Credit cards

For a while it seemed that neither record commodity prices nor falling wealth could put a dent in American consumers’ propensity to pay with plastic, but the moment of frugal reckoning is now finally here. August had the biggest drop in revolving debt on record and the last several weeks were probably even worse.

The fall in spending and rising late credit card payments have naturally weighed on the financial sector. Lately though, companies such as Visa and MasterCard that depend on transaction volumes rather than creditworthiness have been hit nearly as hard as those facing delinquencies. The largest issuers of credit cards are big banks, but they have many other businesses and have gyrated recently on separate concerns. Three that come close to being pure plays on cards while still having credit exposure are Capital One, American Express and Discover Financial Services and they are off by an average of 51 per cent from their 52 week highs. Visa and Mastercard’s drops of 35 and 46 per cent, respectively, are better but still an overreaction.

The future of the two big processors lies in developing markets. These have wobbled recently, but if future penetration rates climb anywhere near their expected pace, processor shares still look attractive. In the not-too-distant future, developed market revenue will merely grow in line with nominal output. In the US, for example, cheques and cash already have dropped from three fourths of spending in the early 1990s to a little over a third today. Worldwide though, these represent an $80,000bn untapped market for cards.

At around 27 and 20 times prospective earnings, respectively, Visa and Mastercard might seem expensive in a bombed-out financial sector, but they can still grow earnings respectably if revenue rises in the low teens, several percentage points lower than consensus forecasts. Even if global recession looms, plastic cards are one American export with a bright future.

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