The payment card industry is generally on track to increase its profits this year if card purchase volume continues its post-recession growth — but the fortunes of the four largest card networks may vary significantly.
Visa Inc., MasterCard Inc., American Express Co. and Discover Financial Services share certain basic economic opportunities and risks as the economy stabilizes and mobile payments begin to take shape in the U.S., analysts Sanjay Sakhrani and Steven Kwok of Keefe, Bruyette & Woods Inc. in New York said in a report published Dec. 20. Key differences among the networks probably will dictate their performance this year more than in previous years, they said.
The analysts expect Visa in 2011 to continue enjoying an edge over rivals through its dominant U.S. market share in credit and debit and its "strong" bank relationships. But it is likely to be more "negatively impacted" by the Federal Reserve Board's proposed new rules than is MasterCard because of the latter's relatively low U.S. debit card market share. The proposed rules would restrict debit card interchange revenue and require banks to offer merchants a choice among debit card networks for routing transactions.
MasterCard as a result "could actually gain market share in debit," the analysts wrote.
Moreover, MasterCard recently "battled back and picked off some wins" versus Visa in bank signature-debit contracts, which bodes well for its competition with Visa in 2011, the analysts wrote. SunTrust Banks Inc., Chevy Chase Bank and Sovereign Bank all converted their debit card portfolios to MasterCard last year, from Visa.
The Single Euro Payments Area initiative was viewed as a "big opportunity" for MasterCard, given the strength of its Maestro brand in Europe, but the analysts said the company's SEPA growth was "more modest than originally anticipated" due to economic turmoil and complications in getting institutions to comply.
Visa's operations do not include Visa Europe, which the company spun off before its 2008 initial public offering.
For issuers of Visa and MasterCard alike, credit card purchase volume this year "could be stronger than expected, given our view that issuers are likely to encourage consumers to increase their credit card usage post-implementation of the Durbin Amendment, when debit card interchange fees are subject to oversight by the Federal Reserve," the analysts wrote.
American Express, with its strong focus on affluent customers, a segment whose purchase volume held up fairly well through the recession, is positioned to continue realizing relatively strong sales as the recession's effects abate, the analysts said. But Amex simultaneously faces stiff legal challenges, including a Justice Department lawsuit and concern among investors that legislators or regulators seeking to reduce merchant fees could target Amex's higher-than-average merchant discount rate.
Keefe, Bruyette & Woods said "odds are high" that Amex will prevail in the suit.
Amex's recent strategic moves in the alternative- and mobile-payments space also bode well for the company, the analysts wrote. Its 2009 purchase of Revolution Money "enhanced" its competitive position in alternative payments, and its creation last year of global services and enterprise growth groups to explore new payments technology remains a positive, they said.
Discover also is in a stronger position this year than recently, the analysts said. On the issuing side, Discover has a "simpler" balance sheet than some of its competitors, with credit card receivables making up 86% of its loan portfolio. It weathered the recession with relatively lower chargeoffs.
Discover also formed a partnership with wireless carriers last year for Isis, a national mobile payment and commerce network. Though details about the business model remain hazy, the Isis announcement has "opened the floodgates for mobile-payments movement," the analysts wrote.
But Discover also remains at risk to be bought by another network or large bank, the analysts contended. The network's increasingly broad third-party credit and debit card acceptance network, with dozens of new global card-acceptance agreements signed last year, has strengthened its value as a transactions processor.