Benefiting from the Cashless Transaction Trend
Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The world is gradually moving towards cashless transactions. According to McKinsey & Co’s report featured in Barron’s, for households that had income of more than $60,000, a year, cash accounted for around just 2% of the total point of sale payments, and cards (credit and debit) combined represented around 60% of all retail transactions. It expected that if the trend keeps going cash payments would account for only 10% of total US retail transactions. This is definitely a favorable trend for Visa (NYSE: V) and MasterCard (NYSE: MA).
The Global Leader in Card Transactions
Visa and MasterCard are in head-to-head competition in the cashless transaction trend. Visa is already the global leader, with the nearly $3.77 trillion in total payments volume in fiscal 2012. It has already issued a total of 2.1 billion cards. MasterCard ranked second, with around $2.43 trillion in total payments volume, and 1,059 billion cards have been issued. American Express (NYSE: AXP) and Discover Financial Services (NYSE: DFS) are in the third and fourth place, with $808 billion and $114 billion in payments volume, and 97 million and 59 million cards have been issued, respectively.
Different Business Strategies
However, Visa and MasterCard have a bit different business strategies and focuses compared to American Express and Discover. Visa and MasterCard are the intermediaries to connect consumers, banks and merchants; they don’t provide loans directly to consumers. It is the banks that lend to consumers. Thus, both Visa and MasterCard have no credit risk; their revenue is derived from fixed transaction fees. On the other hand, American Express and Discover are the financing providers for their users, so they are exposed to credit risks. For American Express, the majority of the revenue came from discount revenue, the fees charged to merchants on their network, at $16.73 billion out of $28.85 billion in total net revenues, net of interest expenses after provisions for losses. The interest income was nearly $7 billion. Discover derived the majority of the revenue from credit loans; $5.65 billion out of total interest income of $6.36 billion in 2011.
Indeed, Visa and MasterCard have competed quite vigorously with each other, as they are expanding into new markets and new businesses. In 2012 MasterCard became the first credit card company in Myanmar, even before President Barack Obama’s first official trip to resume diplomatic relations with the country. Visa established its foundation in Africa with the payment network in Rwanda. It also partnered with leading Indian banks to provide tens of millions of Indians Adhaar holders, the Indian national identity system, with access to Visa accounts. In terms of the new business, Visa launched V.me, the digital wallet service with more than 50 additional financial institution partners, to compete with Google wallet, to bring the addressable base of cardholders to 55 million. MasterCard also partnered with ING to test the new EMV Internet Payments system using mobile phones. The move was intended to capture the increasing demand of online shopping from PCs to tablets and smartphones. Mobile payments, which totaled $172 billion in 2012, are expected to increase up to $600 billion globally by 2016.
Good Opportunities With Expensive Valuations
Valuation-wise, with the market leading position and the unmatched market share, Visa is the most expensive stock with 48.1x trailing P/E. MasterCard is much cheaper in terms of trailing earnings, with 28.6x P/E. American Express and Discover are the cheapest, with 13.2x and 8.9x P/E, respectively. American Express is paying the highest dividend yield, 1.4%, whereas MasterCard had the lowest yield, 0.2%. Visa and Discover are paying 0.6% and 1.1%, respectively.
Foolish Bottom Line
All four businesses compete in the global card industry, each with different business focuses described above. If investors don’t want to get involved with credit risk, they might consider both Visa and MasterCard, along with the increasing cashless transaction trend. Those two are definitely solid long-term bets, even with their high valuations. Visa looks cheaper in terms of the PEG ratio at 0.8x, whereas MasterCard is valued at 1.4x PEG.
hoangquocanh has no position in any stocks mentioned. The Motley Fool recommends American Express Company and Visa, Inc.. The Motley Fool owns shares of MasterCard, Inc.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!