Credit Services Industry

1. Credit Services Industry Team B

2. Industry Screen

3. Business Model Comparison American Express (NYSE: AXP) and Discover Financial Services (NYSE: DFS) are involved in the lending business. They issue cards, process transactions and lend. Both firms maintain a closed-loop network, issuing cards carrying their brands and establishing direct relationships with merchants, as well as lending to their cardholders. AXP DFS American Express generally targets big spenders and makes most of its money from its network, while Discover's customers are primarily middle class, with the firm relying on lending for most of its profits.

4. Business Model Comparison In contrast, Mastercard (NYSE: MA) and Visa (NYSE: V) simply charge a fee for every transaction done via their payment networks. All financial risk lies with the bank issuing the card. MA V

5. Business Model Comparison American Express (NYSE: AXP) and Discover Financial Services (NYSE: DFS) get a double boost when things are going well since they profit at the same time from growing consumption and expanding credit demand. Currently, American and Discover are showing healthy credit performance over the last few quarters. However, as highlighted by the 2008-2009 financial crisis, these businesses are exposed to credit risk on a long-term basis which represents a source of uncertainty for investors.

6. Secular Market Trends Plastic has been, and will continue replacing cash as a payment method all over the world for many years to come. • Cards accounted for a 48% percent of total U.S. consumer purchases in 2010, a number expected to grow to 59% in 2015. • Globally 85% of transactions are still done in cash. 

7. Purchase Transactions Outlook

8. Credit Card Evolution (US)

10. Credit Card Transaction Processhttps://www.youtube.com/watch?v=UPMzNgOTH8s

11. You can group the four most familiar credit card companies in pairs with Visa and MasterCard using one system of transaction and American Express and Discover another.  There are other differences between them, too. Visa, MasterCard  Visa and MasterCard do not issue cards. Rather, they function as intermediary organizations creating networks between financial companies, including major banks and credit unions that issue cards bearing the Visa or MasterCard name, and merchants providing goods and services. The issuer, a term describing the banks, and merchants pay fees to participate in the Visa or MasterCard networks. Visa and MasterCard set and maintain rules governing use of their branded cards. American Express, Discover Whereas the Visa and MasterCard systems engage many organizations, American Express and Discover are akin to one-stop shops. That is, they issue their own cards, authorize purchases and settle both with consumers and merchants.

12. When a cardholder requests a purchase via either Visa or MasterCard, it triggers a multistep processes. The merchant submits the charge to his or her bank, which requests authorization from the issuer of the card. If there are enough funds available in the cardholder's account, the issuer, and subsequently the merchant's bank, can authorize the transaction. At the end of a business day, a merchant sends a batch of sales receipts to its bank, which distributes them to the appropriate issuing organizations. For example, the merchant's bank will send separate batches to Chase, Bank of America or Barclays. Each issuer subtracts a fee from the amount charged. The issuer shares this fee with Visa or MasterCard. The card network sends the remaining amount to the merchant's bank, which subtracts its own fee before advancing a final total to the merchant. https://www.youtube.com/watch?v=UPMzNgOTH8s

13. Visa and MasterCard are intermediaries, not card issuers. • American Express and Discover issue, authorize and settle themselves. • American Express charges a higher fee, has limited circulation. It also didn't allow revolving payments until 1987. • Discover has the smallest circulation of the four largest card types.

21. Mastercard (MA) Types of Customers. Note growth in # of Cards for Debit/Prepaid GDV by Region GDV = Gross Dollar Volume

22. MA 2013 Annual report, pg 5. Cross Border Fees: The company collects a fee on all international transactions which has historically been about 0.8% of the total transaction amount. The company has been under regulatory pressure to reduce these fees, and we currently forecast a slight decline over our forecast period. However, should the company be forced to cut fees to below 0.6% by the end of the Trefis forecast period there could be a downside of about 6% to our current price estimate.Authorization, Settlement and Switch Fees: MasterCard charges issuers and acquirers fees for the authorization process through which MasterCard validates credit cards for each transaction. The company also charges settlement fees for the exchange of funds between issuers and acquirers as well as switch fees for the use of the MasterCard debit switch, which transmits financial messages between issuers and acquirers. These fees are charged on a per-transaction basis. While debit card fees were raised in the past few years, we currently forecast these per-transaction fees declining from $0.08 to 2006-2007 levels of about $0.07 by the end of our forecast period. However if the company is able to combat pricing pressure and keep these fees constant, there would be an upside of nearly 5% to our price estimate.

23. VISA GOES HERE

24. Overall • Secular market trends are towards growth and opportunity in plastic and electronic payment transactions. • VISA has the highest global market share by transaction volume. • MASTERCARD is outgrowing VISA in International markets. • Does either company represent a better investment return opportunity than CREDIT ACCEPTANCE CORPORATION?