The Green Sheet Online Edition

May 25, 2009 • Issue 09:05:02

Economic indicators suggest cautious optimism

The Electronic Transactions Association's second quarter 2009 economic report tempers slight improvement in the overall U.S. economy with the strength of the payments industry to conclude the industry is holding its own amid trying economic conditions.

The ETA U.S. Economic Indicators Q2 2009 Report states that the economy has lost 5.1 million jobs since December 2007, with almost two-thirds of that loss occurring in the last five months. And with consumer confidence levels at historic lows, the report finds an economic recovery is not yet underway; however, the economy seems to have stabilized.

Citing gains in the Dow Jones Industrial Average and the Standard & Poor's 500 index, the report said, "Although the economy may not yet be in a recovery, it is no longer in the freefall it had been."

Concerning the payments industry, the report highligh-ted four main points:

1. While U.S. consumers' general credit use - and access to credit - is down, credit and debit card transaction volumes continue to rise.

2. Companies focused on retail segments severely affected by the economy, such as the petroleum and hospitality sectors, may need to adjust their strategies.

3. The recession has negatively impacted publicly traded companies more than private sector businesses.

4. Consumers' continued adoption of traditional and nontraditional electronic payment options is serving as a buffer for the payments industry overall; while the volume of total payments decreases, the percentage of payments done electronically is increasing.

A rocky year

The report, compiled by payments consultancy The Strawhecker Group, said as consumers' personal savings rates increase, consumer spending will decrease, which creates "headwinds for processors and acquirers alike."

Thus, increased savings by consumers, coupled with the subsequent decrease in the debit and credit card receivables of retailers, could cause a decrease in the profits for payment businesses, which in turn may force those businesses to find "new sources of revenue as interchange revenues slow down," the report said.

From March 2008 to March 2009, the publicly traded stock of card brands MasterCard Worldwide and Discover Financial Services took significant hits. The stock of acquirers Heartland Payment Systems Inc., TSYS Acquiring Solutions, Global Payments Inc. and Alliance Data Systems Inc. also saw double-digit declines.

(Visa Inc., First Data Corp. and Metavante Corp. were not included in the stock analysis because they were not public companies over the year-long time frame, the report said.)

Keep your heads up

The report noted that credit card charge-off rates have been steadily increasing. The rate has grown from 5.61 percent in the first quarter of 2008 to 7.11 percent as of February 2009. The report cites multiple reasons for the rise, including increased competition among card issuers resulting in more issuers taking risks, high consumer debt levels and the spike in unemployment.

Despite this negative news, the report shows growth in U.S. credit and debit card purchase dollar volume. From the third quarter of 2007 to the third quarter of 2008, the combined Visa and MasterCard debit volume grew at 15 percent. In that same period, combined credit volume growth stood at 3.5 percent.

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