A Huge Win for Credit Card Companies

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Credit card issuers have been riding high recently, enjoying a surge of credit card use among consumers, more timely payments, and lower charge-off rates of bad loans. Even the recent $7.5 billion settlement the card companies agreed to with a coalition of merchants didn't tarnish their stars, as investors apparently perceived the end to the wrangling as a positive rather than a negative event. Now, the U.S. has won a case against China, which will most likely open up that country's market to Visa (NYSE: V  ) , MasterCard (NYSE: MA  ) , and American Express (NYSE: AXP  ) .

State-owned monopoly
The World Trade Organization ruled on a complaint the U.S. filed in 2010 regarding UnionPay, China's state-owned network for processing credit card payments. Though the U.S. didn't win on every point, the ruling supports the contention that UnionPay enjoys monopoly status in China, to the detriment of foreign credit companies. Though the decision may be appealed, the ruling is considered a win for U.S. credit card issuers.

UnionPay was created 10 years ago by China's central bank and does have partnerships with banking entities such as Citigroup (NYSE: C  ) , which is one of two non-Chinese banks allowed to market its own branded card. Generally, foreign financial institutions are forced to co-brand with Chinese companies to clear payments through UnionPay. Citi's card transactions are currently processed by UnionPay, not by any of the U.S.-based credit card companies.

Fool's take
This decision is monumental for Visa, MasterCard, and American Express, as well as Discover Financial Services (NYSE: DFS  ) , which I imagine will also benefit from the decision. Even though the ruling may be appealed, I think China will see the writing on the wall and realize that this market needs to open up. In fact, the pact with Citi was seen as a consequence of the filing of the complaint regarding UnionPay, and a movement by China to open up its credit market, albeit only a tiny bit.

There are pots of money to be made in this market, which has grown by leaps and bounds over the past few years. Currently, there are approximately 268 million credit cards in circulation in China, up from 207 million one year ago. Estimates from MasterCard expect yearly growth to be between 11% and 14%, and other analysts say the number of issued cards could top 1.1 billion by 2025 -- with the gross profit for each card increasing six times its 2010 level by that date. With that kind of market to look forward to, U.S. card issuers look like a very lucrative investment opportunity indeed.

Credit card companies appear to be a very profitable investment for the future, but they aren't the only game in town. Let our banking analysts clue you in to some other stocks that the smartest investors are buying -- including one that fulfills the investment criteria of one of the world's savviest investors. Want to know more? This special report is free.

Fool contributor Amanda Alix owns no shares in the companies mentioned above. The Motley Fool owns shares of Citigroup and MasterCard and has created a bear call spread position in American Express. Motley Fool newsletter services have recommended buying shares of Visa and creating a write covered strangle position in American Express. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.

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10/28/2016 4:00 PM
AXP $66.45 Down -0.48 -0.72%
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