MasterCard's business model will be tested, as the various data points we monitor all tracked somewhat weaker/slower in the quarter," writes Howard Shapiro, an analyst at Fox-Pitt Kelton Cochran Caronia Waller, in a research note where he trimmed his quarterly earnings estimates on the firm. "These include weak retail sales in the U.S. and slower growth in revolving debt, anecdotal signs of slowing volume growth internationally and a flat dollar versus major currencies.
Adil Moussa, a payments industry analyst at Aite Group, says he is more worried about Visa than about MasterCard because the San Francisco-based firm is more concentrated -- Visa Europe is a separate entity. This leaves Visa "more at risk" and "at the mercy of economic downturn" than MasterCard, he says
On the whole, analysts expect both MasterCard and Visa to post healthy second-quarter profits this week. Visa, which reports late Wednesday, is expected to post 48 cents a share in earnings. It made $314 million, or 39 cents a share in the first quarter -- the only quarter so far when the firm has reported earnings on a GAAP basis since it went public.
MasterCard, set to report Thursday, is expected to post earnings of $2.01 a share, according to average estimates compiled by Thomson Reuters. It recorded a profit of $253 million, or $1.85 a share, in the year-earlier quarter.
Visa's stock is up by roughly one-third since its first day of trading. MasterCard shares, which went public in May 2006, have risen more than fivefold, even as the financial sector has plummeted amid the credit crisis. Both companies, which issue cards to bank partners and collect a fee on each consumer transaction, are aggressively expanding globally as consumers and businesses shift from paper to electronic forms of payment.
The companies also do not extend credit to consumers. Credit delinquencies and defaults from lending to consumers have pressured earnings at two other card companies, American Express AXP and Discover Financial Services DFS, as well as several banks with large credit card market share.
But even these two bright spots of the financial sector have seen their stocks taken hits recently, as the financial sector remains volatile one year into the credit crisis. Investors are worried that the U.S. economic slowdown could expand internationally, hurting Visa's and MasterCard's growth plans. Visa shares are down 13% this month, while MasterCard's have fallen roughly 4%.
"There is obviously going to be pressure on volume growth, but we do feel there are other levers to them to offset pain," such as expense cutbacks, says Sanjay Sakhrani, an analyst at Keefe Bruyette & Woods. He maintains outperform ratings on both stocks.
MasterCard derives roughly half of its revenue from its U.S. business, while about 59% of Visa's revenue comes from the U.S., Fox-Pitt's Shapiro estimates. He remains "comfortable" with his earnings estimates on Visa of 47 cents a share for the quarter, according to a separate note.
Last week, American Express posted second-quarter profit that fell nearly 40%, as even wealthy consumers have trouble paying their bills these days. "The scope of the economic fallout was evident even among our longer term, superprime card members," Chairman and CEO Kenneth Chenault said in a company statement.
Discover Financial Services also recorded higher customer delinquencies when it reported earnings in June.
Several large banks, including Bank of America BAC, Washington Mutual WM and Citigroup C, also acknowledged that customers were increasingly having trouble paying their credit card bills because of the weak economy and rising unemployment.
BofA, which captures the largest market share of credit, debit and prepaid cards, said "managed" credit card losses of 5.96% represented "more than 60% of total consumer losses" during the second quarter.
"We've continued to see increased delinquencies in our card portfolio in those states most affected by the housing problems, while other states have actually shown some declines. California, Florida, Nevada and Arizona make up a little more than a quarter of our domestic consumer card book but represent about a third of the losses," CFO Joe Price said last week.
WaMu, which bought the subprime card company Providian in 2005, said it expects card charge-offs this year to rise to 10.5% of receivables, from 6.5% in 2007. Citi's "managed" net credit loss ratio jumped 202 basis points -- just over two percentage points -- to 6.53% in the quarter.
Higher credit costs reflected "the housing market downturn, higher fuel costs, rising unemployment trends and higher bankruptcy filings, as well as the continued acceleration in the rate at which delinquent customers advanced to write-off," it said on July 18.
To be sure, Visa is still consolidating its global businesses in the wake of a restructuring it completed in order to prepare for its March IPO. "As they standardize all their fee income structures, you could actually see an enhancement to the revenue yield," Sakhrani says. For MasterCard, "it's about maybe not reinvesting as much" by temporarily pulling back on certain growth initiatives, he adds.
Visa and MasterCard have each acknowledged the slowdown in consumer spending in the U.S. this year, but neither seems deterred regarding their growth forecasts as they look to expand globally with various products.
"There are more opportunities for us than threats," MasterCard CEO Robert Selander said in late May
"There is obviously going to be pressure on volume growth, but we do feel there are other levers to them to offset pain," such as expense cutbacks, says Sanjay Sakhrani, an analyst at Keefe Bruyette & Woods. He maintains outperform ratings on both stocks.
MasterCard derives roughly half of its revenue from its U.S. business, while about 59% of Visa's revenue comes from the U.S., Fox-Pitt's Shapiro estimates. He remains "comfortable" with his earnings estimates on Visa of 47 cents a share for the quarter, according to a separate note.
Last week, American Express posted second-quarter profit that fell nearly 40%, as even wealthy consumers have trouble paying their bills these days. "The scope of the economic fallout was evident even among our longer term, superprime card members," Chairman and CEO Kenneth Chenault said in a company statement.
Discover Financial Services also recorded higher customer delinquencies when it reported earnings in June.
Several large banks, including Bank of America BAC, Washington Mutual WM and Citigroup C, also acknowledged that customers were increasingly having trouble paying their credit card bills because of the weak economy and rising unemployment.
BofA, which captures the largest market share of credit, debit and prepaid cards, said "managed" credit card losses of 5.96% represented "more than 60% of total consumer losses" during the second quarter.
"We've continued to see increased delinquencies in our card portfolio in those states most affected by the housing problems, while other states have actually shown some declines. California, Florida, Nevada and Arizona make up a little more than a quarter of our domestic consumer card book but represent about a third of the losses," CFO Joe Price said last week.
WaMu, which bought the subprime card company Providian in 2005, said it expects card charge-offs this year to rise to 10.5% of receivables, from 6.5% in 2007. Citi's "managed" net credit loss ratio jumped 202 basis points -- just over two percentage points -- to 6.53% in the quarter.
Higher credit costs reflected "the housing market downturn, higher fuel costs, rising unemployment trends and higher bankruptcy filings, as well as the continued acceleration in the rate at which delinquent customers advanced to write-off," it said on July 18.
To be sure, Visa is still consolidating its global businesses in the wake of a restructuring it completed in order to prepare for its March IPO. "As they standardize all their fee income structures, you could actually see an enhancement to the revenue yield," Sakhrani says. For MasterCard, "it's about maybe not reinvesting as much" by temporarily pulling back on certain growth initiatives, he adds.
Visa and MasterCard have each acknowledged the slowdown in consumer spending in the U.S. this year, but neither seems deterred regarding their growth forecasts as they look to expand globally with various products.
"There are more opportunities for us than threats," MasterCard CEO Robert Selander said in late May
