Plastic will continue replacing cash as a payment method all over the world for years to come, and this is a strong secular tailwind benefiting the major players in the debit and credit card business.
The trend is particularly promising in emerging markets, where economic growth is faster and market penetration is lower than in developed countries. No company is better positioned than Mastercard Inc (NYSE:MA) to capitalize on this opportunity.
Different business models
There are basically two kinds of card companies with significantly different business models. Players like American Express Company (NYSE:AXP) and Discover Financial Services (NYSE:DFS) are involved in the lending business, while companies like Visa Inc (NYSE:V) and Mastercard Inc (NYSE:MA) are simply dedicated to processing transactions: All of the credit risk in their credit cards lies with the issuing banks.
American Express Company (NYSE:AXP) and Discover Financial Services (NYSE:DFS) get a double boost when the economy is doing well since they benefit from growing consumption and expanding credit demand at the same time. Consumers have come a long way in terms of improving their financial position over the last years, and both companies are showing encouraging trends in terms of credit performance, so they are well positioned to benefit from growing credit demand in the middle term.
American Express Company (NYSE:AXP) reported a net lending write-off rate of 2% in the second quarter of 2013, relatively stable versus 1.9% in the first quarter of the year and 2.2% in the second quarter of 2012. Discover is doing well on the credit front, too: Loan delinquencies over 30 days past due reached a record low of 1.58% in the last quarter, and the credit card net charge-off rate decreased 2 basis points sequentially to 2.34%.
American Express Company (NYSE:AXP) and Discover appear to have their credit risk under control now, but both companies suffered serious losses during the 2008-09 financial crisis because of rising defaults in their portfolios. Credit exposure is always a considerable risk to watch when investing in these kinds of companies.
Mastercard Inc (NYSE:MA) and Visa Inc (NYSE:V), on the other hand, offer much more visibility regarding potential risks, and their business models allow for faster international expansion because they don’t need to worry about their customers’ creditworthiness too much.
Nielson Report estimates that cards accounted for a 48% percent of total U.S. consumer purchases in 2010, a number expected to grow to 59% in 2015. But things are very different on a global scale: A whopping 85% of global transactions are still done in cash, and that represents a huge opportunity for Mastercard Inc (NYSE:MA).
Visa Inc (NYSE:V) is bigger than Mastercard Inc (NYSE:MA), but when it comes to growth opportunities in emerging markets, MasterCard is outgrowing its competitor.
MasterCard generated over $1 trillion in gross dollar volume during the last quarter, and almost 70% of that volume came from international markets. Key regions like APMEA — Asia Pacific Middle East and Africa — and Latin America were particularly strong with annual growth rates of 18.8% and 17.5%, respectively.
Visa Inc (NYSE:V) had $1.7 trillion in total volume during the quarter, although regions like Asia Pacific and Latin America are still doing well, with growth rates in the area of 10.5% and 9.9%, respectively, Visa Inc (NYSE:V) is clearly lagging MasterCard in those regions.