JPMorgan Chase Signals Strength in Credit Card Processing

In the company's Q2 earnings announcement JPMorgan Chase  (NYSE: JPM  ) included data about its card services division that could be good news for other companies in the payment processing industry. The company announced credit card sales volume (the amount of purchases made on a Chase branded card) of $118 billion up 12% from the same quarter the previous year. The 12% figure is the highest reported year over year growth rate reported by the company in at least the last 8 quarters.

  Card Sales Volume ($bn) % Growth (yoy)
Q2 2014 118.0 12%
Q1 2014 104.5 10%
Q4 2013 112.6 11%
Q3 2013 107.0 11%
Q2 2013 105.2 10%
Q1 2013 94.7 9%
Q4 2012 101.6 9%
Q3 2012 96.6 11%

Even a slight acceleration in card usage could be a signal in the health of consumer spending patterns, and could be good news for companies generating commissions on transaction related volume. Visa  (NYSE: V  ) and MasterCard  (NYSE: MA  ) are the obvious beneficiaries of this continued growth as two of the purest payment processing plays.

Weakness in interest related income
Despite positive volume numbers, loan balances and the resulting interewt revenue has not kept pace. Average card loans for the quarter was only grew 1% year over year, indictating that while Customers might be using their cards more they're keeping less relative debt on these accounts. This is a continuation of a multi-year trend of lower interest related revenues in the credit card business as cardholders are keeping smaller interest paying balances. 

These numbers are ar result of Chase and along with many other issuers making shifts in their consumer offerings toward a greater mix of rewards credit cards. The cards are marketed to consumers that have higher spending, better credit and are the least likely to keep interest paying balances. In many cases the credit cards act as lead generators for the company's other financial services including bank accounts and mortgages. While the interest related revenues account for approximately 75% of the Card services revenue at JPMorgan, we're likely to see a long term shift in this break out.

Focus on processing 
The credit card and payment processing industry continues to grow rapidly from both a dollars and volume perspective. The diverging metrics in volume based metrics vs credit related loance balances however, draws a clear distinction between companies best poised to take financial advantage of these trends. Companies focused on processing related revenues are in a superior class when compared to the banks and issuers financing consumer credit.

For investors looking at this space, companies like Visa and MasterCard are clearly in a better position and should see positive results in the second quarter and over the long term.

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