Visa, Mastercard and the Debit Card Revolution

We spoke of this trend of debit vs credit in the analysis of the Visa (V) report last week [Apr 30, 2009: Visa (V) Beats the Street] and it was part of the reason I hedged away from Mastercard (MA) going into earnings (although the valuation gulf between the two is now more than pricing this situation in). For the first time in history we saw debit volume surpass credit in Visa's business.

In one sense, this is simply the secular move to a "cash-less" society. But in a broader sense it speaks to the delevering going on in the country (indeed, Western world), the push by credit card companies to get rid of "risk", and we could also ascertain some potential longer term behavioral changes. Again, many of my theses for the next 12-36 months are based on a change in behavior by the American consumer. Where I could be shown wrong is if he/she judges what he/she has just gone through (and shall go through in the months ahead) as a 1 time blip and returns "to good ole times" in 2010.

The irony is, if we step back 50+ years, the behavior of the past 10 was the abnormal - not the previous 40+. So the question is do we return to the perverse behavior (which our government leaders are trying in every shape and fashion to push us towards) or do we return to 1990s and earlier actions? It will be an interesting development either way. [Dec 29, 2008: What Happens if America Returns to a Historical Savings Rate?]

Via Wall Street Journal

• The urge to not splurge by thrift-conscious consumers is giving the debit-card revolution a new push. On Wednesday, Visa Inc. reported that the total dollar volume of purchases made using its branded debit cards surpassed credit-card purchases for the first time during the last three months of 2008.
• "The reality is that the vast majority of consumers want to pay as they go," said Stacey Pinkerd, who oversees Visa's debit-card business.
• Brad Sagara uses a debit card to buy everything from groceries to climbing gear to bottled water. He barely uses his two credit cards anymore, and is trying to pay off a combined balance of $4,000. "The painful realization is that I need to be an adult, and this is a time to save," said Mr. Sagara, a 26-year-old consulting-firm analyst who lives in Tucson, Ariz. (Don't worry Brad, many adults don't bother to save either)
• The surging popularity of debit cards largely reflects the growing use of plastic by American consumers. Credit- and debit-card purchases of retail goods and services vaulted past cash and checks in 2003. Now the recession is giving many consumers second thoughts about their credit cards. Lenders also are making it more expensive to charge purchases and lowering credit limits on credit-card users.
• Revolving debt, which mainly reflects credit-card loans, fell 9.7% to $955.7 billion in February, the Federal Reserve said.
• "A big group of consumers like the discipline that debit spending can bring them, and that is particularly relevant in this kind of environment," said Tim Murphy, who oversees MasterCard Inc.'s main payment products around the world.
• Debit cards are especially popular with younger consumers. Debit cards are less profitable for banks than credit cards, but merchants still pay banks to accept the cards. In the past couple of years, banks have encouraged debit-card use through rewards programs. Those rewards typically are less generous than credit-card rewards.
• To be sure, growth rates of debit-card transactions have slowed as Americans rein in their spending. Volume is widely expected to climb by a single-digit percentage this year, compared with more than 10% annually during the past few years. But credit-card usage is expected to keep declining.

(click to enlarge)

Disclosure: Long Mastercard in fund; no personal position

Comments

[bcncv:]

I hadn't realized how much debit had caught up with credit. Thank you for the excellent article.

May 04 12:51 PM

[Kristian:]

Average households are over $11,000 in debt on their credit cards (average balances are now down from over $12,000 earlier this year). Most realize they must pay the usurers their required fees any way they can manage to. Recent industry-wide increases in credit card interest rates and finance charges have been shocking. (Many report fees have been raised to twice what they were just months ago).

Swell of the card companies and their banking buddies to pull this off, especially with prime now at 0% to 0.25%.... not to mention how much the banks are now siphoning off their willing victims in billions of tax dollars the Treasury has provided to the financial industry to fund bank bailouts and bad bank assett guarantees.

This astonishing legal ripoff is obviously the principal reason that debit card use is now eclipsing credit card use.

Want to see the banking and credit card business exposed for what it really is....this recent PBS 20 minute documentary says it all:

www.pbs.org/wgbh/pages.../

May 04 05:31 PM

[RObert P. O...:]

Will debit purchases last? Individuals are adapting to today's current economic enviroment, however, what happens when we get out of the recession? Interesting. Good article.

May 04 05:37 PM

[The Geoffster:]

If you don't like the terms, don't borrow the money.


On May 04 05:31 PM Kristian wrote:

> Average households are over $11,000 in debt on their credit cards
> (average balances are now down from over $12,000 earlier this year).
> Most realize they must pay the usurers their required fees any way
> they can manage to. Recent industry-wide increases in credit card
> interest rates and finance charges have been shocking. (Many report
> fees have been raised to twice what they were just months ago).
>
>
> Swell of the card companies and their banking buddies to pull this
> off, especially with prime now at 0% to 0.25%.... not to mention
> how much the banks are now siphoning off their willing victims in
> billions of tax dollars the Treasury has provided to the financial
> industry to fund bank bailouts and bad bank assett guarantees.<br/>
>
> This astonishing legal ripoff is obviously the principal reason that
> debit card use is now eclipsing credit card use.
>
> Want to see the banking and credit card business exposed for what
> it really is....this recent PBS 20 minute documentary says it all:
>
>
> www.pbs.org/wgbh/pages.../

May 04 07:34 PM

[InvestBaboo:]

Let's get to the point here. Debit cards, spending, cashless society, lack thereof, all is fine but how do I make money? Tell me where Visa's stock is going? I published my comment a while back in response to one of TraderMark's article (I believe the title was 'Visa is not everywhere I want to be!") that Visa's charts were pointing a run up and I gave it a near term target of mid 60's which it met right after the earnings announcement and exceeded the target today going into the late 60's. The bearish bias of his article did not bother me and I don't think I even read it because the bearish bias simply did not align with Visa's charts. I mean, why take the time to read and understand a bias if it simply is not true?

Grand standing aside this begs the question -- why even look at what a company does if the charts can tell you what to do with its equity? What is more important to you? Making money of an equity or jerking off late in the night writing long notes deeply analyzing the ins and outs and idiosyncracies of a business? I don't know what a majority of the companies do in my Slumdog Millionaire portfolio but all I can tell you is that it was up 12% today and has been up over 80% since I created it in March of this year. I published it about 3 weeks back in my InstaBlog and it may amuse you to take a look at it.

May 04 11:43 PM