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Plastic Money Keeps Crowding Out Cash

23 August 2013 in Trading Ideas

The recent uncertainty about how willing consumers are to spend has likely contributed to the recent pullback in stocks. However, the evolution in the methods we are using for spending appears to be much more direct.

Credit-card companies and electronic payment processing firms have been exhibiting evidence that the move toward a global cashless society continues – and shareholders of these companies have been benefiting. The Digital Dollars motif has gained 22.2% year-to-date; during that same period, the S&P 500 has risen 14.8%.

In the past month, the motif is up 1.9%. The S&P 500 has fallen 1.9%.

digital dollarsContributing to the motif’s relative strength in the past 30 days has been a solid performance in shares of Mastercard, which makes up about one-fifth of the motif’s weight. The stock has gained 4.4% in the past month, largely on the run-up after the company’s earnings on July 31, when Mastercard said worldwide spending on its Mastercard- and Maestro-branded credit cards climbed 12%.1

In addition, the company said the number of transactions it processed rose 11% to 9.5 billion.

And apparently, there’s more growth to come: the company’s chief financial officer said Mastercard is expecting revenue to increase on a compound annual rate by 11% to 14% between now and 2015, and earnings per share could rise 20% during the period.

That growth is being helped along by increasing adoption in emerging markets, where, unsurprisingly, Mastercard said it would continue to target opportunities. The company said Latin American card spending rose 20% in the latest quarter, while it jumped 19% by customers in the combined Asia-Pacific, Middle East and Africa regions.

Naturally, with this sort of uptick in demand, competition is fierce for each and every market. For example, witness the recent agreement struck by Wells Fargo to begin issuing American Express-branded credit cards to its own customers. As the Wall Street Journal’s Marketbeat blog noted, Wells Fargo is trying to boost its credit-card business at a time when the industry’s loan losses are near historic lows thanks to borrowers’ good payment behavior. Wells Fargo’s CEO said last month the bank planned to expand its credit card offerings in a bid to double its market share.2

This isn’t to say that headwinds for the sector don’t exist. Some uncertainty could surround what may be a protracted legal battle on caps for so-called debit-card swipe fees. On Wednesday, the Federal Reserve said it would appeal a ruling by a federal district court judge that the Fed’s cap was illegal.3

1Donal Griffin, “Mastercard Profit Beats Estimates as Card Spending Increases,” Bloomberg.com, July 31, 2013, http://www.bloomberg.com/news/2013-07-31/mastercard-profit-tops-estimates-as-consumer-card-spending-jumps.html?cmpid=yhoo, (accessed Aug. 21, 2013).

2Andrew R. Johnson, “Wells Fargo and American Express Join Forces on Credit Cards,” WSJ.com, Aug. 7, 2013.

3Tom Schoenberg, “Fed Tells Judge Swipe-Fee Rule Rejection Will Be Appealed,” Bloomberg.com, Aug. 21, 2013, http://www.bloomberg.com/news/2013-08-21/fed-tells-judge-swipe-fee-rule-rejection-will-be-appealed.html.