Credit Card Companies Experience Double-Digit Drop During the Third Quarter

The sluggish quarter is blamed on closed borders during the pandemic.

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Credit-Card-Companies-Experience-Double-Digit-Drop-During-the-Third-Quarter

Third-quarter results for the three major credit card companies were less than ideal. Visa, American Express, and Mastercard all reported double-digit losses in the last quarter compared to the previous year’s quarter. The drop in profits pointed back to travel slowdowns because of the coronavirus pandemic. The companies said that border restrictions and closures played a part, as did the slowing of cross-border payments, which tend to yield more profit than domestic payments.

Sachin Mehra, Chief Financial Officer for Mastercard, said: “While we believe that cross-border will ultimately recover, it will take time for people to build their confidence in the safety of travel. We believe that is tied to the broad availability of vaccines and therapeutics, likely towards the latter part of next year.”

International travel came to a screeching halt early in the outbreak. Unfortunately, it’s yet to recover and is impacting the bottom line of credit card companies. Those companies earn fees from each transaction on their network. American Express also makes a large part of its revenue through the annual fees it charges. Less cross-border revenue impacts companies who have higher margins in that area.

Visa last reported its third-quarter results on Wednesday. Its cross-border payments fell by 29 percent, while its third-quarter revenue fell by 17 percent when compared to last year from the same period. The company said weakness from cross-border payments is a “significant and continued drag on revenue growth.” Vasant Prabhu, Visa’s Chief Financial Officer, said the trend would probably continue into next year.

“The cross-border recovery has been sluggish since borders remain closed,” Prabhu said. “And there are significant impediments of crossing borders like quarantines and other such restrictions.” 

Prabhu alluded to the uncertainty of the impact of COVID-19 spikes of infection in the United States and Europe. Other uncertainties, such as therapeutics, a vaccine, reopening of the borders, stimulus aid, and the economic impact when stimulus aid ends, all play a role in how fast the company can recover from the coronavirus impacts.

Recent coronavirus resurgences in Europe caused French and German leaders to announce new restrictions over the next month. Meanwhile, the U.S. has recently seen its highest numbers of cases.

Mastercard reported similar earnings to Visa’s last Wednesday. Its net income dropped by 28 percent in a year-to-year comparison, while its net revenue had fallen by 14 percent. Both were lower than analysts anticipated. Mastercard also said its cross-border volume had fallen by 36 percent. The company was also pessimistic about the future of cross-border payments.

Mastercard shares saw their worst week last week and were down by 11 percent. American Express and Visa also were down by 10 percent and 8 percent, respectively.

American Express said it experienced a 40 percent fall in profit when compared to last year during the same time. Entertainment and travel spending had fallen by 69 percent in a year-to-year comparison. Amex’s Chief Financial Officer Jeffrey Campbell said he is “highly confident” that travel demand will rebound, but “it will take a while.”

“The human urge to travel is insatiable,” Campbell said. “But it will take some time to come back, just like it did after September 11. For our company to be back at its pre-pandemic levels of earnings, we do need consumer travel to come back. We’re highly confident, and, in the meantime, we’re trying to take the right steps to rebuild growth and momentum.” Campbell also held the title of CFO for American Airlines prior to his tenure with American Express. Campbell said it could be years before business travel recovers.

The credit card companies did see some reason for optimism. The companies said there was a rebound in domestic spending as well as an improvement in e-commerce spending. Those divisions helped the credit card companies offset their losses from their poorly performing divisions, mainly in the global market. 

Ajay Banga, CEO of Mastercard, pointed to domestic travel, which he said improved in the third quarter. Americans spent more money on sports and lodging. Mastercard processed more transactions per dollar, while Visa’s payment volume also rose 4 percent.

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