Pfizer vaccine benefits card brands, but recovery is still a long road

Even given the huge jump in digital transactions from e-commerce, card brands are holding out for COVID-19 vaccines as a path out of the payment declines that have accompanied 2020’s health and economic crises.

That makes Pfizer’s announcement that its vaccine candidate is more than 90% effective undeniably good news for consumers and businesses, since it’s the first sign of virus mitigation that doesn’t involve curtailing mobility and in-person commerce.

But there are numerous steps ahead, including FDA approvals, manufacturing and distribution that will take much of the next year — so the early news from Pfizer is just that. The news won’t immediately stop the present jump in coronavirus cases and hospitalizations, and probably won’t have a major impact on the health crisis and economy until the second or third quarter of 2021.

And even then, the changes in consumer and merchant behavior will be sustainable enough to create a new mix of payment flows when the market does recover, so a total return to 2019 is unlikely.

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“Digital payment usage and innovation will continue to be the driver of payment strategies,” said Krista Tedder, head of payments for Javelin Strategy & Research. “The difference will primarily be additive with industries which have been severely impacted, such as travel, entertainment, brick and mortar shopping increasing digital presence as in person activities open. Americans will still want in person experiences and in-store commerce will increase.”

While some delivery options like food and grocery might reduce their business as more consumers get out in public, there will be more multichannel experiences that connect digital and physical commerce, according to Tedder.

“Card channels will be impacted as consumers use stored payment credentials with fewer reasons to switch payment methods. This will reduce the number of network-branded cards and cause financial institutions to focus on diversifying revenues away from interchange channels,” Tedder said.

In the short term Mastercard, Visa and Amex will benefit, given the almost total absence of good news over the past year. The vaccine news provides more visibility than there was even last week at this time.

In a research note, Keefe, Bruyette & Woods said a “clear winner” from Pfizer's vaccine release would be Amex.

“When travel resumes it will be led by pent up demand from consumers and also, but maybe to a lesser extent, business,” KBW’s note said, adding proactive investments from Amex could have a shorter payback time than original projections. “This will drive inflationary pressures as well, benefiting the company.”

Amex has been particularly hard hit by the almost total disappearance of travel, and thus payment volume for hotels and airlines. Amexrepoted travel and entertainment spending was down 69% in the third quarter while non travel and entertainment spending increased one percent. In its most recent earnings report, Amex showed some recovery and has turned to non-travel income to boost performance, including its acquisition of small-business lender Kabbage.

“[The vaccine] news is good news. It’s in sync with what we have been planning for,” said Jeff Campbell, executive vice president and CFO of American Express, in a Tuesday conference call with Bank of America Securities.

Non-travel and entertainment spending in October was up 3%, while travel and entertainment was down 65% at Amex. “There will be one or several vaccines with approval by the end of this year; that still leaves you with a long road,” Campbell said.

Amex's strong brand and partnerships around travel still exist, Campbell said, adding that consumer travel returned even after historical disasters such as 9/11. Amex has added services but is not planning to pivot dramatically away from travel.

“The consumer desire to travel is insatiable, we see markers of pending demand where there is medical progress,” said Campbell, who did not predict when 2019 travel levels will be met. Consumers are stocking up travel points, and local travel where it’s possible is recovering quickly, he said. “We see caution with corporate customers. They will be the last to come back.”

Visa and Mastercard, which have weathered the crisis relatively better due to a greater dependence on services and the pivot to e-commerce, will also get a boost, KBW says. But Visa and Mastercard have recently stalled given the lack of improvement in cross-border travel. KBW also predicts fleet card issuers such as WEX could improve if there is a return to more traditional offline commerce and thus supply chain deliveries to brick and mortar stores.

Mastercard divides the stages of coronavirus recovery into containment, stabilization, normalizing and growth, classifications it has held onto for most of the past year. Mastercard CEO Ajay Banga, in recent public statements, has placed most countries in the normalizing phase, which means payment volume is starting to recover, albeit slowly and with continued modifications.

In each earnings call since the pandemic began, Banga has mentioned vaccines as necessary to reaching a growth stage in most economies — echoing the view of most businesses, schools and government operations that assert social distancing measures and at least partial closures will be necessary.

In Mastercard’s most recent earnings call, the card brand missed Wall Street analysts’ estimates, a rarity for the steady company. This was partly due to concerns about a renewed wave of infections that are pushing some countries backwards into lockdowns and travel restrictions.

During Visa’s most recent earnings call, Vasant Prabhu, Visa’s vice chair and CFO, mentioned the renewed virus cases as a potential headwind for 2021. Both Visa and Mastercard have offset the declines in travel, cross-border payments and in-store shopping through the dramatic increase in e-commerce and value-added services such as consulting and security.

These services position Visa and Mastercard well for a digital future in which payment processing is embedded in a broader range of merchant services, but it’s still a stopgap measure.

The card brands need travel to recover to return to their pre-pandemic performance, and investors see the vaccine news as a key step; that’s why the card networks' stock prices shot up quickly upon Pfizer’s announcement on Monday.