Things Are Looking Up For Amex, Down For EMV And Extremely Uncertain From China

If Google Trends are to be believed, the majority of Americans spent the last week thinking about football. Day in and day out, people were searching for information on the NFL, in general, or for data on teams and players.  

An entirely understandable trend, given that the season starts in two weeks (the time to finalize those fantasy drafts is now) and that commissioner Roger Goodell and Patriots star quarterback Tom Brady are staging an opera worthy of Wagner in Federal Courts over deflated footballs.

But for us peeps in payments, the world did turn far from the gridiron last week, offering up all kinds of new, shocking and in some cases alarming data. Which PYMNTS has rounded up nicely and neatly for our weekly data dive. Wanna know why an investor made a billion dollar bet on Amex or why China should be making you very nervous right now? We have it all here.  

The Whys Of The Big Amex Buy

The first half of 2015 has been rough on Amex – if headlines are any measure of roughness. The firm has weathered both the end of its partnership with the nation’s second largest retailer Costco, and lost a verdict in a pivotal antitrust case that could drastically alter the firm’s ability to charge higher interchange fees.

Then there was the announcement last week that American Express has secured a major investor.

How major?

Major enough that it has taken a $1 billion stake in the company, according to unnamed sources close to the matter cited by Bloomberg.

ValueAct Capital Management is reportedly the investor behind the billion bucks. ValueAct is an activist fund reportedly attempting to help Amex position itself better among shareholders looking to back the issuer.

All in, ValueAct’s investment is projected to be less than a 5 percent stake, but it turned out to be enough of buy-in to boost American Express’ stock on the announcement. Share price jumped to $79.72, giving it a market value of $80 billion, the firm’s biggest jump in four years.

However, ValueAct’s recent investment does not make Amex a “core active target” of ValueAct, according to sources. This means the firm may still decide to sell the position if at the conclusion of its current talks with the issuer, ValueAct decides against a longer-term campaign for changes.

“ValueAct is a well-respected firm,” said Marina Norville, a spokeswoman for Amex. “We have been speaking with them, as we do with other investors, and look forward to continuing a constructive dialogue. At American Express, we are focused on building long-term value for shareholders and are always open to the views and perspectives of our investors.”

Polite enough. But activist investors are hardly those that companies roll out the welcome mat for.

Amex has had a tough couple years, apart from the particularly tough body shots it has taken this year. The network as a whole has seen slower spending volumes, and revenue goals have fallen short. It’s been slow to capitalize on mobile payments and seems to have hitched its mobile wagon to Apple Pay, which is not exactly setting the mobile payments world on fire. Amex also, tragically, lost Ed Gilligan, the executive that most said would likely succeed CEO Ken Chenault, sending a shock through the management team and forcing an interim reorganization. In the last year alone, Amex’s stock price has taken a 20 percent haircut, and Chenault is under pressure to get the ship righted — and fast.

According to Bloomberg, ValueAct has played a major role in helping public companies implement their strategies, including Microsoft, Gardner Denver, Valeant Pharmaceuticals International, Reuters Group, Adobe Systems and Sara Lee.

What’s interesting about this investment, according to Scott Valentin, an analyst with FBR Capital Markets, is that activists don’t commonly look to invest in financial firms because of the stringent regulations, such as the Fed having to approve capital plans. However, many analysts noted that in the case of Amex, the price and potential may have simply been too hard to resist, despite the added complexity of working with an FI.

“It’s a perfect opportunity, American Express is ripe for an activist to take a sizable stake,” said Stephen Biggar, an analyst at Argus Research, who recommends buying the shares. “The stock has taken a big hit.”

EMV: Full Steam Ahead – Or – Running Out Of Steam?

The EMV stopwatch is ticking – and at this point it is ticking pretty darn loudly. As of today, there are 44 days until the liability shift goes into effect, and merchants who are not ready to abandon the mag stripe for the chip face full liability for future frauds when EMV cards are presented and they do not have terminals capable of processing an EMV transaction.  

And yet despite the nearing proximity of the EMV deadline, it seems the movement to convert the nation’s cards is perhaps petering out some, especially among consumers who seem manifestly uninterested in the coming change.

A recent poll indicates that only one in 10 Americans reported receiving chip-enabled cards. That poll of about 1,000 people was  conducted by GfK Public Affairs for the Associated Press. The poll further found that among the 10 percent who are holding EMV cards only 35 percent confirmed actually using their card in a chip card reader, while another 30 percent admitted they were unsure exactly how to use the new card.

The data strongly indicates that there is an awfully large gap to bridge when it comes to EMV adoption — perhaps much larger than anyone had thought.  

In the U.S., about 14 percent of the 11.8 million operating terminals are EMV-compatible, putting the nation in last place for EMV adoption. By comparison, nearly 95 percent of payment terminals in Western Europe accepted EMV cards.

In 2014, the U.S. accounted for nearly half of all global gross losses on cards and U.S. card issuers were hit with $3.89 billion in card counterfeiting losses. The spree of data breaches has added fuel to the fraud fire, with millions of stolen card numbers and cardholder identification information being made widely available.

And consumers, despite their low EMV adoption rate, do seem to be genuinely concerned about fraud risks and retailers’ abilities to protect their information. Almost 40 percent of those surveyed expressed extreme or high concern about the security of their personal information when shopping in-store, and that figure jumped to 45 percent for online purchases.

However, that concern about security has not necessarily translated into wide enthusiasm for EMV, as most consumers don’t seem to really understand it, or how they fit into protecting their data. Nearly 46 percent of respondents disclosed not truly understanding why chip cards are being introduced, while 22 percent communicated doubt that the move will make any improvement to their security.

And consumers aren’t the only ones not feeling the love. According to a DDPR survey of 26 ISOs and acquirers in the first quarter of 2015, only 30 percent expressed interest in pursuing EMV with a partnership or vendor relationship. With less than one-third reporting interest incidentally, EMV clocks out as the thing they are just about least interested in.

Beating EMV was interest in mobile point of sale (72 percent), digital loyalty (68 percent), semi-integrated payments solutions (62 percent), integrated payments (58 percent) and eCommerce gateways (46 percent.)

The Chinese Currency Kerfuffle

Last week, China’s currency, the yuan, took a 4.4 percent tumble over the course of about three days. And while contemplating Chinese currency devaluation does not seem like a natural favorite for almost anyone, the deep dip in the yuan has caught world’s attention, and raised some alarm.  

China’s relationship to its currency is rather different than the relationship most power player economies have with theirs. In most of the world, the U.S. for example, the market determines a currency’s value. Government action through monetary policy can greatly affect that value, but the day in day out value of the dollar is set by the supply vs. demand of dollars — not by the U.S. government.  

That is not how China rolls; instead, the Chinese government has pegged the yuan’s value against a collection of international currencies and the central government manages their currency’s value on a day-to-day basis.  

And for the last decade or so, China has been defending itself against claims that it uses the management authority to keep the yuan artificially cheap – which de facto makes Chinese consumer goods cheap, especially if one is buying them in a high value currency like the dollar.

That critique became increasingly pointed during the immediate aftermath of the Great Recession in 2008, when Chinese currency manipulation was often accused of being yet another lead weight on the struggling to get into first-gear U.S. economy, since Chinese exports were stealing business from American firms desperately in need of customers.  

Sudden Chinese currency devaluation tends to draw a negative reaction, however, many have pointed out that the shape of this devaluation is a bit different from those in years past, when a strong and quickly developing Chinese economy was being powered by currency being kept artificially low. This current currency drop, on the other hand, is predicated upon the fact that the Chinese economy has been contracting sharply of late — and devalued currency is the normal market response to that. The Chinese government is not pushing the value of the yuan down in this case — they are simply allowing it to fall in line with market pressures.  

“If you want to be optimistic, you could argue that this is really a case of China testing the waters about trying to move from a world where it fixed the value of the currency to one where it’s set by the markets. It’s trying to move from a world where, essentially, it’s been like old-style socialism in finance to one’s which is a bit more like something that Americans are familiar with,” financial writer Gillian Tett explained to NPR last week. “And by moving to a more floating exchange rate, which has been devalued, it’s also trying to win approval from the International Monetary Fund and make its currency more widely recognized as a potential benchmark for the global economy. “

However, Tett noted, there is much darker interpretation here also available — and one that should be of concern to anyone watching the markets these days.

“The pessimistic interpretation is that, actually, this is China panicking about the fact that its economy is slowing down and trying to provide a quick fix boost to its economy and doing so in rather a clumsy way that could actually end up backfiring.”

Because, August — though widely perceived as a “do nothing” month in financial services where everyone goes on vacation — is actually often the cauldron from which economic disasters spring.  

“Think back to 1997, when you had the Asian financial crisis. Then, in 1998, you had Russia. And then you had Long-Term Capital Management, the hedge fund blowing up,” Tett noted. “And then, of course, in 2008, you had the precursor to the Lehman Brothers crisis as well. So unfortunately, summer months are often anything but a vacation for the markets. I suspect that’s part of what’s going on right now.”

So to watch for? Based on the data, changes from Amex, some serious EMV soul-searching and a potential tidal wave of turmoil from Chinese shores.  

Have a great week!