Buy now, pay later
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.