DFS Discover Financial Services

How much your Aunt Agatha spends this holiday season, and whether she puts that flat-screen television purchase on her plastic, will determine the cheer factor in the credit-card sector.

The holiday sales season kicks off with Black Friday, the day after Thanksgiving, traditionally the busiest shopping day in the U.S. in terms of foot traffic and sales. Investors, analysts and company executives, searching for signs of an economic recovery, will be sifting the numbers to see how much shoppers spend through Christmas on their cards.

Issuers of plastic, such as Capital One Financial Corp. (COF), JPMorgan Chase & Co. (JPM), Bank of America Corp. (BAC) and Citigroup Inc. (C), and credit-card payment processors, such as MasterCard Inc. (MA) and Visa Inc. (V), earn income from fees stemming from card transactions. Therefore, the more consumers charge on their plastic, the more these companies earn by way of fees. Discover Financial Services Inc. (DFS) and bigger rival American Express Co. (AXP) both issue cards and process transactions.

As economic woes and unemployment have grown, however, consumer spending has slowed, eating into the fees the companies collect from transactions.

How much consumers spend during the holidays, starting Friday, will offer the card sector a window into spending trends and consumer confidence. Moreover, seasonal trends also are scrutinized because they pose additional risk: Strapped consumers who borrow more on their plastic could fall even further behind on payments.

"Retail sales numbers will give a directional view as to spending patterns on credit cards," says Sanjay Sakhrani, an analyst at Keefe, Bruyette & Woods. "Black Friday will give us some prelude to how the holiday shopping season will pan out."

Unfortunately for credit-card companies, more holiday shoppers will pay with cash this year, according to a survey polling 8,692 consumers from the National Retail Foundation, a trade group. The percentage of shoppers using credit cards is expected to fall 10.2% from last year, with 28.3% of consumers using credit this year, down from 31.5% a year earlier. Debit-card use is expected to rise, but these cards are less profitable for banks.

Another survey, from Visa, also indicates that consumer spending will be muted this season. Consumers plan on spending 20% less on holiday shopping than last year, according to the online survey, which polled 1,000 people.

The holiday shopping trend is "important for credit-card issuers," says Scott Valentin, an analyst at FBR Capital Markets, because "it usually results in a build-up in [card] balances in the fourth quarter."

- By Aparajita Saha-Bubna, Dow Jones Newswires; 617-654-6729; aparajita.saha-bubna@dowjones.com

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