Last month, I showed how massive cuts in idle consumer credit lines could equal hell for credit card processors like Visa
Turns out, the problem might be bigger than I thought.
The Federal Reserve released its monthly report on consumer credit, and it ain't pretty. Revolving credit balances fell 9.7% in February -- the largest decline in 31 years.
This creates a two-pronged battle sucking the life out of the credit card industry:
- Credit issuers like Citigroup
(NYSE:C) , Bank of America(NYSE:BAC) , and JPMorgan Chase(NYSE:JPM) are drastically slashing open lines of credit and jacking up interest rates on existing balances. In the fourth quarter alone, $500 billion of credit-card ammo was yanked away from consumers. - Consumers themselves are ditching credit cards like their lives depend on it. With the personal savings rate blowing up and the specter of unemployment on nearly everyone's mind, there's a mass exodus from consumer credit like we haven't seen in 31 years.
Now, for the American consumer and the economy as a whole, this is about as good as it gets. Higher savings and less debt is exactly what we need to move our economy from Neverland to reality.
But for card giants -- particularly Visa and MasterCard, which still trade at premium multiples -- we're looking an industry that's unrecognizable from even a few months ago. The boom in plastic transactions that propelled card processors to glorious heights is quickly losing a core segment -- credit. Heck, American Express
While card processors are far from hurting, that isn't the kind of behavior you'd like to see from an industry with double-digit growth expectations baked into its share prices.
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