At Odds with Your Customers: Why I’m Short Mastercard

Last night I thought I made a mistake buying puts on Mastercard (MA). The StockTwits community was tweeting about 9:1 in favor of $MA for the long run. I’d been trying to snag puts at fire sale prices for about a week and finally got them just before the Wednesday rally really kicked in.

Then I got thinking this morning about the whole credit card industry, and I decided that holding puts wasn’t a mistake. The credit card companies’ best customers are the ones who run a balance and rack up charges but still make some sort of minimum payments; the deadbeats are the ones who pay their bills on time. And if you run a balance, say, trying to stimulate the economy by buying overpriced close-out electronics at Circuit City, then your reward for failing to make a payment is a late fee and massive finance charges from the time of purchase. If times are good, you keep making your monthly minimum, or not, and they pile it on. If times are bad, they just pile it on. Now you’ve gone from being a good customer to a burden; they jack your rate up to 20%, or 25% or 30%, and with late fees it works out to even more, and even the minimum payments can’t be met.

So the best customers get hosed, while the credit card companies’ worst customers are only racking up transaction fees on the backs of the retailers.

Here we are, facing a potentially deflationary economy, in need of consumer confidence and stimulation, and the credit card companies are not only dropping credit limits, but accelerating the fees and rates on whole new classes of consumers who before were their bread and butter. Fewer people will hold credit cards (or be able to) and the ones who do will be spending less. I just don’t see a strategy of business as usual with regards to fees and rates as sustainable through a very nasty recession. In the bigger picture, it might make more sense to reduce rates and finance charges, and stimulate more growth. Share the burden, in the interest of

From my perspective, the credit card companies are at war with their customers, the very people who use their products, whose confidence is a critical element of stimulating the economy and lifting all boats with a rising tide.

So I’m staying with the MA puts a little while longer. The real dog in this industry is Discover Financial Services (DFS). For the first time in a long time, I’m seeing it accepted at fewer places. It may have been a better pick than MA, and I’ll be keeping an eye on it for a possible entry after I close out this MA position. DFS has not much coverage on StockTwits, but seems the one most at risk.

The credit card companies aren’t the only ones whose business model and relationship with their customers create an adversarial relationship. There are others. More on that analysis later. These are not companies you want to be on the wrong side of during a recession.