US card payments: shrugging off shrinking balances

Credit cards updates

Americans put away their plastic last year as the pandemic triggered the worst economic downturn in decades. Credit card debt fell by $108bn in 2020, according to data from the Federal Reserve Bank of New York. This marked the largest annual decline since the data series began in 1999.

The decline has continued in 2021, with card balances falling another $49bn in the first three months of the year.

The enthusiasm for paying down credit card debt is a negative for lenders that make money from charging double-digit interest rates on it. Capital One recently said payment rates, though easing, were “breathtaking”. American Express reported a 4 per cent year-on-year fall in net interest income in the second quarter.

But interest payments are just one part of the picture. They accounted for less than a fifth of American Express’s quarterly revenues. The overall total was up by a third.

Anticipating the rebound, investors have pushed up shares in the payments card business to more than double their March 2020 lows. Synchrony Financial, which provides credit cards for stores such as JC Penney, Gap and American Eagle Outfitters, has nearly quadrupled in value over the period to a new peak. Capital One Financial and Discover Financial have both made similar gains to trade at or near new highs.

Payment card companies are benefiting from both reduced credit losses and the bounceback in consumer spending. Payment processing giant Visa last week reported a 39 per cent year-over-year rise in the number of transactions it processed in the latest quarter. Chief financial officer Vasant Prabhu said the business was back to where it was before the pandemic.

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Amex cards are frequently used by travellers. The group should benefit most from the slow rolling off of travel restrictions. But its shares — which trade on a multiple of 22 times forward earnings — are no longer cheap. Synchrony, Capital One and Discover, all trade at less than half that. They offer a better way for investors to benefit from a return to rising borrowing balances among Americans.

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