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When stock pickers dream, they dream of charts like those of Visa or MasterCard. The payment processors' shares have more than doubled since the start of 2011, in a beautiful steady climb. Sure, the shares were depressed back in 2010 – spending was weak in the aftermath of the financial crisis, and there was uncertainty about the part of Dodd-Frank regulation that capped swipe fees on debit transactions. Spending has returned and the regulations have proven to be manageable, but the driver of the gains has been the move towards a cashless society.
According to The Nilson Report, half of consumer payments in the U.S. were done with cards in 2011, up from about 40 per cent in 2006. By 2016, over 60 per cent of payments are expected to be made with cards compared with just half that with cash, cheques, money orders and the like.
But the thing about secular trends is that they eventually mature. Cash-to-cards still has room left, but most of the growth will come from outside the U.S., in emerging markets. MasterCard estimates that 85 per cent of the world's transactions are still done with paper. Both Visa and MasterCard are expanding their presence in the developing world. And these companies will also prosper as global spending rises generally.
There are threats. For a start, regulators could crack down further on fees. And there is the risk of disintermediation, particularly in mobile payments. In the next phase of the shift away from cash – the move from paying with a piece of plastic to a phone – new entrants could try to change payment processing to capture, or in the case of merchants avoid, some of the fees.
The incumbents have a key defence: banks', companies' and consumers' trust of their networks. That helps explain why both companies trade at multiples of more than 20 times this year's earnings. At that level, the secular trend alone is not enough to ensure further outperformance. The economy has to co-operate, too.