Chris Hondros
Some of the basics and metrics we like to track are retail spending trends by month. Mastercard provides information per month in its SpendingPulse report, and also provides estimates for the upcoming holiday shopping season. We like those Mastercard metrics because they capture in-store and online retail, for all the payment bureaucracy (not just MA’s).
Before we look at the biggest holiday season, let’s take a look at the spending trends of the past two months. In August 2022, Mastercard SpendingPulse reported that US retail sales increased +11. 7% YoY and +20. 4% from 2019. August eCommerce sales increased +8. 9% and +100. 2% compared to the same Covid era. Sectors showing strong double-digit expansion are restaurants, airlines and lodging. In September 2022, Mastercard SpendingPulse reported that US retail sales accelerated sequentially and grew +11. 0% YoY and +24. 6% from 2019. September eCommerce also accelerated sequentially and increased +10. 7% and it was +90. 3% higher than the same Covid era. Store sales also remained strong at 11. 1% year-on-year. Sectors showing strong double-digit expansion were electronics, as well as restaurants, airlines and lodging last month, while retail sectors that contracted or slowed were luxury spending and hardware/housing.
During this upcoming holiday season (which runs from November 1 to December 24), Mastercard estimates that U. S. retail sales will be in the U. S. The U. S. economy will grow 7. 1% year-over-year. Last year, U. S. retail sales were in the U. S. U. S. growth grew 8. 5% year-over-year, driven by the pandemic — induced spending and pent-up demand. In addition, this impressive expansion compared to a low 0. 4% in 2020, which obviously impacted through Covid-19.
Retailers are making plans to ensure in-store experiences, with the purpose of attracting shoppers to their stores. Mastercard expects vacation vacations to increase traffic and inspire consumers to increase spending by 7. 9% year-over-year. E-commerce continues to grow, thanks in part to its convenience, and grows up to 4. 2% year-on-year (up 70% before Covid).
Clearly, spending trends remain fairly strong, despite all market concerns. As Visa(V) CEO Al Kelly just said at a business conference, “the client feels pretty strong and we just don’t see those negative effects on our numbers. “Brian Moynihan, CEO of Bank of America (BAC), echoed those bullish sentiments when he said, “U. S. customers are not in the U. S. “The U. S. is in good shape and will continue to spend at its best. “
The banknote industry has been a critical component of our portfolio. Why are those spending signs so resilient, despite so much economic uncertainty?We believe this has a lot to do with the slow and steady migration of cash, but also with the significant increase in the card acceptance footprint. In 2012, Visa had approximately 25 million acceptance issues worldwide. Now, Visa has 80 million and the number exceeds one hundred million, if it comes with payment facilitators like Square, Adyen and Stripe. In the last decade, the number of card acceptance problems globally has quadrupled. This happens because payment networks take advantage of generation and focus their attention on new categories such as rental, parking, ATMs, etc.
As we continue to point out, global card penetration is still low. While it is estimated between 60% and 70% in the United Kingdom, Canada and the United States, it is only 53% in Ireland, 46% in Chile, 34% in Spain, 29% in Poland, 23% in Germany and 21% in Mexico. As a result of these factors, we are confident that we are still in the early stages of this favorable wind of secular bill growth.
No one deserves customer spending to account for about 2/3 of U. S. economic activity. UU. La U. S. Bureau of Economic AnalysisThe U. S. highlights the expansion in PCE (personal consumption expenditure) and is a big graph (top right, unless it’s for a little Covid blink). PCE has been one of the key elements in the development of our economy and, thank God, Americans love to shop around and spend their hard-earned money.
Before we dive into GS and its Apple Card, we thought it would have value in typical bill economics. Credit card interchange fees are set through payment networks (Visa, Mastercard, and American Express (AXP)) and then reassessed through merchants. acquirers and payment processors, with a small surcharge for merchants. This general transaction fee is called the MDR (Merchant Reduction Rate). Interchange fees range from a minimum of 1. 3% (grocery stores or tobacco stations, alcohol, etc. ) of sales. This wide diversity depends on the network used, the type of merchant, the length of the transaction, and a host of other factors. We have created this pie chart to show how those fees are paid. redistributed to each of the parties, so one can easily perceive the economics of a typical $100 credit card transaction. As you can see, the vast majority of the economics goes to the card issuers and banks, to assume the vast majority of the risks while a portion of those fees goes to the payment networks.
Warren fisherman
As just mentioned, spending trends remain healthy. One of the reasons we don’t like to invest in the auto emission industry is that those are the entities that take on the greatest threat in the lyrics ecosystem. As our pie chart above shows, auto issuers earn about 70% of the MDR, yet they take on the maximum threat in every transaction. Worse yet, there is no collateral for those lines of credit, unlike a space or car that can be repossessed or repossessed. In addition, they attract consumers with loyalty and rewards programs, which in the end have significant costs.
Although our payment networks, merchant acquirers, and payment processors don’t have the same credit risk point, we like to monitor default trends. We analyze Master Trust’s monthly loan data to see how consumers are spending and whether they are paying fees. Companies such as American Express, Bank of America, Citigroup (C), Discover (DFS), JPMorgan (JPM), Synchrony (SYF) publish monthly information on payment rates, overrun spreads, money and unpaid. As consumers miss minimum payments, balances can swell, especially when you consider that the average interest rate (according to Bankrate) on U. S. credit cards is not enough. UU. es 17. 96%. This is the highest interest rate recorded since 1996. Analysts can track 30-, 60- and 90-day delinquency rates, which unfortunately leads card issuers to cancel accounts at a loss.
What are the recent trends in delinquency? American Express has a premium visitor and its delinquency rates are low, at 0. 8% (August 2022). Discover is sometimes in the middle of the group and has an August delinquency rate of 1. 96%. 57 basic problems overcame year after year, an increase of 40%. JP Morgan and Bank of America just released their third-quarter effects and reported healthy trends in customer spending and lower delinquency levels than Covid.
In addition to agreeing with the acceptance of the monthly core as true with the data, TransUnion provides an annual update on card failure rates. TransUnion estimates there were about 500 million bank-issued credit cards in circulation this summer, up 7. 5% year-over-year. was a larger-than-expected buildup in notable credit cards, as some card issuers gave the impression of creating larger credit lines aggressively for U. S. customers. U. S. consistent customer balance of $5,270.
Although they are still below Covid levels, either measure showed a noticeable accumulation until last year. Many of those card issuers paint with consumers facing economic uncertainty and provide some with monetary assistance. Unfortunately, more and more consumers are experiencing stress, leading to building updated delinquency and loss rates for issuers. Speaking of credit losses, we will now talk about the new “most successful” credit card introduced in the industry in recent years.
How is it possible that a product that combines those 3 corporations is not a general execution of the house, right?Well, it all comes down to focus. Apple aims to build its iPhone, while Mastercard is a scalable network for billions of payment transactions. We are not necessarily sure that GS has brought its card expertise to this partnership.
Apple GS Card (Warren Fisher)
Apple GS Card (Warren Fisher)
In 2019, Goldman Sachs caused a sensation in the card industry by using Apple and Mastercard on a credit card. The actual card is pretty trendy (as you can see below), as visitors’ names are engraved on an Apple titanium card. The payment card generated a lot of buzz, as many early adopters temporarily posted their newest card on social media sites.
Marcus’ initial purpose (in 2016) was to leverage the glorious Goldman logo and create a full-service virtual bank. This card is an important component of GS’s ambitions to grow its retail banking franchise called Marcus. After five years, Marcus now has 14 million consumers and $16 billion in loan balances. Surprisingly, Marcus now accounts for only about 20% of the company’s overall revenue.
We thought it would be attractive to see how the Apple card is doing in terms of loans and displays. With over $100 billion in assets, this has been a successful source of reasonable deposits for GS. Despite having an institutional brand/”white shoe” in the world of investment banking and retail, the GS Apple Card was a disappointment.
The original plan was to implement current accounts for the masses, but this was not the providence that some leaders envisioned. After implementing its undeniable checking accounts, Marcus looked to offer easy-to-use customer loan products. the initial thesis that GS probably had with his Apple card. With the disappointing effects of this card association, GS control will now have to make this questionable decision.
It has been widely written that GS’s client department is on track to lose $1. 2 billion this year, and at most it will likely have to set aside more reserves to cover long-term loan losses. A recent Bloomberg article (on Marcus) indicated that cumulative losses for Marcus exceed $4 billion and that’s ahead of the $2. 2 billion deal for GreenSky (loan provider) reported last year. who wonder why the company has taken this questionable tactic. GS CEO David Solomon has strongly supported Marcus, but many institutional shareholders are disappointed that he continues to pump more money into the troubled entity.
How do the effects of GS compare to those of other card issuers?Competitors like Bank of America are enjoying record repayment rates, while GS’s loss rate on credit card loans reached 2. 93% in the current quarter. This is one of the highest delinquency rates among major U. S. card issuers. U. S. American Express said its trends “remain strong,” especially in the SMB and high-end customer segments. Discover cited strong customer spending and healthy credit quality. Wondering if you’re guessing whether your retail ambitions in 2016 were or not.
Early effects were not positive, largely due to the variety and allocation of credit lines to the wrong consumers. About a quarter of its consumers (and those lines of credit) went to consumers with FICO scores below 660 (defined as “fair”). to poor”). While we don’t think FICO scores are the only creditssss metric to watch, it’s helpful to see how some card issuers circumvent the perception of threats from adding new accounts. The goal of a creditssss score is to rank your consumers as threats. The score can be used during the initial acquisition of an account, or you can measure it throughout the credit cycle. We think it’s more productive to constantly monitor this information, but this is considered exaggerated and unnecessary (like a belt and suspension approach). Did GS correctly assess the threat when it first signed up for your Apple Card?
When the credit cycle is underway (and still is), adding some of those high-risk accounts can be expensive. Adding new accounts requires credit card issuers to calibrate their loan approval models based on underlying risk. Were those some of the situations GS had to accept, that others like JP Morgan were too onerous?We didn’t participate in those behind-the-scenes negotiations, but we’d be surprised if Apple did. Do not seek and ask for credit sss waivers.
Unfortunately, those are decisions that become quite costly because they are the first customers to become antisocial in the face of an economic downturn. The Federal Reserve Bank of New York is conducting a survey on the average probability that consumers will be able to pay off their minimum debt. Unfortunately, this survey found that 12. 2% of consumers will not be able to pay their minimum debts (up from 10. 8% last month).
We don’t highlight those Marcus flaws to act as a bearish note on GS. We’re just looking to convey a few key investment themes. One is “stand firm. “In our opinion, GS has a glorious logo and is internationally known as one of the most productive institutional corridors. He masters investment banking, advisory paintings, and trading. Why did you want to diversify into checking accounts and card issuance?This company did not have the valuation of GS, as it now trades below its e-book value.
The point of moment we emphasize is to fully perceive the company you are in. When it comes to consulting, banking or trading, GS is at the service of its clients and acts as a valuable partner. Helping clients solve their financial problems is precisely what GS has been doing for decades and what they deserve to be doing for years to come. How does providing a $2,000 line of credit to a Gen Z student strengthen the GS brand?Maybe that customer will become a GS visitor in 10 or 15 years, however, we’re not sure this company was true to its culture and long-term aspirations. The card issuance business comes with a massive threat to the balance sheet and increases GS’s exposure to cyclical businesses. We only know that it was an advertising business that didn’t want to take place. And they deserve to be considered a mistake.
Looking back a few years, GS was seduced by the concept of starting a FINTECH company. With its strong presence in Silicon Valley, many GS executives believe it would be undeniable to migrate from an institutional and corporate company to one that could simply dominate an average customer franchise in the United States. Is the launch of a new high-yield savings account new and inspiring?Long-term business plans.
We try never to “marry an idea” or be too grumpy to admit that we are wrong. One of the legends of making an investment is Charlie Munger, Warren Buffett’s 98-year-old partner. We agree with Mr. Munger, who said “We all learn, modify or destroy concepts all the time. Quickly destroying your concepts at the right time is one of the most valuable qualities you can acquire. You have to force yourself to argue on the other side. “
Warren Fisher, CFA
Founder and CEO
Manole Capital Management
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