How To Cash In On Credit Cards

By Casey Murphy AAA

Each day, billions of transactions take place without the use of physical cash or coin. Credit cards have taken hold, and their use is accelerating at breakneck pace. Most people today use a plastic card to pay for their goods, and in most cases, these consumers aren’t even paying for these goods or services with money that they’ve earned yet. As a result, continued dependence on consumer credit — and by extension credit cards — has been one of the contributing factors that have led to the economic rise of the U.S. economy over the past hundred years.

Growth of Card-Not-Present Transactions

The Federal Reserve's recently released 2013 Payments Study, which takes a look at recent and long-term payments trends in the United States between 2000 and 2012, found that the number of general-purpose credit card-not-present transactions (transactions where the individual is unable to show a physical card to the vendor such as those transacted over the internet) have increased at more than three times the annual rate of card-present transactions (situations where the consumer can provide the physical card to the vendor) from 2009 to 2012. Data suggests that card-not-present transactions are increasing more than 25% annually to approximately $1 trillion.

This broad shift in buying behavior is not to be ignored by investors. According to creditcards.com, average debt per credit card that usually carries a balance comes in at $8,220. According to the same site, the average APR on credit cards with a balance is 12.73% as of May 2014. Given the extremely large amounts of money involved you can see why credit card companies make for lucrative investment candidates. (For more, see: Investing In Credit Card Companies.)

Credit Card ETFs...Not Yet

When such a strong investment thesis is formed it's not surprising for retail investors to turn to exchange-traded funds (ETFs). These investment products offer a one-stop solution for retail investors seeking exposure to whole industries, specific commodities, investment strategies or even broad market indexes or derivatives. Unfortunately, there is no exchange-traded fund in the market that gives investors direct access to the credit services industry. Investors who are interested in buying into credit card companies should focus their attention on the major publicly traded general-purpose credit card networks, which are shown in the table below:

Credit Card Company

Market Cap

Visa Inc. (V)

$163.16 billion

MasterCard Inc. (MA)

$89.16 billion

American Express Co. (AXP)

$93.79 billion

Discover Financial Services (DFS)

$28.92 billion

The Economy Matters...But Not As Much As You'd Think

When it comes to consumer-credit, the biggest factor of success as it relates to the credit card companies boils down to the overall state of the economy. When consumers are benefiting from a strong economy and labor market then they tend to make more money, which generally leads to more purchases. On the other hand, when the economy starts to slide consumers get concerned about making their payments, and as a result they generally reduce the number of credit card transactions. While it's important to stay on top of the overall health of the economy, over the past several years it's important to note that increased reliance on credit cards for everyday purchases and the accompanying fees and interest income have trumped short-term economic fluctuations in the eyes of investors.

A Long-Term Look At Visa

When looking into the credit card companies it makes sense to analyze Visa first, as it's the 800-pound gorilla in the sector. Taking a look at the six-year weekly chart, you’ll notice that it has been trading within an extremely strong uptrend. The series of higher lows will be used by investors as a signal of strong upward momentum and they’d likely protect their positions by using a swing lows — such as the one shown in early April 2014 near $194 — as a starting point for placing their stop-loss orders. (For related reading, see: How Visa Counts On Your Free-Spending Ways.)

Looking to Credit Card Cos. for Growth

Coming in with a market capitalization of nearly $29 billion, Discover Financial Services is the baby of the group. What it currently lacks in market cap it has made up for in its five-year performance, which comes in at 363.36%. As you can see from the chart below, Discover Financial has outperformed the entire group of stocks mentioned above, but no matter which way you slice it, you can’t ignore the fact that that the credit services industry has been one of the most lucrative places to put money to work. (For more, see: How Financial Companies Encourage Bad Habits.)

The Bottom Line

The rise of consumer credit and shift away from physical currency has been one of the largest forces of economic progress. As mentioned above, credit card use is steadily growing, and as a result, investors are naturally looking for a tool to profit from this theme. Unfortunately, there is no ETF that has been developed to track the group of credit card companies. Luckily, the average investor can buy shares of Visa, MasterCard, American Express and Discover Financial Services. As shown in the last chart, this group of stocks has performed quite well over time and many pundits expect that trend to continue. (For more, see: How To Trade Credit Card Stocks.)

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