It`s a good time to be in the credit card network business.
Partly due to the electronic payment revolution and a huge shift away from the use of cash by consumers, as well as the fact that they simply collect fees, rather than lending money – the banks do that – MasterCard and Visa have doubled their revenue over the past six years. The Bloomberg Riskless Return Ranking puts them at the top of the financial services industries with better returns than every major bank in America.
Compared with banking giant JPMorgan Chase, which reportedly posted a $2 billion loss this month, MasterCard and Visa`s business is booming. Barclays analyst Darrin Peller says that “if I was allowed to, I would put both stocks in my personal account and forget about them for the next four or five years,” due to analysts’ predictions that they will only gain more revenue in the near future. According to analysts surveyed by Bloomberg, Visa`s revenue is predicted to rise 9.3 percent by March 2013 and MasterCard`s could rise 13 percent by that time. That would put Visa at $2.82 billion and MasterCard at $1.99 billion in profits.
How Do They Do It?
Unlike banks, such as Bank of America, JPMorgan Chase, and Citigroup, who were some of the worst performing companies in the Standard & Poor`s 500 Financials Index (S&P 500) last year, credit card networks don`t lend money. They simply process transactions for merchants, consumers, and banks, collecting a percentage of each purchase using a card bearing their logo. Says Peller, “they are very sophisticated toll collectors.”
As electronic payments boom and cash transactions become more infrequent, credit card networks only stand to profit more. By 2015, card and electronic-based payments will make up 69 percent of all payments in the U.S., according to the Nilson Report, a California-based industry newsletter. Last year $11.2 trillion worth of transactions were put on plastic, with $7.81 trillion of that activity going processed by Visa and MasterCard credit and debit cards.
Barclays analyst Peller, on credit card networks: “It`s a very profitable group that`s very capable of managing and controlling their earnings power.”
What About Banks?
JPMorgan Chase, the largest U.S. Bank according to assets, and which posted that $2 billion loss mentioned above, was 35 percent more volatile than Visa and 11 percent more volatile than MasterCard, according to the S&P 500. Out of JPMorgan, Bank of America, Citigroup, and Wells Fargo, only Wells Fargo had a positive risk-adjusted return on the S&P 500. The rest returned negative results and ranked near the bottom of the index.
Banks, of course, are the ones who take the biggest hit when consumers can`t pay off their credit cards. Once a transaction is made, credit card networks have already taken their slice of the pie, leaving banks to collect their money back from the purchaser. For this reason, banking is an inherently riskier enterprise than the credit card network business.
Visa and MasterCard produced better returns than 81 publicly traded financial institutions on the Bloomberg Riskless Return Ranking.
The Sweet Smell of Revenge
If Visa and MasterCard don`t seem entirely rosy and glowing about their rising profits, it may be because lawsuits could be on the horizon. Already, MasterCard is doing battle over fees in the European Union, where they are defendants in an antitrust case, and U.S. lawmakers are rumored to be considering similar actions. MasterCard lost its appeal in the European Union just this week and vows to continue fighting the ruling.