Retailers breaking ties with Visa
Target, Macy's and Bloomingdale's store-brand credit cards will no longer be serviced by Visa.
In order to spur spending, retailers have been offering shoppers discounts off their total ticket after signing up for their store-brand credit cards. And more often than not, those cards carry the Visa (V) logo.
Well, some merchants appear to be tired of Visa skimming off the top of those sales. This week, Target (TGT) announced it will no longer issue cards with the Visa logo and instead encourage shoppers to sign up for its own plastic “REDcard.”
Admittedly, Target’s move alone will not sink Visa. Target credit cards accounted for about 1% of payments Visa processed in the U.S. last year, according to industry analysts. But if this trend picks up across other stores, it could really erode the company’s bottom line.
Credit card companies are doing cartwheels to increase their profits amid weak consumer spending, so this comes at a bad time. Visa rival MasterCard (MA) just launched an online retail site as a way to prop up profits, but Visa can't pull of anything on this scale quickly enough to offset the impact. American Express has been one of the market's best performers since the 2009 lows, but it too appears to be slowing down.
Back to Visa: Target is the second-largest discount chain in the U.S., behind retail behemoth Walmart (WMT), so when Target moves, the rest of the sector often follows. And while Visa’s cash flow may not be severely impacted, it’s sign-up rate surely will be -- Target is the third-biggest issuer of Visa credit cards, with 23.9 million cards outstanding, and represents the 15th-biggest issuer overall by purchases, according to the Nilson Report.
Granted, those numbers are a bit slippery since Target Visa cards could be used anywhere, and the branded credit cards Target will be using now can only be swiped at Target stores or at Target.com. Still, the impact is not to be overlooked -- especially considering that consumers aren’t swiping the plastic as much as they used to.
It’s worth noting that the door swings both ways on the consumer credit front. Bad credit card debt remains a problem for many financial companies, and Target is not just taking on the benefits of greater credit card issuance but also the risk.
The real question, of course, is whether consumers are willing to spend in any form. Target is hopeful after a double-digit increase in same-store sales in March -- and with a track record of four consecutive quarterly earnings surprises, things appear to be looking up. Target stock has seen a whopping 17 upward revisions to earnings estimates in the past month, including 13 in the last week alone. That bodes very well for the company’s May 19 earnings report.
If Target can lure more shoppers, giving Visa the boot could really help the retailer maximize its profits in the months ahead. And if other retailers follow the lead of Target and Macy's, Visa could start to see the impact on shares.
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The company has made at least 4 acquisitions in the space, and few people have paid any attention.
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