Are you one of the many shoppers finding yourself using plastic more often?
In some of my recent articles, I’ve highlighted the financial sector as a beneficiary of rising interest rates with some mention of credit card companies. However, in this article, I would like to focus on the numerous tailwinds set to help some of the largest credit services including Visa Inc (NYSE:V), Discover Financial Services (NYSE:DFS), and PayPal.
Over the last couple of months, interest rates have spiked from their generational lows, largely as a result of market uncertainty. A series of hints, winks, fair flips, whatever you want to call these signals from the Federal Reserve Chairman Ben Bernanke, have caused traders and investment banks alike to finally realize that the end of extremely loose monetary policy may be coming to and end later this year.
If I recall correctly, 2014 has always been an initial estimated target end date for the Federal Reserve, the only difference is in 2011, this end date felt like an eternity away.
While some sectors, including housing, have experienced great turbulence as a result of these rising rates, the financial sector stands ready to finally generate significant net interest incomes. Many of these credit companies were hit badly during the ’08 financial crisis as delinquency rates soared over 10% for some in combination with a rise in cash spending. Today, credit quality and delinquency data has improved greatly, helping the profitability of these institutions.
What’s up with Visa
Visa Inc (NYSE:V) has done very well already this year, in line with broader markets. Shares have moved up 25% year to date on the back of strong delinquency and earnings data. The company generates just over 50% of its revenue from its U.S. business segment, which is expected as in the United States, consumers typically use plastic more often than those in emerging market economies.
However, emerging markets may be the key to sustaining long-term growth. Due to low banking and financial infrastructure, the use of plastic in emerging market economies is significantly lower than in the developed world. In India alone, over 90% of point of sale transactions are done with cash. Within these markets, personal spending has been growing at a steady rate of 10%, thus a 10% growth rate within these countries at a minimum seems likely.
Earlier this year, the company announced that it became the second credit company to issue Yuan denominated credit cards, with the announcement that it predicted the convertibility between the Yuan and base currencies to help grow this segment going forward. Significant growth out of Asia bodes well for overall growth as 30% of its global payment volumes come from this business segment. In the mean time, rising interest rates in the U.S. will help the company generate higher margins ahead.
Earlier this year, Discover Financial Services (NYSE:DFS) and eBay Inc (NASDAQ:EBAY) announced an expansion in their payment processing partnership. Back in 2002, eBay Inc (NASDAQ:EBAY) acquired PayPal for $1.5 billion. Since then, PayPal and eBay have grown greatly, together. At that time, PayPal was one of the primary payment methods for users on eBay Inc (NASDAQ:EBAY), which it still is today.