The past year was quite eventful for the credit card industry. The Dodd-Frank financial reforms bill shook the industry with a cap on debit card interchange fee while the decline in credit card default rates and delinquencies provided some comfort for the industry. Developments in the mobile payments paved the way for growth in transaction volumes supporting the stocks of Visa (NYSE:V), MasterCard (NYSE:MA), and Discover Financial (NYSE:DFS) that rose 44%, 66% and 30% respectively last year. In this article we look at the top three events for the credit card industry in 2011.
Debit Card Interchange Fee
The most controversial issue last year was the government regulation of the debit card interchange fee. The Durbin Amendment to the Dodd-Frank financial overhaul bill, which went into effect on October 1, 2011, changed the interchange fee from an average of 44 cents per transaction to 21 cents per transaction with an additional amount to cover losses from fraud. The cap on interchange fee was intended to resolve a bitter issue for merchants who paid a significant portion for their profits to banks for transaction processing but it also ignited unintended consequences for consumers, such as banks dropping rewards for debit card purchases and proposing additional fees for debit card usage.
Decline in Default Rates
Credit card defaults and delinquencies declined during most months last year. Default rates declined as the credit card issuers closed risky accounts, cut credit limits on millions of accounts, and tightened lending standards to cut their risk of defaults and late payments. Tighter lending environment brought an excessive system of credit card borrowing under control. Many of the borrowers have diligently paid down their balances and used other forms of payment to avoid the high interest rate penalties.
Growth in Mobile Payments
Smartphone users rejoiced last year when Google Wallet debuted in September and mobile payments became a viable payment option. With mobile payments, consumers can make purchases or transfer money with their mobile phones.
Credit card companies are busy convincing retailers to spend money to buy the equipment necessary to link cell phone to cash registers, but retailers have been reluctant to embrace this new technology as the same fees associated with cards will apply to mobile payments. As a result we see this as a trend that will play out over a couple of years.
Our price estimate for Discover stands at $26, almost same as the current market price.