What happened

The stock market is having a rough day on Wednesday, with the Dow Jones Industrial Average and S&P 500 down by about 6% and 5%, respectively, as of 12 p.m. EDT. And as we've seen several times in the numerous declines of the past few weeks, the financial sector is one of the market's worst performers, with the Financial Select Sector SPDR ETF (NYSEMKT:XLF) down by more than 7.4%.

However, when it comes to credit card and payment-processing giants American Express (NYSE:AXP), Discover (NYSE:DFS), Capital One (NYSE:COF), Visa (NYSE:V), and Mastercard (NYSE:MA), it's a mixed bag. To be clear, all of these are trading lower on Wednesday. However, consider the following:

  • Visa and Mastercard are both down by about 6.5% for the day, so far, outperforming the overall financial sector and down by 21% and 26%, respectively, year to date.
  • The other three are performing much worse. American Express is down by 12% today and nearly 40% in 2020. Capital One has shed 20% of its stock price today alone and is down 58% year to date. And worst of all is Discover, down 23% Wednesday and 67% this year.
Credit card being inserted into a chip reader.

Image source: Getty Images.

So what

The key difference is how these companies make their money. Specifically, Visa and Mastercard are purely payment-processing companies. They facilitate the movement of money between consumers, banks, and merchants and collect a fee for their services. Of course, this is a simplification of these massive businesses but is the general idea behind the business model.

On the other hand, American Express and Discover aren't just payment processors, but also serve as the lenders. When you swipe your Amex-issued credit card, it's American Express that lends you the money and moves it into the merchant's account (this is known as a closed-loop payment network). Capital One is a bank and the lender behind the credit cards that bear its name. It doesn't process the payments itself.

The point is that while Visa and Mastercard could certainly see transaction volumes (and therefore income) slow down considerably in the event of a prolonged recession, they don't have any exposure to loans. On the other hand, a recession tends to lead to more people having trouble paying their bills, which could cause a surge in defaults and credit losses for the other three companies.

It's also worth mentioning that American Express has a generally more affluent clientele than either Capital One or Discover, which could mean that the company will take a lesser hit in a prolonged downturn. This is probably why Amex is down but significantly outperforming the other two lenders.

Now what

It remains to be seen at this point whether the coronavirus-fueled recession will be short-lived or not. And this is creating a lot of uncertainty for most of the stock market, but especially for companies that have direct exposure to consumer debt, like American Express, Capital One, and Discover.