The credit card industry got a nice gift on Wednesday — the Federal Reserve set the cap on interchange fees to 21 cents a transaction. That was much better than the original plan for 12 cents, and it should mean healthier transaction volumes.
The response from Wall Street was immediate, as the stock prices of the large credit card operators soared. For example, the shares of Visa (NYSE:V) spiked by 15% to $ 86.57. In fact, it’s now trading at levels not seen since early 2008 (the stock was off 2.6% in Thursday trading).
But is Visa still a good investment? Let’s take a look at the pros and cons:
Pros
Massive infrastructure. The origins of Visa go back to the late 1950s. Since then, the organization has invested aggressively in building a sophisticated network for payments. It now has coverage across more than 200 countries.
No doubt, the infrastructure is a huge barrier to entry. Keep in mind that Visa is the world’s largest payment network in terms of volume, number of transactions and cards in circulation.
Mega brand. Visa is one of the most widely recognized brands in the world. Again, this is another huge barrier to entry. Ultimately, the strong brand helps to increase the usage of credit cards, which means higher fees.
And Visa continues to invest heavily in marketing and promotion.
Acquisitions. With it enormous cash flows, Visa is nicely positioned for deal-making. One important transaction was picking up CyberSource, which is a provider of e-commerce systems. Then there was a recent deal for PlaySpan, an operator of a payments platform to process digital goods for things like online games and social networks.
Cons
Competition. The industry has tough rivals. The top ones include MasterCard (NYSE:MA), American Express (NYSE:AXP) and Discover (NYSE:DFS). Various countries also have major incumbents, such as China’s UnionPay.
Disruptive technologies. The surge in growth in smartphones poses a threat to Visa. Might a company like Apple (Nasdaq:AAPL), eBay (Nasdaq:EBAY) or Google (Nasdaq:GOOG) introduce an alternative payment system?
Security. So far this year, there have been many high-profile breaches of technology systems. Perhaps the most notable was Sony’s (NYSE:SNE) PlayStation, which resulted in the shutdown of its platform. Basically, a security breach could have a potentially devastating impact on a company like Visa.
Verdict
The new Federal Reserve regulations are certainly a big relief for shareholders. It essentially takes away a big overhang on the stock. Visa can now continue to benefit from its scale and brand. True, there are some threats – but these are far from certain.
As worldwide commerce continues to grow, so will the fortunes of Visa. Thus, the pros outweigh the cons on the stock.
Tom Taulli’s latest book is “All About Short Selling” and he has an upcoming book called “All About Commodities.” You can find him at Twitter account @ttaulli. He does not own a position in any of the stocks named here.
