Credit Card Giants Grow Anxious - Analyst Blog

While lobbying charges for Visa Inc. (V), American Express Co. (AXP) and Discover Financial Services (DFS) declined for the third quarter of 2010, they rose for MasterCard Inc. (MA).  On Friday, Visa and MasterCard reportedly spent $1.1 million and $0.84 million, respectively, during the third quarter of 2010. In November 2010, Discover reported that it spent $0.23 million on lobbying while American Express spent $0.46 million for the same period.

Visa's lobbying costs declined 28% year over year and sequentially from $1.53 million, for Discover they decreased by almost half year over year and 18% sequentially. American Express' lobbying costs dipped 29% year over year and 27% sequentially. However, lobbying charges for MasterCard surged 24% year over year from $0.68 million but declined drastically from $2.33 million reported in the sequential quarter.

Lobbying Details

Visa lobbied the Congress, the Federal Reserve System and Federal Trade Commission for multiple issues such as credit card regulations, fees charged to merchants for accepting card payments and the creation of a consumer protection agency.

In the July-September period, MasterCard took the federal government into its confidence regarding the regulation of consumer financial products, interchange fees, online payments, data security, Internet-based card purchases and Internet gambling, among other issues. Overall, the company lobbied the Congress, the Federal Reserve and the Treasury Department.

American Express contracted with the Congress, the Treasury and Energy departments, the Federal Reserve, the Postal Service and the Internal Revenue Service on credit card reform law, including gift card issues and small business credit card practices. The company's lobbying issues also included tax laws, online data collection, card interest rate caps, changes in mail delivery and online behavioural advertising.

Meanwhile, Discover took help of the House of Representatives and the Senate on similar issues related to credit card lending, regulation of the fees charged to merchants for processing transactions and the financial regulatory overhaul.

Nitty-Gritty on Financial Reforms

The credit card regulations were enforced by the CARD Act (The Credit Card Accountability, Responsibility and Disclosure Act) of 2009. It laid down various provisions that could regulate the fees levied on customers by credit card companies.

Further, the Dodd-Frank Act signed in July 2010 also limited the interchange fees that card issuers charge merchants for using the card, which constitute a major component of card issuers' revenues. These issues have been concerning the card giants.

The sweeping new Dodd-Frank Act was enacted to enforce greater regulation on banks and capital markets following the 2008-09 financial meltdown and to protect consumer interests. The Act entails new fees and sets limits for the card companies, modifying the interest rate hike and charging over-the-limit fees. Apart from this, the law has imposed new restrictions on the $450 trillion derivatives market, and developed a new consumer-protection division for mortgage and credit-card products.

Although major repercussions of the financial reform are expected to be felt in the long term, it has already started to influence our cautious outlook on the card giants. Though the new rules will protect credit card users from unreasonable late payment fees, interest rate hikes and other penalty fees, it could adversely impact the profitability of these major card issuers.

Nevertheless, we believe that all the four card giants discussed above are fundamentally strong stocks and are expected to deliver well with the market stability. Hence, we maintain a Neutral recommendation on all the four stocks with a Zacks #3 Rank in the short term.

 
AMER EXPRESS CO (AXP): Free Stock Analysis Report
 
DISCOVER FIN SV (DFS): Free Stock Analysis Report
 
MASTERCARD INC (MA): Free Stock Analysis Report
 
VISA INC-A (V): Free Stock Analysis Report
 
Zacks Investment Research