70 years of credit cards and the investment opportunities today

Earlier this week, I spent a whole three minutes applying, and being accepted, for a new credit card. Personally, I think it should take a little longer than that, and people ought to be given a crash-course on compound interest before they make their first purchase.

If used correctly, credit cards offer an easy and affordable way to spread out expenses month by month. If used incorrectly, debt can quickly spiral out of control. A balance of £1,000, unpaid over the course of a year, soon becomes £1,200*. After two years it’s a debt of 1,430*.

A short history of credit cards

Credit ‘coins’ and ‘charge plates’ were used to give credit to farmers as far back as the 1800s, so that they could delay paying bills until after their harvest or their cattle had been sold at auction.

But it was the Diners Club Card that claimed the title of the first credit card in widespread use in 1950 – a full 70 years ago.

The bill had to be paid by the end of the month, however, so it was technically more of a charge card and it was the American Express card, launched in 1958 that really changed things. Within five years, 1 million American Express cards were in use at 85,000 merchants, foreign and domestic. The major banks soon followed with credit cards of their own.

Credit card usage in the UK

In July 2019, 61.9 million** credit cards were issued to UK residents. The same month, 342 million credit card transactions were made** – an average of seven per person.

Going back to my initial point about compound interest, this time last year, the total credit card debt in the UK was £72.6 billion**. This equates to £2,649 credit card debt per household, or £1,386 per adult**.

With typical credit card interest rates at around 18% today**, there is obviously money to be made from our little plastic (or for those of you around in the 1980s: flexible) friends – both by the credit card companies, and investors.

Five managers investing in credit cards and payment systems

American Express

Alessandro Dicorrado, co-manager of Investec Global Special Situations fund, told us about the fund’s holding in American Express:

“The electronic payments market is an attractive industry, with the main players benefiting from fee-based revenues, low capital intensity, attractive network economics, and inflation protection – given that fees are charged as a % of transaction amount.

“It is a growing industry with a durable growth tail-wind, provided by the ongoing substitution of cash payments by “plastic”. In the US and Canada, the most mature markets from this perspective, cards still only represent about 60-65% of all eligible payments. Elsewhere, card payment penetration is far below this, typically ranging between 20 and 40%.

“American Express operates mainly in the credit business, carving out a sustainable niche for itself by targeting wealthy customers attracted by the company’s brand and rewards on offer. The average expenditure on an Amex credit card is approximately four times higher than the average on Visa or Mastercard.”

Visa & Mastercard

Visa and MasterCard are investments held in the Brown Advisory Global Leaders fund.

Portfolio manager Bertie Thomson says: “Visa and MasterCard are benefiting from the ongoing structural shift to the cashless global economy. Both outperformed the broader market in 2019 and both businesses continue to invest in new initiatives to support and enhance future growth.

“Their electronic transaction network gives emerging market populations access to electronic financial services via mobile phones that would otherwise be unavailable. We believe the global payments system is a key ingredient in improving the flow of goods and services in emerging markets, ultimately creating major societal benefits, as well as a powerful platform for future growth.”

Apple Pay

Jeremy Gleeson, manager of AXA Framlington Global Technology, owns Apple. “Our decision to invest in Apple is based upon it being the most successful company in the smartphone market in terms of revenues and profit generated,” he said. “Apple Pay has been an important product for them in terms of their foray into financial services and has been a success with customers due to the convenience it provides – but it in itself is not a huge revenue generator.

“Apple Card^ is an extension of their Apple Pay product – as in some instances, Apple Pay might not be accepted if the customer needs to present a physical card in order to complete a transaction, or for when there are limits on the maximum value of a transaction conducted via Apple Pay.

“Apple Card currently has no fee (no annual charge, international fees, or late payment fees) – making it an attractive alternative compared to some cards issued by major banks in the US. There are also additional security benefits provided, as the card does not display a card number or Card Verification Value (CVV) on it – so if your card is lost, damaged or stolen, you can immediately get a new number issued, allowing you to immediately resume using the virtual version of the card that you will have on your Apple Pay application.

“We think these types of attributes will increase in attractiveness and go far beyond what traditional (bank) card issuers have historically provided; and over time would expect them to attain higher shares of this fragmented market.

Western Union

On a slightly different tack, TB Evenlode Global Income invests in Western Union. Co-manager Chris Elliott told us:

“Western Union is a leader in global money movement and payment services. The core segment, consumer-to-consumer, enables global money transfers usually within minutes of transfer initiation. This utilises a physical network, with agent locations in more than 200 countries and territories, and a compliance network, used to prevent money laundering and fraud.

“The company is increasingly seeking to supplement these services with online money transfers, which have been built into several global social media networks.”

PayPal

James Thomson, manager of Rathbone Global Opportunities, has no fewer than four payment companies in his top ten – including PayPal.

James said: “We’ve a number of payment companies in the portfolio, which together form around 9% of the fund. There is an ecosystem around payments, and getting paid is obviously a mission critical business function. So we own different companies that are attacking this in different ways, although if one isn’t successful, it isn’t a house of cards – there’s balance and diversity.

“We own Visa and Mastercard – the payment networks, the rails that transactions run over. They don’t take credit risk, just a very small fee per transaction. But as the shift from cash to card accelerates, and the overall volume and value of payments rises, they should benefit.

“PayPal is a payments platform. It links merchants and consumers with a particular focus on e-commerce. There is also emerging growth coming from person-to-person money transfers using Venmo.

“Finally, we own merchant acquirer Global Payments, which provides payment terminals to small businesses. But increasingly they are wrapping value around the transaction – linking it to the small businesses accounting software, inventory management, and a loyalty program. This creates a much stickier link than just a terminal.”

*Source: www.thecalculatorsite.com, £1,000 with 18% annual interest rate calculated monthly for one year.
*Source: www.thefinder.com, UK credit card statistics 2019
^Apple Card is not available in the UK at present.
All holdings correct as at 31 January 2020