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Is Visa affected by delinquency?

Visa

The answer is easy – not, [tag]Visa[/tag] (V) is not affected at all. You may oppose this answer arguing that it is a [tag]financial institute[/tag], so when people stop paying their [tag]debt[/tag] in their Visa accounts the company gets hit. It is a big misunderstanding how Visa operates. Many people believe that Visa lends [tag]money[/tag] and even a friend of mine who trades [tag]stocks[/tag] told me when we spoke together and I informed him I bought some shares, that this may have been a dangerous move because these days delinquency ratio would grow up significantly.

However Visa and [tag]Mastercard[/tag] (MA) are probably the only two companies I know of who operate on different basis. Unlike American Express (AXP) Visa and Mastercard do NOT lend money.

They are card issuers only.

They have agreements with [tag]bank[/tag]s worldwide to issue their cards to banks’ clients and manage all [tag]card transactions[/tag] for them. So if you hold your Visa [tag]Capital One[/tag] (COF) plastic in your wallet, it means that Capital One bank lent you money through Visa credit card. Whenever you use this plastic and buy a product in your favorite shop or grocery store, you borrow from Capital One. What Visa does in such transaction? Visa manages a [tag]clearing center[/tag] to process this transaction. Visa takes the money you just spent from your account you have with Capital One and transfers it to a grocery store’s account. Visa guarantees all is smooth, clear, fast and without errors (however these may occur). For this service Visa gets paid around 3% [tag]commission[/tag].

If you start having a hard time [tag]paying off your debt[/tag], it will be Capital One who will suffer, not Visa. Visa already got its share on your business and has nothing to do with your debt. Isn’t this a wonderful business? Getting paid whenever anyone worldwide purchases something no matter what it is?

Visa gets paid no matter what account type you have, whether you use your [tag]credit card[/tag] or [tag]debit card[/tag]. Whenever the plastic used for purchase contains Visa’s logo, it’s their payday when you use it for your purchases.

Why I am writing about this? I could see several articles on the web related to delinquencies and Visa, which may lead to misunderstanding how this company makes money. When, for example, you pull the web site on MSN Money about Visa you could see the following tab:

News about V

“News about V” with the article “1Q credit card delinquency rate jumps 11 percent” which may lead you to an impression that this is a negative news for Visa. It is not. It is misleading, wrong and it won’t affect Visa at all.

So what are Visa’s risks in its [tag]business[/tag]? Basically none. Visa is however dependent on [tag]consumers[/tag] behavior, whether they are spending or not. With improving economy people will spend more and more and Visa will take its share on this spending – sooner or later. This is quite significant issue. Today I found an article Sell Visa. Now. (V) full of pessimism and … how to say that “politically correctly”… well you fill the missing words.

The author of this article believes Visa is overbought and will be hit by economic issues. The argument is that analysts predicts 17.4% growth every year until 2012, which is not sustainable because banks are slashing credit limits and people are less spending. Yes, this is what WAS happening recently. However the author oversees one thing: as the economy starts getting better (and it slowly is happening) banks are greedy enough to start lending more to get their share. I do not believe credit limits will be slashed forever.

Another argument of the author was that using debit cards won’t make up credit drops. However it is already happening. Debit transactions during 2008 surpassed credit by 3 billions of dollars worldwide and totaled at 50.3%, so where the author got one third ratio I do not know. US consumers used debit in 70% of all Visa’s transactions last year. 52% of debit transactions were for non-discretionary purchases such as food. You can find more at Visa’s web page. So selling Visa now? Fat chance! Unlike Morgan Housel I say buy, buy, buy. Any time Visa makes new high low, buy more shares; there is nothing wrong about this stock.

You can also find a good analysis on Kevin’s stock picks page, which I agree with what he is saying about this company.


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