Visa, MasterCard Say They’re Serious About Security

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Late last year Target (NYSE:TGT) was the victim of a cyberattack, and as a result, the security of millions of customer accounts was jeopardized. This was obviously a setback for Target, as consumers were concerned that they couldn’t safely pay for purchases there with their credit or debit cards. But the attack was in many ways a greater blow to credit card providers Visa (NYSE:V) and Mastercard (NYSE:MA).

You wouldn’t know it looking at these companies’ share prices. While they are off their all-time highs by a few points, Visa and Mastercard shares have continued to work. Nevertheless, if we take a step back from the particular incident, we realize that credit card users in general are at risk, and this means that these two point-of-sale transaction companies are at risk, as well. There are two reasons for this.

First, some consumers be concerned that the wrong people can get their hands on their credit card data, leading them to avoid electronic payments when possible. Seeing that Visa and Mastercard make their money by collecting a small fee each time their cards are used, this would be a direct hit to their top and bottom lines. Second, Visa and Mastercard could be held liable for losses incurred by their card users in the event of fraud.

As a result, the two companies are starting a joint effort in which they are pushing for a more rapid universalization of their EMV technology. EMV stands for Europay, Mastercard, Visa, and it is essentially a new technology that is meant to be an improvement over the current system, which is based on the magnetic strips found in credit cards, consumer signatures found on the card, and identity verification by store clerks. The replacement system will require that consumers enter a PIN (personal identification) number, and this will ultimately make it more difficult for hackers to steal customer data.

In the short run, I think that Visa and Mastercard might see hits to their bottom lines as they invest in implementing this system. However, there will be long-term benefits. In particular, the fact that the EMV system is safer than the current system will make consumers feel safer when they use their credit cards. For instance, consumers who are afraid to use their credit cards online for fear of somebody stealing their information might feel safer if they have to enter a PIN. This will mean that consumers will feel more confident in using credit cards, and we will continue to see a greater portion of all transactions take place using credit cards.

This ultimately makes the credit card companies more appealing as long-term investments. Those looking to take positions in credit card companies should focus on Visa and Mastercard. Companies such as Discover Financial (NYSE:DFS) and American Express (NYSE:AXP) will benefit from the same trends. However, keep in mind that these companies make a lot of their money by lending money to their customers; Visa and Mastercard get paid regardless of whether their clients pay their credit card bills — these debts are owed to a bank. Discover and Amex act as banks, and they have additional risk. While this may be a risk worth taking, investors need to keep in mind that this is a different sort of investment than the one I am advocating here.

Investors should also keep in mind that Visa and Mastercard shares have been performing extremely well, as I am by no means the only one who sees the opportunity in the cashless payment industry and the benefit of owning the leaders in this industry. Therefore I highly recommend that investors wait for a pullback before taking a position. Given that both stocks trade near all-time highs means that a pullback is overdue in both stocks.

While they seem invincible given that they hardly reacted to the Target data breach, it is inevitable that something will come along and create at least short-term weakness that savvy long-term investors can take advantage of. Given the virtual oligopoly in this industry, these companies are often under regulatory scrutiny, and a couple of headline stories can send shares into a tailspin in the short term.

Ultimately the cashless payment industry is growing rapidly, and as it grows, it will suffer growing pains such as the Target security breach. But the fact that the industry is approaching the problem proactively ensures its long-term sustainability, even if such problems mean that capital costs will rise for a few quarters.

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