Visa Stock Vs American Express: Which Is Best?

Visa Stock Vs American Express: The transition to cashless, touch-free payments was well underway at the start of 2020. While consumers were still using cash for small purchases, digital payment platforms were taking off.

Tap-to-pay and payment through stores’ mobile apps became increasingly popular – a phenomenon that was especially vivid when consumer behavior was broken down by generations.

Generation X, Millennials, and Zillennials were glad to dispense with nickels and dimes in favor of platforms accessed through mobile devices. 

In the spring of 2020, COVID-19 gained a foothold in the United States and Europe. Suddenly, shopping felt dangerous. Use of cash dropped in favor of easy-to-clean plastic, and an unprecedented number of consumers enrolled in touchless payment services.

Though this abrupt decline in the use of cash was precipitated by the pandemic, experts agree that the new behavior will stick around long after the novel coronavirus has been eliminated. 

The major electronic payments networks, including Visa (V), Mastercard (MA), American Express (AXP), and Discover, suffered revenue losses when non-essential businesses closed temporarily, but most industry analysts believe those lost months will have a negligible impact on the companies’ long-term results.

The trend towards digital payments promises to be particularly lucrative for the big names in merchant services, which means good things for their shareholders. 

The question is, which of the industry leaders is best positioned to gain, both short-term and long-term? In other words, when the choice is Visa stock vs American Express, where should investors place their bets?

Visa Tap-to-Phone Technology = Revenue Growth

Though Visa is “everywhere you want to be”, some are surprised to learn that the company doesn’t actually issue credit cards.

Instead, Visa generates revenue through an extensive payment network that connects nearly every country on the planet.

Through that network, Visa facilitates payment processing. Merchants pay a portion of each transaction to Visa in fees, which rapidly adds up. 

After all, more than half a billion transactions move through Visa’s network each day. That, together with licensing fees and other business services, positions Visa as a leader in the financial services world. 

Visa might have been a bit behind the touchless payment revolution, but in late October, the company made a long-awaited announcement.

It now offers Tap-to-Phone technology that makes bulky payment terminals all but obsolete. Merchants need only set up the Tap-to-Phone app, and they can accept payments from any customer that owns a credit or debit card with the Visa logo.

It’s an important advance for Visa, considering touch-free payments have gone up a full 40 percent since the start of the pandemic. 

Visa’s new technology competes directly with services like Square (SQ), which makes acceptance of cash-free payments accessible to sellers who don’t operate traditional brick-and-mortar establishments.

However, the Visa platform is more user-friendly than those of other providers in this space, because there is no need to have a mobile-compatible accessory to swipe cards.

The Visa platform also offers new opportunities for the 180 million micro and small merchants around the world who have been thus far excluded from the plastic economy.

According to Visa’s market research, only 10 percent of that group can accept cashless payments today, but a full 63 percent of those surveyed are anxiously awaiting the technology that will open this option up for them. 

The bottom line is that Visa is a smart choice for investors – particularly those that plan to buy and hold for an extended period.

While it saw revenues drop in 2020 due to suppressed transaction volume, the consensus is that the dip is short-term.

The company is in solid financial shape, so it is able to withstand the current challenge. More importantly, it is hard at work on positioning itself as a leader in the new economy.

Is It Time To Buy American Express?

American Express isn’t as widespread as Visa, but it is certainly accepted where it counts.

The company generates a large portion of its revenues by issuing credit cards to consumers, then encouraging them to spend through impressive rewards programs.

Examples include cash back, travel points, and points that can be used to purchase goods and services from a long list of merchant partners. 

These cards are geared towards consumers with top-notch credit, and some require the balance to be paid in full each month. Interest charges and annual fees add to American Express’ revenues, creating a circle in which the company benefits from each part of the transaction.

The pandemic has depressed consumer spending, particularly in the industries that American Express relies on most: travel and entertainment. The impact was vividly illustrated in the company’s third-quarter earnings announcement on October 23rd. 

Management reported a 20 percent year-over-year drop in revenue, which totaled $8.75 billion. While that isn’t great, it was comparatively good considering analysts projected an even larger decline.

Earnings-per-share dropped to $1.30, which is a 38 percent decrease year-over-year. That figure was disappointing for investors and analysts, who had projected EPS closer to $1.35. 

American Express stock lost 3.1 percent after the announcement, bringing the year-to-date decrease in share price value to roughly 18 percent.

Some investors are convinced that this is the right time to buy, as stock prices are lower than usual. They believe the company will fully recover over the long-term, and they have time to wait. Those that have short and mid-term financial goals may not want to take a chance on the recovery timeline. 

Will Visa Stock Tumble Soon?

The biggest risk Visa faces is a short-term one: the on-going pandemic. There are signs that case numbers will rise in coming months, and mitigation measures like business closures might become necessary again. That could cause another dip in the number of transactions processed, which means lower revenues for Visa.

However, if that drop does come, it will only be temporary, and Visa will bounce back quickly. That means this is generally only a concern for short-term investors. 

Dangers of Buying American Express

On the surface, Visa and American Express look like peers, but there is a critical difference that spells danger for American Express and its investors.

American Express issues credit cards to its clients, while Visa limits involvement to payment processing.

That may continue to be a serious problem for American Express as the economic impact of the pandemic plays out. 

Unemployment means bills go unpaid, and unsecured credit cards tend to be some of the first that struggling households set aside. There is potential for American Express to suffer higher-than-average losses as consumers default.

Along the same lines, American Express relies on fees and interest for a portion of its revenue. When interest rates drop and card issuers come under pressure to waive fees, that directly impacts American Express’ bottom line results.

American Express Vs Visa Stock: The Bottom Line

Both American Express and Visa are solid companies with excellent long-term prospects. However, given the difference in business models, Visa is better-prepared to ride out the volatile COVID economy. American Express relies on travel and entertainment spending far more than Visa, and those industries are among the hardest hit in 2020. They will recover – eventually – but the timing is anyone’s guess. For now, that makes Visa stock a better buy. 

---

The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.