RECENT NEWS
Benzinga  Sep 11  Comment 
Below are the top mid-cap credit services stocks on the NYSE and the NASDAQ in terms of earnings per share. The trailing-twelve-month earnings per share at Credit Acceptance (NASDAQ: CACC) is $10.72. Credit Acceptance's PEG ratio is 1.00. The...
Benzinga  Sep 9  Comment 
In a report published Tuesday, Keefe, Bruyette & Woods analyst Sanjay Sakhrani initiated coverage on Synchrony Financial (NYSE: SYF) with an Outperform rating and $31.00 price target. In the report, Keefe, Bruyette & Woods noted, “We are...
Benzinga  Aug 27  Comment 
Below are the credit services stocks on the NYSE in terms of revenue. The trailing-twelve-month revenue at American Express Company (NYSE: AXP) is $31.55 billion. American Express' ROE for the same period is 28.72%. The trailing-twelve-month...
Benzinga  Aug 19  Comment 
Below are the top credit services stocks on the NASDAQ in terms of profit margin. The trailing-twelve-month profit margin at Medallion Financial (NASDAQ: TAXI) is 70.90%. Medallion Financial's revenue for the same period is $38.10 million. The...
Wall Street Journal  Jul 28  Comment 
Moody's Investors Service has upgraded Colombia's government bond rating one notch to Baa2, citing the country's robust growth rates.
Wall Street Journal  Jul 11  Comment 
Standard & Poor's Ratings Services backed Germany's triple-A government bond rating Friday and lifted its credit outlook for Ukraine.
Wall Street Journal  Jun 27  Comment 
Moody's Investors Service assigned a negative outlook to Russia's government bond rating, citing geopolitical risks and a weakening medium-term growth outlook.
DailyFinance  Jun 20  Comment 
WYOMISSING, PA--(Marketwired - June 20, 2014) - Customers Bancorp, Inc. (NASDAQ: CUBI) and Customers Bank (collectively "Customers") announced that Kroll Bond Rating Agency ("KBRA") has initiated coverage on the company with investment grade...
Clusterstock  Jun 17  Comment 
Gov. Andrew Cuomo's office was so hyped about New York's new and improved bond rating that someone baked a cake to celebrate it. On Monday, Moody’s Investors Service announced it upgraded New York State’s general obligation bond rating to...
Forbes  Jun 6  Comment 
In trading on Friday, credit services & lending shares were relative leaders, up on the day by about 1.5%.  Leading the group were shares of Bear State Financial (BSF), up about 8.4% and shares of Tree.com (TREE) up about 5.8% on the day.




 
TOP CONTRIBUTORS

The use of credit cards has grown considerably during the past decade - the interchange fees collected by Visa (V) and Mastercard (MA) have risen from 16.6 billion in 2001 to 42 billion in 2007. [1] The credit card system limits the need to carry cash for card holders and reduces the troubles of handling and storing large amounts of cash in brick and mortar locations for merchants.

However, due to the costs to merchants of accepting credit cards, all consumers (even those who pay by cash) are in some sense subsidizing the growth of the credit card industry. Stores that accept credit cards must pay a fee called the merchant discount rate to a bank (sometimes called the acquiring bank for "acquiring" the transaction) or payment processing company. Included in the merchant discount rate is the interchange fee, which the acquiring bank pays to the bank that issued the card (sometimes called the issuing band for "issuing" the credit card being used), and an additional percentage that is the profit for acquiring banks. The existence of these fees mean that ultimately every product must be marked up, to compensate for the costs of paying the middle-men (the banks involved in a credit card transaction).

Credit card usage is growing as more consumers shift from cash to credit for their everyday needs. Its prevalence is further bolstered by the increasing prevalence of E-Commerce, which usually requires a credit card (although other systems of online payment like PayPal are also threatening to take market share). The credit card industry is strongly influenced by general economic trends, which influence card holders' willingness to spend money. It also continually faces risks associated with credit-defaulting card holders.

Companies Involved in the Credit Card Industry

Credit Card Associations

Card Issuers

Acquiring Banks

Note: Many companies engaged in credit transactions participate in more than one segment of the process.

What Happens When You Pay with a Credit Card

There are two parts to credit card transactions:

1. Authorization: This process happens within seconds after each purchase - the card is swiped at the register, and the card-issuing bank authorizes the transaction. This is what allows card-holders to check out at the register.

2. Clearing and settlement: This is the process by which merchants get paid for their sales, and issuing and acquiring banks profit by earning an interchange fee and discount fee respectively.

The following diagram illustrates a typical credit card transaction.[2][3]

Closed-loop vs. Open-loop Transactions: The above process accurately illustrates the transaction process for Visa (V) and Mastercard (MA) branded credit cards. These two companies are considered "open-looped" companies: they do not physically issue credit cards, but rather profit from processing and transaction fees when cards under their brand names are used. Other companies, such as Discover Financial Services (DFS), operate as a "closed-loop" company: it issues credit cards under its own brand and profits from transaction processing as well as its card-issuing operations. Still others, such as American Express Company (AXP), are hybrids that not only issue their own branded cards, but also license their card brands to other Card Issuers.

Who Profits from Credit Card Transactions

Card-issuing Banks

These banks provide consumers with credit cards and represent individual card holders during credit transactions. In exchange for taking on the risk of representing the customer, they profit from interchange fees (usually between 1-2% of the total transaction [4]) charged to merchants with every transaction, as well as interest payments and fees from their card holders. [5]

Acquiring Banks

They act as the middleman between merchants and issuing banks. They receive all credit card transactions from card-issuers, and present all payments in a time period to the merchant in lump sum. In exchange, the acquiring bank charges merchants a fixed amount for its services, as well as a variable sum dependent on the volume of the merchant's sales. Companies that operate acquiring banks include: Capital One Financial (COF), J P Morgan Chase (JPM) , Wachovia (WB), and Wells Fargo (WFC).[6]

Credit Card Associations

These umbrella organizations establish brands that are licensed to card issuers for a fee based primarily on the volume of activity of the issuer's customers. In return, they provide transaction processing services between the four parties involved in a typical transaction (card holder, card issuer, acquiring bank and merchant). In addition, they establish and enforce rules regarding credit cards issued under their brand, and actively promote the effectiveness and reliability of services under their brand names. [7] Within this group, some companies, such as Visa (V) and Mastercard (MA), act purely as card associations and do not profit from interaction with individual card holders and merchants. The rest, including Discover Financial Services (DFS) and American Express Company (AXP), also act as card issuers and receive interest payments from card holders.

  • Independent Sales Organization (ISOs) are middleman entities between acquiring banks and merchants. ISOs are responsible for seeking out individual businesses, often smaller or recently established merchants, and offering them the services of an acquiring bank for a fee. It must then refer the merchants to the acquiring bank and pay the bank on behalf of the merchants. ISOs profit from the difference between the fees they charge their merchants and the sum they must pay to acquiring banks.[8]

Risk Factors Affecting the Credit Card Industry

Exposure to general economic trends

Credit card debt, which in 2008 stood at whopping $957 billion nationally (approximately $3,000 for every U.S. citizen) has, in recent years, taken on a different role in the life of American consumers.

This may adversely affect the credit card industry as a whole. For the credit payment system to thrive, card holders must continuously and increasingly consume with their credit cards. A downturn in the economy will reduce overall transaction volume and in turn the profits of credit card companies[9]. In addition, downward economic trends may cause more card holders to default on their payments, thereby forcing issuing banks to sustain losses.

In the past, credit cards were used primarily to purchase big-ticket items, enabling consumers to spread the costs out over many months, making goods a bit more affordable. Now, however, charge cards are increasingly being used to bridge the gap between cost of living and the diminishing purchasing power of Americans who have been taxed mercilessly by inflation. By buying with available credit instead of unavailable cash, consumers are not simply postponing the pain of higher prices, but compounding it by packing interest expenses into the costs of everyday purchases. In addition, as home equity credit is now unavailable to fund large purchases, many consumers are turning to non-deductible, higher-cost credit card debt as their last remaining lifeline. As such, credit card debt compounds steadily, and for many borrowers, becomes increasingly impossible to pay down.

Credit default

Credit Default is a continual risk to credit card issuers. They take responsibility for paying the acquiring banks, who then pay the merchants for the transactions, then bill the card holder for the balance. If the card holder cannot pay, however, the card issuer still must pay the acquiring bank. This risk is mitigated, however, by legal regulation that allows the credit card issuer to pursue the defaulted borrower for the money owed. Furthermore, credit card companies actually profit when people don't pay their credit card bills on time, because they earn interest on the late payments.

Security

Security is paramount to the credit card transaction process. If credit cards are perceived as unsafe, consumers may forego the convenience of credit use for the safety and assurance of cash and check transactions. In additional, credit card companies, such as Mastercard (MA) have been sued by groups of card holders for failing to protect personal information.

Future of Credit Cards

There is a clear trend away from cash and check payment options throughout the world today. According to the Bank for International Settlements[10], global electronic transactions have and will grow at 12.9% per year from 2004 to 2009, while check transactions will have decreased by 3.3% per year in that same period. Companies involved with credit card transactions will undoubtedly benefit from this macro trend. In addition, the increasing prevalence of online transactions will further encourage the use of credit cards.

Notes

  1. Debit Cards Cash in on Riches
  2. The Life of a Visa Transaction
  3. How MasterCards Work
  4. MasterCard Interchange Rates and Criteria
  5. Credit Card Transactions: Real World and Online
  6. Acqquirer List, VISA
  7. 2007 MA 10-k,Item 1 Pg. 3
  8. Independent Sales Organization (ISO)
  9. MA 10k Item 1A, pg 35
  10. Global Electronic Payments Market Study and Forecast
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