Credit Cards Shine As Banks Decline – What’s The Play?May 20 | Posted by Kevin Monaghan | Top Story
Credit card companies have taken charge lately and have quickly become one of hottest talking points of the financial sector. Visa (V) and Mastercard (MA) have temporarily avoided the wrath of congress and the limitation of interchange fees and are now seeing their stocks move back towards their highs. An interchange fee is the percentage of each transaction a credit card company receives for processing payments. For those of you who don’t know, Visa and MasterCard only handle processing requests and do not provide loan facilities whatsoever, therefore they have no loan default risk at stake.
However, that’s not the case for Capital One Financial (COF), Discover Financial Services (DFS), and American Express (AXP). Unlike Visa and MasterCard, they do take on default risk and underwrite the credit when you buy an item using your card (unsecured credit). All three of these stocks have been recommended for our subscribers over the last year; including an upgrade a few weeks ago to our Pro members that we were again bullish these stocks could continue higher. Discover (DFS) continues to be one of our favorite, as its shares were beaten down to under $5 at one point, despite being a very well managed company with high customer loyalty.
These stocks take on credit risk by making the loans to their customers, but consumers have been doing a good job of reigning in their debt. That’s led to the recent decline of the default rate and charge-off rates, allowing these companies to release excess capital from their reserve requirements and post stronger earnings numbers.
With consumers spending paying off their debts, credit card companies are now looking to make new loans to increase their business. In addition, they have all been racing to get into the mobile payment game. Companies collect a small percentage fee of every transaction, like a “toll.” We’ll be watching this race very closely as MANY companies are competing for a piece of the mobile payment pie. Even Google (GOOG), VeriFone (PAY), AT&T (T), Verizon (VZ), and Apple (APPL) are all trying to get their hands on this lucrative “toll” collecting business.
Disclosure: Author, Kevin D. Monaghan, Senior Partner at Elite Investment Group, is long DFS, T, AAPL, and may go long MA, COF, AXP in the next 3 days.