Play your cards right

AP

WHEN markets are rocky and the economy is wobbling is it a good idea to splash out on a credit card? Visa, the world's leading credit-card operator, certainly thinks so. On Monday February 25th Visa said that it would soon go ahead with an initial public offering (IPO) of around half of its shares, which might raise as much as $18.8 billion. Given the dark mood at most of America's leading financial institutions what has motivated Visa to embark upon what would be, by a comfortable margin, America's biggest IPO?

In October 2006 Visa took the decision to float its businesses outside Europe (within that continent Visa will continue to be operated by the banks that own it). An IPO in May of that year by MasterCard, its nearest rival as an enemy of deferred gratification, proved a roaring success. Despite the troubles in credit markets its shares are still worth five times their value on flotation. Visa clearly reckons that it might benefit in the same way.

Although Visa and MasterCard are not immune to a downturn in America the longer-term prospects for both firms is encouraging. The world is rapidly becoming cashless reckons Visa's boss in Europe. Nilson Report, a trade publication, estimates that by 2011 55% of transactions in America will be cashless, up from 40% in 2005.

This trend is good news for Visa and MasterCard. As credit-card operators they collect a fee on every transaction, whereas the issuing banks are left to collect interest or worry about bad debts. In contrast American Express and Discover, the pair's closest competitors, operate networks and, as with the banks, issue cards, which leaves them open to credit risk. A recession in America would undoubtedly hit business for all card issuers, but Visa and MasterCard would avoid the added fears of widespread defaults.

The switch from paper to plastic is not confined to America and Europe. Visa's IPO will give it access to money to plough into Asia and Latin America, regions that have not taken to credit cards as enthusiastically as Americans or the British but where business is growing and opportunities for expansion are plentiful. Drumming up new business in America is difficult because the market is saturated (although cashless transactions are showing a secular increase). Most Americans who are creditworthy already have a selection of cards.

Nonetheless new products could help to spur growth even in the most mature of markets for credit cards. Pre-paid debit cards, those which are loaded with money, are making progress in allowing card-based transactions for some 80m Americans who lack bank accounts and who have no access to credit. Another potential money-spinner is a “smart” system that lets users make small purchases with a mere wave of a card. Supposed competitors, such as PayPal's online payment system, in fact offer complementary services rather than threatening to steal business from Visa.

But is the future so bright for Visa that investors would be wise to fork out nearly $19 billion? Although it has settled one antitrust case with American Express that followed in the wake of a Supreme Court decision of 2004, Visa still intends to put aside $3 billion to cover future payouts.

Visa's flotation will at least provide some distraction on Wall Street from the subprime battering. And, after IPO numbers dropped off sharply at the start of the year, it might allay fears that companies are fleeing overseas to list on stock exchanges where regulations are less onerous. The timing of Visa's impending IPO is perhaps a sign that the firm believes that market conditions will not improve, but for now the IPO itself is a rare moment of light amid the gloom.