Wells Fargo (NYSE:WFC) made news this week by scrapping its debit card reward program. Beginning in October, customers will no longer earn points for using their debit cards. Wells’ decision followed similar moves by JPMorgan Chase (NYSE:JPM) and Sun Trust (NYSE:STI) to eliminate their own reward programs.
It appears that after the Fed’s decision to cut the fees that banks can charge retailers, the existing debit card model is no longer profitable. Banks can now charge no more than 21 cents for each transaction; previously the average fee had been 44 cents. Having seen their fees sliced in half, banks are having to slash expenses and look elsewhere for revenue. Wells Fargo and Chase are experimenting with something that hasn’t been seen in a long time: actually charging customers a monthly fee for debit card use.
Though it is hard to get customers to pay when they have become accustomed to getting something for free (witness the continued struggles of paid music download sites), I suspect the banks will be surprised by how willing some of their customers are to pay. Once accustomed to the convenience of paying with plastic, few customers will want to go back to the Dark Ages of lugging around cash or a checkbook (do stores even accept checks anymore? Has anyone actually tried lately?). A nominal monthly fee of $2-$3 for the use of a debit card is an irritant, but it is still better than the alternative of no debit card at all. Ultimately, competitive forces will probably force banks to keep any fees to a minimum, and they will have to find other ways to cut costs and extract revenues.
In any event, Visa (NYSE:V) investors appear to be shrugging off any lingering concerns about the fee cap on the company’s prospects. Visa shares have weathered the storm of the past month comparatively well, losing considerably less than the S&P 500 in a market gripped by macro fears.
When this current spate of volatility subsides, I expect Visa to continue its ascent. As I’ve repeated in past articles, Visa’s continued growth is supported by two durable macro trends:
- The global shift to a cashless society. As Internet commerce becomes a larger share of the global economy, universally accepted methods of payment such as Visa stand to benefit most. This trend is inexorable, and a mild inconvenience like a Federal Reserve fee cap isn’t going to stop it. (It should also be remembered that credit card transactions and all international transactions were not affected. Many debit card defectors would not doubt wind up with credit cards if push came to shove.)
- The rise of the emerging market consumer. As living standards rise in Asia, Africa, and South America, these emerging regions are witnessing the same democratization of banking and finance that the West experienced in recent decades. A new migrant to a Chinese city may go his entire life without seeing a paper check. But chances are very good that he will quickly learn to use a credit or debit card or some other form of electronic payment. Visa is an “Emerging Market Lite” investment. It already gets 40% of its revenues from overseas, mostly from the fast-growth markets of Asia and Latin America. Visa has a stated objective of having more than half of its revenue from overseas by 2015, and all indications are that the company will reach this goal. Should consumer spending remain depressed in the United States, it may even happen sooner.
The growth in electronic payments is a durable macro trend that is unlikely to be broken, even by forces as incompetent as the U.S. Congress and the Federal Reserve. The current volatility in the stock market may have already ended – or not. Only time will tell. But in any event, Visa at current prices would seem to be an attractive investment for the next several years. I reiterate my buy recommendation.
Disclosure: I am long V. Visa is a recommendation of the Sizemore Investment Letter.