Payments industry watches for inflections in mobile, credit

Bloomberg IntelligenceAlison Williams, Senior Analyst

Apple Pay’s potential success may be a key development in mobile payments’ long-awaited and debated prospects, given Apple’s history as a game-changer, its network advantages and help from networks’ push for chip technology adoption.

The spinoff of PayPal, also much anticipated, may have competitive implications. For card issuers, historically low credit metrics and a pickup in loan growth indicate a potential inflection point, though further U.S. employment gains may limit cost increases.

Impact: Mobile payments will likely be less meaningful to Apple than PayPal, the payments business being spun off by EBay. Leading networks Visa, MasterCard, American Express and Discover, as well as top card issuers are also affected by industry trends

PayPal spinoff, Apple Pay are key in payments as mobile develops

Apple Pay has the potential to accelerate growth in the emerging mobile-payments market. Apple’s culture of filling a need customers didn’t know they had offers promise to spur mobile-payments adoption, while an Apple failure may make the strongest case yet against the opportunity.

Adoption of EMV card chip technology may aid mobile penetration. The spinoff of PayPal from EBay may allow it to better capitalize on the evolving payments landscape.

Benign credit may support near-term credit card issuer profits

Low credit costs have been a card profitability driver for issuers since the crisis. Delinquencies in 1Q15 are at their lowest level since the Federal Reserve tracking began in 1Q91. Employment is a key driver, and further improvement should help contain costs.

Modest industry growth in recent years should also limit increases, as costs tend to follow growth with a delay. Improving loan growth lowers credit ratios, though it adds to costs through reserve building. Underwriting quality is key to watch.

Impact: American Express and Discover have the highest credit card concentration among top lenders. Capital One, Citigroup and JPMorgan have relatively higher consumer exposure among bank peers, driven by relatively higher credit card concentration.

EMV card technology may increase 2015 costs, improve long-term profit

Costs of implementing more-secure EMV chips may add to U.S. card issuers’ 2015 expenses, though lower fraud costs could support profits. U.S. credit card fraud cost the industry $7 billion in 2014, a 50% increase since 2011, according to Aite Group estimates, with issuers bearing most of the related expenses.

An indirect negative is lower potential payment volumes as card fraud may deter consumer use. Propensity to use cards may improve if fraud incidence is lowered, supporting higher volume and related revenue.

Impact: Bank of America, Wells Fargo, JPMorgan, Citigroup, Capital One, American Express and Discover Financial are among issuers offering chip cards, though penetration is likely to increase across portfolios. Increased adoption should reduce industry fraud costs.

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