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Credit or Debit? And Which Card Stocks Stand to Benefit?

Card stocks get another look after recent trend reversal

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Credit CardsAfter a brief hiatus following the 2008 financial crisis in which debit card use outpaced credit card use, it appears credit is back on top. According to First Data, a major card processor, growth in credit card usage has outpaced growth in debit card usage in 2011, including the post-Thanksgiving shopping binge we call Black Friday.

After the 2008 meltdown — a crisis that was caused from an excess of debt — consumers “got religion” for a while, cut up their credit cards and chose to live within their means by using debit cards tied to their bank accounts. But ironically, the Dodd-Frank financial reforms — ostensibly rammed down the banking industry’s collective throat to protect us from the evils of irresponsible lending and borrowing — made credit more appealing than debit for banks and consumers alike. The Durbin Amendment to Dodd-Frank limited the revenues that banks could earn from issuing debit cards, leading some to charge monthly fees to consumers for debit card use. Not too shockingly, in many households, the debit cards got cut up and the credit cards came out of the desk drawer.

Only in Washington, D.C., could a law intended to encourage responsible financial behavior lead to an increase in credit card use.

As investors, it doesn’t pay to fret about politics. Instead, we should simply follow the money to see who best stands to benefit. We’ll start by looking at the two dominant card companies, Visa (NYSE:V) and MasterCard (NYSE:MA).

Visa and MasterCard are well positioned to profit from two powerful macro trends:

  1. The shift to a global cashless society.
  2. The rise of the new emerging-market middle class.

Every year, a larger percentage of purchases are made using plastic. In many U.S. cities, even the taxi cabs take credit cards. So whether the boom times return or we sink back into recession, the revenues of the major card companies should continue to grow. The explosive growth in Internet commerce will only accelerate this.

There always will be some demand for the anonymity of cash, and the paper check will continue to be with us for a while. But the march toward electronic payments is inexorable.

As is the rise of the emerging-market consumer. In much of the world outside of America and Europe, a large percent of buying and selling is done in cold, hard cash. Given the long history of banking crises and government confiscation, many emerging-market consumers prefer to keep their savings out of the bank and under their respective mattresses.

Or at least they used to. As living standards improve and millions of consumers join the ranks of the middle classes, there is a growing preference for electronic payments. And this trend isn’t going to be reversed anytime soon.

I’m somewhat partial to Visa, as the stock has been one of my best-performing recommendations of 2011. And barring a dramatic turn of events, Visa also will be the winner of InvestorPlace’s “10 Best Stocks for 2011” contest.

Article printed from InvestorPlace Media,

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