Friday, 20 May 2011

Don't cut up your credit card ... stocks

EW YORK (CNNMoney) -- The nation's biggest banks are sitting out this year's market rally. But credit card companies? That's another story.
Shares of Citigroup (C, Fortune 500), Bank of America (BAC, Fortune 500), Wells Fargo (WFC, Fortune 500) and Goldman Sachs (GS, Fortune 500) are all down this year. JPMorgan Chase's (JPM, Fortune 500) stock is up only 3%. American Express, however, is up nearly 20%, making it the second-best performer in the Dow Jones industrial average.
And AmEx (AXP, Fortune 500) has actually lagged the performance of Mastercard (MA, Fortune 500), Discover Financial Services and Capital One Financial. What's in your wallet? If it was shares of these credit card firms, you'd be a lot richer.
Why are the credit card companies doing so well at a time when banks are still struggling and consumers appear to be still somewhat wary of adding more debt?
Well, the mere fact that consumers seem to be acting more fiscally responsible (lawmakers in Washington may want to take notes) is one thing that's helping the big card stocks, particularly issuers like AmEx, Discover and Capital One.
Those three companies reported their latest monthly delinquency and charge-off figures on Monday -- and it looks like more consumers are paying their credit card bills in a timely fashion.

Anatomy of a $500,000 credit card fraud

Delinquencies at AmEx were just 1.7% of balances in April, an industrywide low. Discover's (DFS, Fortune 500) delinquency rate fell to 3.15% -- the lowest since 2006. Capital One's (COF, Fortune 500) delinquency rate was just 3.4%. What's more, default rates were down for all three issuers too.
"The credit card business has been one of the fastest to rebound from the financial crisis," said Michael Taiano, an analyst with Sandler O'Neill & Partners in New York. "People assumed that consumers would default on credit cards before other loans because there is no collateral. But that hasn't been the case."
Of course, this isn't a great sign for the housing market and broader economy.
Many consumers appear to have come to the conclusion that it's better to hang on to the cards and just ditch the mortgage payment. The foreclosure process -- even before the robo-signing scandal -- tended to drag on and people used that to their advantage.
Still, it goes without saying that if the card issuers have to write off a smaller percentage of loans as bad debt in coming quarters, that's great news for the financial health of these companies.
Taiano said he thinks that charge-off rates for AmEx, Capital One and Discover may even fall below historical averages over the next 12 to 18 months.
"Most of the initial bad accounts have written off and issuers are left with very high quality loan portfolios," he said.
Still, this doesn't explain why Mastercard, and to a lesser extent Visa (V, Fortune 500), are also stock market studs this year.

Buffett reaches for Mastercard

They are network operators, not companies which actually issue cards and collect payments. So their fortunes are tied more to card usage -- in particular the amount of money that gets put on credit or debit cards.
But it looks like the pain at the pump we all are complaining about is probably helping the two card giants.
"With gas prices going up so much, Visa and Mastercard get a boost to transaction volume," said Thomas McCrohan, an analyst with Janney Capital Markets in Philadelphia who covers Visa and Mastercard.
Sure, gas prices could quickly become a negative for Visa and Mastercard and the card issuers if consumers really start to rein in spending elsewhere.
But Visa and Mastercard may also be benefiting from more political puffery in Washington. Both companies have come under attack from lawmakers as part of the Dodd-Frank financial reform bill passed last year.
An amendment to that law introduced by Democratic senator Richard Durbin of Illinois gives the Federal Reserve power to govern the so-called swipe fees that Visa and Mastercard charge retailers for debit card transactions. The Fed is supposed to implement new rules by July 21.
However, Visa and Mastercard and several banks have lobbied heavily against this. And there has been a call from some in Congress to delay the implementation of the Durbin amendment.
Senator Jon Tester, a Democrat from Montana, has introduced a bill to delay the implementation of the Durbin amendment by two years.
It's uncertain whether the bill can pass but investors clearly seem less worried about Durbin than they were last year. Shares of Visa and Mastercard both fell in 2010.
So if the economy continues to slowly but surely improve and the regulatory cloud over the credit card industry lifts, the credit card companies may still be decent bargains.
At the very least, Taiano said the card companies should keep outperforming the bigger banks.


Google, Apple to Expand Mobile Payments

Credit Suisse
Visa and MasterCard are well positioned in the mobile-payment ecosystem.
Mobile payments have garnered substantial interest in recent months, yet no single paradigm for mobile-payment solutions has spurred the technology into widespread use. Visa (ticker: V), with its recently announced open, interoperable and globally functional digital wallet, is especially well positioned to capture mobile-payment demand in our view.
We believe that Google (GOOG), Apple (AAPL) and other Internet players are complements to Visa and MasterCard (MA) in the mobile-payment space.
Payment responsibilities are both Visa's and MasterCard's comparative advantages, and Google and Apple more likely aim to expand the mobile-payment revenue pie through targeted advertising and online apps, in our view.
Visa and MasterCard offer the quickest route to the mobile-payment market based on their open and interoperable infrastructure, rendering them integral players in the mobile-payment ecosystem.
Contactless technologies (e.g., microSD cards, barcodes, stickers) have achieved only limited success largely due to their disparate technology standards.
We expect near field communication (NFC) to overcome this adoption hurdle and emerge as the mobile-payment industry standard due to its superior security, comparability and interoperability.
Several handset manufacturers have made NFC commercially available, and demand should grow as consumers increase their familiarity with the technology and begin to realize mobile payment's value over traditional card payment (e.g., targeted offers, enhanced security).
We foresee mobile-payment demand precipitating in 2012 after initial deployments of NFC-enabled handsets and commercialization of pilots from leading U.S. financial institutions.
Three models will emerge. Comparative advantages of mobile-network operators (MNO), financial institutions and payment networks (e.g. Verizon Wireless [a joint venture of Verizon Communications (VZ) and Vodafone Group (VOD)], Bank of America (BAC), Visa and MasterCard) incline us to believe that three business models will emerge in mobile payments: a bank-centric approach, an MNO-centric approach and a collaborative approach.
These models will likely leverage existing payment rails to bring mobile payments to market, allowing Visa and MasterCard to monetize the 70% compound-annual-growth rate (CAGR) in mobile-payment transaction volumes expected in the next five years.
Economics are favorable for Visa and MasterCard. In any of the aforementioned business models, we believe that Visa and MasterCard will at least maintain their present network fees for credit and debit transactions given the security needs associated with mobile payments.
Additionally, the players could earn additional revenue by providing merchants with value-added services (e.g., data analytics) to aid top-line growth.
Given the recent trends in mobile payments, we reiterate our Outperform rating on Visa and MasterCard.


Saturday, 14 May 2011

US TV station highlights major flaw in Visa/Mastercard/Amex RFID technology

Consumer reports researchers on a US TV station have uncovered a potentially serious security flaw in the RFID systems used on credit and debit cards such as Mastercard Paypass and Visa Paywave.

These RFID systems operate in a similar manner to the London Underground Oyster card and allow Visa, Mastercard and Amex cardholders to 'wave' their card in the vicinity of a reader to pay for a transaction - typically of up to 10 euros – without authenticating themselves.
According to researchers on the Katu TV station, they have been able to create an electronic wand - using kit costing around $20.00 - that extracts credentials from a card, wirelessly, at a range of up to four inches.
This data is then sufficient, they claim, to allow fraudsters to generate unauthorised purchases online.
The TV station says that Walt Augustinowicz, a security expert, demonstrated at a local Portland airport "how scammers can rip off your card number by concealing a reader in a tablet or iPad case and waving it near back pockets or backpacks of travellers."
His device, say the researchers, can pick up a person's card number and the expiration date if it's held just four inches from a wallet or purse.
"With permission from purse and wallet owners, Augustinowicz and the Katu Problem Solvers (a consumer TV programme), scanned dozens of wallets and purses at the airport looking for cards with RFID technology", says the station in its report.
"They found cards with RFID in about 50% of the wallets they tested. Owners were shocked and angered that their credit card information could be `magically' snatched from them," it adds.
After contacting the card associations - Visa, Mastercard etc - that brand and manage the cards for financial associations such as banks, the researchers found that they argued that a scammer would not get enough information to make a purchase, and that the reader "does not transmit the cardholder's name, billing address or the security code on the back of the card."
"That's true, but the Problem Solvers tried to make an online purchase with a name and address that didn't match the account holder. It went through, and a security code wasn't even required", says the TV station in its report, adding that it was also able to generate a fraudulent phone order.
Interestingly, Infosecurity notes, the researchers claim that, in a patent application filed by Visa, its own product development director admitted electronic pick-pocketing is "a major concern for consumers."


PayPal is most trusted for mobile payments

Visa and MasterCard the next most trusted, finds survey
Consumers in nine major markets are most likely to trust eBay-owned online payment system PayPal among other brands for mobile payment systems, according to a survey.
The survey by market research firm GfK found consumers were most likely to trust PayPal with personal financial data.
Google Checkout and credit card companies like American Express, Visa and MasterCard are PayPal's competitors.
Visa and MasterCard figured in as the next most trusted brands, the survey found, followed by Apple, Nokia and Samsung. Mobile operators were behind in the list.
"When we think of trust or security, we probably default to a brand that's been around for a long time. In this case, people have put their trust in a very new company," GfK analyst and report author Ryan Garner told Reuters.
"Whilst financial brands have built up high levels of trust, mobile-based brands such as Nokia and Apple, and relatively new financial brands like PayPal, have the potential to disrupt this seemingly comfortable position," GfK said.