3 Stocks Hoping for More Fed QE

Federal Reserve Bank of Dallas President Richard Fisher believes that the partial government shutdown that ended last week was detrimental to the Fed's efforts to stimulate economic growth and revive job creation. Speaking to Reuters last week, he said plans to taper quantitative easing might have to be pushed back for now. If the Federal Reserve agrees with Fisher, the retail payment servicing industry of the U.S might be in for a boost.

Here's how it can go, in theory:

• Fed continues to pump $85 billion every month through bond sales;
• Money flows to various organizations;
• More jobs are created -- wages are hiked;
• U.S personal disposable income, or PDI, increases;
• People start spending more;
• Credit and debit card usage increases; and
• Payment servicing companies thrive.

With this investment thesis in mind, investors might want to take a closer look at the payment servicing industry.

Industry dynamics
The industry is dominated by Visa (V 0.49%), MasterCard (MA 0.07%) and American Express (AXP -0.31%). All three companies charge a commission on each card transaction -- usually borne by the merchant. Both Visa and MasterCard allow businesses to impose a surcharge on card purchases, to compensate for their merchant fee. However, American Express prohibits such surcharges in order to protect consumer interest.

This is a major deterrent to American Express' card acceptance. American Express is known to have a clientele of affluent individuals. So its high average merchant fee of 2.52% -- when imposed on high value-transactions -- can aggregate to large chunks of lost profits for merchants. This is about 26% higher than the industry-wide average fee of 2% -- which most business owners don't have the stomach to digest.

On the other hand, Visa and MasterCard charge a relatively moderate merchant fee (or interchange fee) between 0.8% and 1.9%, depending upon the card usage and its privileges. This makes it economically feasible for most merchants to absorb these surcharges in the name of promoting their businesses and building customer loyalty. It also allows the merchants to focus on profitability by imposing a surcharge.

Why it matters
With moderately priced merchant fees, flexible fee structures, and austerity drives curtailing needless expenses, more business outlets accept MasterCard and Visa than American Express. Additionally, more consumers prefer MasterCard and Visa due to their affordable annual renewal fee.

Source: 2012 Annual Reports

The table above highlights some key differences. Although American Express is known have a high average revenue per user, the total value of its processed transactions is significantly lower than MasterCard and Visa's. So if quantitative easing bolsters PDI, the leading payment servicing companies by transaction value -- Visa and MasterCard -- stand to benefit more. 

Chasing EPS growth
Another thing to note is that American Express generates about 67% of its net income from its consumer card services. The rest is represented by its commercial and payment network business. Its diversified business model ensures balanced growth even in economically challenging times -- but at the cost of modest earnings-per-share gains.

 Source : Finviz

On the other hand, MasterCard and Visa are purely credit servicing giants, which generate all of their income from payment servicing. Their financial performance is entirely correlated to card members' spending -- allowing them to grow at relatively faster rate than their diversified banking peer.

Bottom line
All three companies are rolling out their digital wallets: Visa's V.me, MasterCard's MasterPass and American Express' Serve. Their goal is straightforward -- simplify the payment process and collect more fees.

But American Express isn't doing anything extraordinary to surpass Visa and MasterCard. With interest rates are on the rise -- its loan originations could slow down -- which can dampen its growth from payment servicing.

On the other hand, both Visa and Master Card seem attractive investment options. They operate with an almost risk-free business model. The only risk they incur is from stolen cards, which makes them relatively safer investments. And since their financial performance is heavily reliant on the PDI and consumer spending, a continuation in the quantitative easing can be a major boost for both the companies.