Few companies have faced consistently faced greater legal and regulatory uncertainty than Visa (V) and Mastercard (MA). While the financial collapse and subsequent recession led to significant changes in the regulation of the banking industry, the credit card industry has been significantly impacted by many legal and regulatory changes as well.
While the S&P 500 and its tracking ETF, SPY, is up over 20% from the lows of last year, Visa and Mastercard have continually been some of the strongest performing stocks in the market over the last year.
Still, while Visa and Mastercard have rallied nearly 40% over the last year, these companies have risen only modestly since 2008.
Mastercard and Visa are up about 10% a year since 2008, and these companies continue to grow earnings and cash flow at over 20% a year. Most analysts are also projecting these industry leaders to continue to grow in the high double digits over the next several years.
Mastercard and Visa's shares have been very volatile over the last three years since the Durbin amendment gave the Federal Reserve much greater power to regulate the credit card industry. Dodd-Frank and the Durbin amendment were passed in 2010, and it has taken several years to see how future rules and regulation from recent legislation would effect the credit card industry. Significant lawsuits based on the recent legislative changes have also been filed over the last several years as well.
The Durbin amendment called for the creation of a consumer protection agency and also gave federal regulators the power to limit the fees companies in this industry can charge. The primary fear of industry insiders was that Congress would run the consumer protection agency, and many credit card companies had strong concerns that future rules and regulations would be very friendly for small businesses and other merchants.
Still, the Federal Reserve is the primary regulator of these companies, and the Fed has consistently enacted industry friendly rules and regulations since 2010. This is why I think the tentative recent settlement of the more recent lawsuit brought by representatives of national retail groups against Visa and Mastercard is so important. As an attorney, I think it is a legitimate question if Visa and Mastercard operate in a truly competitive industry, since these companies have a combined market share of nearly 70% in the U.S debit and credit card market. While companies such as Discover (DFS) and American Express (AXP) were significant competitors to Visa and Mastercard in the nineties, Visa and Mastercard dominate most major credit and debit card markets today.
This is also why I think the recent out of court settlement between merchants and the two biggest credit card issuers is being overlooked by some analysts.
While Visa and Mastercard did settle this major lawsuit for around $7 billion, it is interesting to look at what the real effect of this recent settlement is likely to be longer-term. Durbin himself viewed the recent settlement as significantly undermining the intent of his original amendment as well, and several leading national organizations that represent small businesses and merchants have already suggested that these groups plan to relitigate the case as well.
The lawsuit clearly failed in its primary goal to fundamentally change the operating environment of credit card companies in the U.S., and Visa and Mastercard still face no significant competition from other companies. While merchants now have more flexibility to pass on increasing fees to consumers, the settlement imposes no limitations on Visa and Mastercard's power to raise surcharges and fees in the future.
Visa and Mastercard have been very hesitant to raise debt and credit card fees over the last several years, and these companies have also had very significant litigation costs recently as well. Visa and Mastercard have consistently spent significantly on litigation since Dodd-Frank was passed in 2010, and increasing regulatory and legal certainty should give management more flexibility moving forward. Both companies are also debt free, and management will likely look to increasingly return value to shareholders with significantly larger buybacks and dividends.
To conclude, while Visa and Mastercard have faced significant legal and regulatory uncertainty over the past several years, these companies' operating environment is likely to change very little over the next several years, and mobile payment systems should not fundamentally change the fast growing industry these two companies still dominate.