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Credit Card Stocks Get a Charge From Russian Reprieve

6 June 2014 in Trading Ideas

It’s funny what a deal to maintain hundreds of millions of customers can do for a company’s prospects – and stock price.

Late last month, Visa and MasterCard surged after the companies came to an agreement with Russia regarding their future in the country.

Before the deal, the two giant credit-card providers’ fate in Russia had lately been looking a little inauspicious due to the situation in the Ukraine and the US sanctions on Russia.

The bottom-line effect was to call into question how secure the businesses’ standing in the country was: Roughly 2% of MasterCard’s revenue came from Russia in its most recent quarter, while Visa counts on Russia for 3% to 4% of revenue. Visa has more than 100 million cards in Russia and was forced to stop working with Russia’s SMP bank after its owners were the target of sanctions.1


Ultimately, the two companies pledged to stay in Russia after meeting with Russian government officials, who agreed to consider easing their hard stance against foreign companies – including brand-new legislation that was to require both companies pay a security deposit of 25% of average daily turnover every quarter to Russia’s central bank.

The day following the companies’ pledge, Visa’s stock led the Dow Jones Industrial Average, while other stocks related to the digital payment industry have also seemed to enjoy the lessening tension.

The Digital Dollars motif, which is more than 40% weighted by Visa and MasterCard shares, is up 2.1% in the past month. The S&P 500 has gained 2.3% in that same time frame. So far in 2014, the motif is down 2.8%; the S&P 500 is up 5.9%.

The recent boost that credit-card stocks received following the Russian impasse could be simply a knee-jerk reaction by investors. However, equally likely is a realization by many investors that potential customers in emerging markets is where significant future growth potential exists.

The Motley Fool recently noted a couple of interesting findings in a report by consulting firm McKinsey & Co that looked at expected changes in the world’s economy. The report notes, for example, the current stark contrast in the payment industry, where only 43% of transactions in the US and Canada are made using cash or checks.2

In emerging markets, that figure is 90%.

According to McKinsey, that’s going to change. In China, the consultant expects the number of card transactions to increase nearly five times to 29 billion by 2016. And the growth should come from everywhere “as emerging economies are set to experience significant growth in their use of electronic payment systems as financial inclusion grows.”

And who should benefit the most? “We expect that the major companies such as Visa, MasterCard, and American Express will continue to have leading positions in the largest emerging markets because of the risk and expense involved in building a fully operational payment system,” McKinsey wrote.

Assuming a steadily growing global economy and fewer geopolitical crises, that could mean an opportunity for investors of major payment-related companies.

1Dan Dzombak, “Visa Leads the Dow Jones Today After Compromise with Russia,” fool.com, May 23, 2014, http://www.fool.com/investing/general/2014/05/23/visa-leads-the-dow-jones-today-after-compromise-wi.aspx, (accessed June 3, 2014).

2Patrick Morris, “The $25 Trillion Opportunity for Visa, MasterCard, and American Express,” fool.com, May 24, 2014, http://www.fool.com/investing/general/2014/05/24/the-25-trillion-opportunity-for-visa-mastercard-an.aspx, (accessed June 3, 2014).