Buy now, pay later

Finweek English Edition - - INVESTMENT - Drikus Com­brink, port­fo­lio man­ager at PSG Kon­sult

It is a phrase that has come to def i ne t he mod­ern econ­omy. Never be­fore in his­tory, as mea­sured by house­hold debt to GDP, have in­di­vid­u­als ex­changed so great an amount of fu­ture con­sump­tion for the present. House­hold debt to GDP in the US is at 90%, i n much of Europe it stands at close to 60% and in the UK it is a stag­ger­ing 110%.

In South Africa we are cur­rently at a level of 76%, com­ing off a level of just 35% a decade ago.

There is a temp­ta­tion to ex­plain away th­ese high lev­els of debt at the hands of record low in­ter­est rates. Most of th­ese lev­els were in fact reached pre-cri­sis and pre-in­ter­est rate col­lapse. In­ter­est rates are only one vari­able ble af­fect­ing the sup sup­ply and de­mand for money. The other vari­able is called the he ve­loc­ity of money.

Money ve­loc­ity can be de­fined as the rate at which money ney changes hands in the econ­omy. Ve­loc­ity city in the US is cur­rently at an all-time me low due the pru­dence of bank­ing in­sti­tu­tions.

This ex­plains why low in­ter­est is hav­ing a hard time ime stim­u­lat­ing de­mand. But what got the de­vel­oped economies mies to high con­sumer debt lev­els was partly de­clin­ing in­ter­est rates and largely a struc­tural jump in in the ve­loc­ity of money. ney. The change in ve­loc­ity came about with the advent of mod­ern bank­ing prod­ucts. The one bank­ing prod­uct ad­vo­cat­ing “buy now, pay later” more than any other is the credit card.

The use of credit cards in the US first started to ac­cel­er­ate in the Eight­ies and re­ally got mo­men­tum in the late Nineties. This is roughly when money ve­loc­ity made a struc­tural break.

Con­sumer debt lev­els in most emerg­ing mar­kets are markedly lower than those of their emerg­ing-mar­ket counter parts. The main dif­fer­ence once again is not in­ter­est rates, but that 2.5bn peo­ple on the planet do not have ac­cess to mod­ern bank­ing fa­cil­i­ties. Per­haps an op­por­tu­nity for the bank­ing sec­tor, but it is bur­dened with all sorts of risks, cap­i­tal and other reg­u­la­tory re­quire­ments. Not to men­tion st r i fe com­pe­ti­tion. Th­ese fac­tors don’t pro­vide hand­some re­turns to share­hold­ers.

En­ter the credit card com­pany. The credit card com­pany does not is­sue credit cards, does not carr y i nter­est rate or credit risk and need not carry any debt. Reg­u­la­tory risk is the only in­hibit­ing fac­tor. Au­thor­i­ties are still try­ing to f ig­ure out how to ap­por­tion fraud li­a­bil­ity. Th­ese com­pa­nies match and clear trans­ac­tions be­tween bank­ing in­sti­tu­tions. They are in fact not credit card com­pa­nies, but data pro­ces­sors. They are not de­pen­dent on tra­di­tional credit/debit cards, but get in­volved in any trans­ac­tions where match­ing and clear­ing are re­quired.

There are only t wo main play­ers in this sec­tor, Visa and MasterCard, and that gives them pric­ing power. MasterCard is the pre­ferred play from a growth per­spec­tive. It is the smaller of the two and has an emerg­ing mar­ket ex­po­sure of 60%. Don’t be per­plexed about pay­ing $580 per share or a P/E of 25. MasterCard con­tin­ued to grow profit through the f inan­cial cri­sis and has been growi ng it ever since at 38 % per an­num. Prof it growth for the medium term is pro­jected to be above 30% per an­num.

MasterCard is a fast- grow­ing cash cow with lit­tle com­pe­ti­tion, lit­tle busi­ness and bal­ance sheet risk, and has put away a $2bn cash re­serve for reg­u­la­tory head­winds. This is the clos­est thing to be­ing the holy grail of in­vest­ments.

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