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The Great MasterCard - Visa Debates

by: Bill West May 18, 2008 | about stocks: MA / V

Bill West

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Perhaps you have noticed the temporary slowdown and recent minor pullbacks in both MasterCard (MA) and Visa (V) stocks.

In checking the popular blogs and wallowing through the assorted financial internet commentary, it has become apparent that many people still believe that MasterCard and Visa are tied to the often mentioned credit crisis. Discover (DFS) and American Express (AXP) have these problems as bill collectors. Mastercard and Visa do not. Remember, MA and V are simply toll-takers in the credit economy.

What all credit card companies do have are assorted fee structures, teaser rates, and different “merchant processing percentages”; these can be dependent on many factors and will not be discussed here in great detail.

The outcome of the Capitol Hill hearings will be as follows.

We are currently heading toward an election. The continued bloviations on credit card practices can be equated with the oil company monopoly hearings that commence every time gas goes over $3 per gallon. (The lack of exploration and refinery construction won’t be debated here.) Nothing has changed in oil for the most part, has it? Not too much will change in the credit card industry, either.

The do-nothing politicians will get some quotations in the record and little will change in the credit card industry, with the exception of the following areas:

Credit card companies will reduce or eliminate many teaser introductory rates.

Bank issued credit card qualifications will become stricter as some defaults may increase.

Credit interest rate percentage increases will require customer notification and payment or payoff options to allow the customer a chance to prevent the implementation of these penalty rates.

Terms and credit card policies will be re-written in more layman friendly language.

Secured credit card options may be used more frequently when credit worthiness is questioned.

And now, of most importance to MasterCard and Visa shareholders:

The numerous bank and merchant associations will square off on Capitol Hill, complaining or justifying the “processing fees” of 1 to 4 percent that are paid directly to MasterCard and Visa. Those fee structures will remain in place, with some attempts at downward renegotiation for some of the largest merchants. The little merchants won’t have much bargaining power. Sorry, but that’s the law of large numbers. These processing fees will simply be passed on to the consumer if necessary. Don’t forget there is always the cash price versus the credit price if you are feeling really squeezed.

However, with the increasing cashless nature of society in the United States, and the international consumer markets skyrocketing, the credit card business is becoming fully entrenched in the world of financial transactions, large and small. As the emerging markets begin to trust the credit services of their respective banking systems, the issuance and accounting practices will become trusted and fully implemented. Paying by credit also provides fraud protection and faulty product redress in many cases.

Cash will soon become simply the path of last resort for emergencies, illegal businesses, persons “living off the grid” and tips for people employed in the service industries.

Bottom line: MasterCard and Visa are perfectly positioned for the continued growth of the credit card industry and will provide rich rewards for those who invest early in both these stellar companies.

Disclosure: Author is Long MA, V, XOM

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Related Stocks:

MA, V

This article has 27 comments:

May 18 08:57 AM
I concur.. good follow up article on this at MG:
www.marketguru.com/opi...
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May 18 09:42 AM
Never underestimate the power of the government to screw with your predictions.
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May 18 09:42 AM
I agree with your conclusion that retail electronic payment networks will continue to provide and excellent investment opportunity. However, your comments below are misguided with respect to the nature and per transaction fees earned by MA and V.

“The numerous bank and merchant associations will square off on Capitol Hill, complaining or justifying the “processing fees” of 1 to 4 percent that are paid directly to MasterCard and Visa.”

You have confused merchant bank processing fees (about .5%) and issuing bank interchange fees (about 1-3%) charged in connection with the retail transaction with the transaction processing and services fees paid by the merchant banks and issuing banks to the operators of electronic payment networks such as V and MA.

Transaction processing and services fees are fractions of a cent per transaction but are levied on billions of transactions and are lifeblood of the retail payment networks. For example in 2006 V processed over 44 billion electronic payment transactions representing over $3.2 trillion in cash and payments volume. For the 12 months ended September 30, 2007 V earned fees of just over $3.9 billion which represent an average cost of around .1% per dollar of transaction volume.

For an excellent description of the retail electronic payments business and how it operates see the V form S-4 filed with the SEC, page 144. www.sec.gov/Archives/e...

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May 18 09:43 AM
So which is a better value MA or V?
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May 18 10:35 AM
Not very much "meat" in this little column. You might think some fiscal comparisons between V and MC might have been in order .You might think numerous comparisons of these 2 giants might have been at least mentioned ????
Reads like the column was "phoned in" ...Of no particular importance or enlightenment ..Mundane, at best ...
Golly, the cashless society will continue to grow ? What a revelation, Duh !!
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May 18 10:43 AM
V winner, I do not proport to be an expert however my facts are correct. If you want to dispute facts then get specific and I will be happy to discuss. With respect to owning shares I'm long on V and MA from day 1.
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May 18 11:11 AM
What's the best value
Visa of course - More shares for your dollar and more profit per share
Everybody out there knows that the more shares you own the more profit that you will make in dividens and the forward price increase
I own Visa and am glad I do
TKTK53
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May 18 11:38 AM
New York wouldn't sell me a toll booth on the GW Bridge. Did the next best thing and purchased MC and Visa and they have really helped my IRA. Hopefully MC will split 3 or 4 for 1 so many more people can drive out the short sellers.
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May 18 12:35 PM
I agree with V winner on this new website visawinners.blogspot.c.../ This site Is 100% for Visa Investors!
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May 18 01:24 PM
I work in this industry and what I know is that Visa/MC make .1% of every transaction and .0075 cents per transaction everytime someone uses that card. It is a very compelling way to make money.
Now that they are demutualizing, the banks which held them in check will slowly be replaced as a constituency in the decision making.

I would not worry about Government intervention in any country. The government, especially the Chinese government, wants to encourage people to migrate from cash so they can monitor the underground economy

V/MC will both be monster winners for a long time. Once PAY can find a way to fix their internal financial problems, they will be a winner too.
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May 18 06:35 PM
I stand corrected on the percentages but the principals are intact.....
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May 18 10:39 PM
Give Master Card space and you will be a happy camper.
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May 19 07:42 AM
Use your Visa or Mastercard here save a bundle:seeksomething.com
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May 19 11:50 AM
Like one of the previous comments, I also have been involved with Visa and MAsterCard during my career. What I think is interesting is what will happen with the recent bill being put forward to Congress HR 5546 - judiciary.house.gov/he....

Visa and MasterCard earn their income on processing transactions and the volume that passes through their systems. Yes, a recession lowers their volume, for a time. In the long run we always come out of a recession and cardholders resume purchasing and cards are becoming the norm for making payments. The people that lose if Governments continue to regulate will be the Banks that Issue MasterCard and Visa cards. Not MasterCard and Visa.

They may have to play by new rules but their role remains the same and frankly what they can offer as services in their new for profit mode can only increase their bottom lines.

Long term these two compnanies are good buys for long term investors. Pick your time and hold is my recommendation.
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May 19 11:57 AM
That may have been the first coherent explanation about why Visa is not tied to the banks and other CC companies like so many people assume they are. Finally. But there's only so much info that can be given in any one article, so come on over to visawinners.blogspot.c... and share your information and opinions. It's a place for those that already own shares of Visa to discuss everything from A to Z. Good luck to all!
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May 19 12:23 PM
If you had to pick between the two, which would it be? It seems MA is growing quicker, less shares outstanding, market cap, etc....
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May 19 01:20 PM
"the processing fees of 1 to 4 percent that are paid directly to MasterCard and Visa" ... You are so far off base here. These fees are paid to the banks by the merchants, not Visa or Mastercard. The banks have an agreement between them on how a fee collected by a Merchant's bank is "shared" with the Cardholder's Bank. Beyond the obvious profit motive, these fees are reduce the risk to the banks for credit card fraud (or did you think they were really just assuming that libility).
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May 19 01:42 PM
They're both too expensive.
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May 19 01:55 PM
Visa did eleven billion (11,000,000,000) transactions last quarter.
Baised on a 91 day quarter, they pulled 83,943 transactions per minute.
I don't care what the processing fees are, Visa is making money hand over fist at that rate.

I thought Amazon had a great holiday season with 62 transactions per second, but Visa had 1,400 per second at the above rate.

On May 19 01:20 PM jmho wrote:

> "the processing fees of 1 to 4 percent that are paid directly to
> MasterCard and Visa" ... You are so far off base here. These fees
> are paid to the banks by the merchants, not Visa or Mastercard. The
> banks have an agreement between them on how a fee collected by a
> Merchant's bank is "shared" with the Cardholder's Bank. Beyond the
> obvious profit motive, these fees are reduce the risk to the banks
> for credit card fraud (or did you think they were really just assuming
> that libility).
Reply | Link to Comment
May 19 04:28 PM
DIS is the ticker for Disney, not Discover.
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May 19 08:02 PM
way to go ! Both MA and V are good INVESTMENT stock!
Anyone use Options as an investment tool on MA and V?

investmentaction.blogs...

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May 19 09:46 PM
sharing of collection of all the research tools, resources sites we need for Visa (V) Investing!

investmentaction.blogs...
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May 19 10:49 PM
Ladies and Gentlemen, no matter what anyone says, Visa and MasterCard are for all practical purposes equally distributed on the planet geographically. See the Nilson Report site to confirm this with a look at their chart; they are the credit card gurus for the industry. With regard to size, Visa is about 2-3 times bigger, depending on what measure you are looking at (revenues, number of credit cards issued, etc.). For the future, it is not unreasonable to project that Visa will not only maintain its lead, but increase it. Now to the investment scenario: whatever MasterCard has achieved price-wise, Visa will match and surpass it over time! Even if it's $100-$200 by the time you read this, investing in Visa is a no-brainer. And whatever problems you hear about one credit card company here or someplace else, generally will apply to other credit card companies as well; all businesses eventually work it out. Buy as much as you can afford, and hope that China uses their services in the future (the general population sill uses cash and doesn't trust doing business online yet-5-19-08).
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May 20 07:47 AM
For some reason, since I bought Visa, it takes me 4 separate transactions on my card to fill up my gastank. Weird huh?

haha
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May 20 03:19 PM
Banks make more profit per tankfull of gasoline than the oil companies do. And as gasoline prices go up, so do the bank profits. Can't lose.
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May 20 06:52 PM
Hahahahahaha, that's great Shane!!!! I love it. I'll have to start doing the same thing!!! LOL
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May 21 11:13 AM
Paul Price
what V price should be? 50?? 40?? 30??
i think you stay with penny stock buddy
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