How Mastercard Plans To Beat Visa

'There are some things money can't buy. For everything else, there's MasterCard'. With that slogan, Mastercard became one of the world's most recognizable brands. It is the second largest card network in the US, accounting for more than a quarter of all purchase volume using a payment card . Internationally, nearly a quarter of the over $624 billion spent using a payment card in 2022 was made using a

MasterCard. Mastercard is a huge company. In fact, they're the most accepted card worldwide in terms of the number of countries. As the world transitions to a more cashless society, MasterCard's value has continued to soar. As of May 2023, the company had a market cap of over $360 billion. Shares of the company have seen nearly 100% gain over the past five years. Post-financial crisis, p re-pandemic, MasterCard

grew earnings at a ten year CAGR of 20%. That's extraordinary. For context, earnings growth of the S&P overall, the market overall is like in the high single digits. But pressure is mounting as MasterCard faces growing competition and stricter regulations. When you have a large enterprise as large as MasterCard, perhaps the biggest risk to their business model is regulation. So how is MasterCard able to generate so

much revenue and how does it set itself apart from its competitors? Mastercard was founded in 1966 by the Interbank Card Association as a direct competitor to BankAmericard, which would later become Visa. Mastercard's original founders tried to get a Visa license and was denied, and so they decided to make MasterCard, and it reeled in a bunch of smaller banks to do so. And then eventually MasterCard obviously

went overseas and it's been growing nicely ever since and continually diversified their business model. Together, Visa and MasterCard dominate the payment network industry. The two companies account for 87% of market share based on purchase volume in the United States. Visa and MasterCard have the benefit of being the original ones in a market where there's tremendous first mover advantage and a tremendous incumbency effect, because once you

have merchant acceptance and once you have the card issuance like two sides of the two sided network, it's extremely difficult to gain that scale if you're a third party coming into the market. Internationally, Visa and MasterCard account for 63% of market shares based on global purchase volume using a payment card. They essentially set the standards and then they would just go to groups of banks in

other countries and say, 'Hey, we've got these standards. We've got all of this technical infrastructure that works for this. Why don't you just adopt ours? Why would you ever create a new one, a competing one?' And so they very effectively expanded around the world as a result, over the following decades. Like Visa, MasterCard does not issue credit itself. Instead, they function more like toll operators that

facilitate the transfer of payments. Their network involves four players: the consumer, merchant, acquirer and issuer. When a consumer swipes their card to make a purchase from a merchant, MasterCard's network communicates back and forth between the acquirer, the merchant's bank and the issuer, the bank that issued the consumer's cards to authorize, clear, and settle the payment. Mastercard and Visa do not extend credit. They're not lenders. They're

merely the payment processors. But that's a very lucrative business. Even just getting a small slice of those transactions, that pie continues to grow because globally there continues to be a sizable transition away from cash and towards digital payment methods. Mastercard made over 64% of their revenue through fees generated from their intricate payment network in 2022. Mastercard's main revenue source is interchange fees that come from card

processing. And they have different types of transactions and volumes that go over their network. They can be domestic transactions, cross-border transactions. The way I would think about it is that they make on average about $0.30 on every $100 transaction that's processed with one of their cards. But because of the tremendous scale, because of the tremendous sums of money that they're processing, this can be a very

lucrative business model. The rest of the revenue comes from what MasterCard refers to as 'value added services and solutions.' The biggest categories of value added services are really in two buckets. One bucket is all related to advisory analytics and data. So as you can imagine, MasterCard has extraordinary amounts of data about consumer spending. So literally consultants that will work with banks and then we'll also work

with retailers and consumer packaged goods companies, even governments in many cases to apply that data and insight into helping build their businesses. The other very large portion of value added services is all cybersecurity and advanced security related services. It's a very important part of their business. It also is very mutually beneficial with the underlying base business. It reinforces the base business so the two kind of

work hand in glove. Despite their success, MasterCard has long lagged behind Visa in company performance. They're just over 3 billion MasterCard in circulation compared to Visa's 4.1 billion. Mastercard reported a net revenue of 22.2 billion in 2022, compared to Visa's 29.3 billion in the same year. Worldwide, Mastercard accounts for nearly a quarter of market share based on purchase transactions, while Visa alone accounts for more than

a third. The reason is really simply one of history. The market shares amongst the card networks barely budge. They move like a point. If anything, globally, MasterCard has modestly gained share over the last, say, ten years. But they barely move because there's just a huge, you know, incumbency bias to the whole ecosystem once you're using one type of card network, you don't typically switch it. Yet

MasterCard stock has outperformed Visa's over the past five years. Experts say MasterCard simply has more qualities that would entice an investor. It has faster top line growth. It has that acquisitive nature that gives it a premium. And there's the perception that there's more margin expansion that's achievable, boosting EPS growth overall. It can grow more. Since it's on that smaller base, people do believe one day it

could get to that same margin that Visa is and they're also taking some partners away. One edge that MasterCard has over Visa is its position in the international market. A lot of that has had to do with Europe. Visa did not use to own Visa Europe. It was brand Visa, but it was still a separate entity. Back in 2016, 2017, Visa was able to buy Visa

Europe and they have gone through a huge effort to modernize Visa's operations in Europe. But in the meantime, MasterCard has taken advantage of that sort of disruption to outgrow Visa significantly in Europe. And that's obviously a really big cross border hub as well. So it's kind of a double whammy benefit to revenue when you have more market share in Europe in particular. Besides Visa, MasterCard also

faces competition from companies like American Express and Discover, which account for 13% of the domestic market combined. But they're also combining forces to fight external threats, especially in the digital payment front. They're sort of frenemies with the other card networks like Visa and like American Express, because the whole card ecosystem competes against alternative forms of payment like account to account payments, like a digital wallet style

direct payment like Venmo or something like that. There are these alternative, usually their country specific or regional, but these alternative forms of payment that don't use cards, that's really the the bigger competition. In recent years, MasterCard has made big acquisitions and investments to focus its technology on business to business payments. Mastercard estimates B2B payments is a $135 trillion industry. One would be expense reports, for example.

MasterCard is actually a big player in virtual cards that companies can give employees for pre-approved travel expenses. There's also the issue of paying suppliers, so you picture that maybe you're some kind of vendor and you have supplies delivered and then you want to pay that company and that can be done in real time with MasterCard. B2B payments are a gigantic market, but difficult to crack into.

That has not really paid off yet, to be honest. But these are investments that can easily take 5 to 8 years to really see them come to fruition. One of MasterCard's several challenges is the rising competition in the payment network landscape. I would think of it as, sure, Visa is the Big Brother competitor that they're up against every day. American Express is sort of the specialty

competitor that they're up against every day. But perhaps the more difficult competitors for them to compete against is the sort of death by a thousand cuts competitors like dozens if not hundreds of small competitors in 200 countries around the world that are all just trying to chip away a little bit at their business. That's like the trickier thing. It's like fighting on all fronts at once.

But rising competition could also prove to be an opportunity. While there are a lot of competition among different payment providers, they still have a really strong market share, really strong positioning because what we found is that the competitors actually want to partner with MasterCard versus trying to take them out. And so as Mastercard has continued to expand its tentacles across the globe, they found themselves in,

even, I would argue, a better competitive positioning than before the pandemic. The payment network industry is one of the most heavily regulated markets in the world. As a result, MasterCard has faced numerous regulatory and legal challenges over the years. Most recently, the US Justice Department began an antitrust investigation into MasterCard's debit card program. Mastercard declined to participate in this documentary, but said they are cooperating with

the Department of Justice. They currently are not speculating about potential outcomes. When you have a large enterprise as large as MasterCard, perhaps the biggest risk to their business model is regulation. I think a lot of the regulatory challenges relate to the fact that MasterCard, like Visa, is a very big, important global company. I mean, these are companies that we engage with almost every day, whether we

think of it or not, through our daily transactions. So I think probably rightfully so, there is a lot of scrutiny there. The Credit Card Competition Act of 2022 currently introduced to the Senate could also have a major impact on MasterCard's business. The bill aims to enhance competition amongst credit card networks, which could potentially end the dominance enjoyed by Visa and MasterCard. If the Credit Card Competition

Act becomes law, I think it would have a massive effect on MasterCard and the whole credit card industry. I don't think it's going to pass, but if it did, it would be a really big deal. It would basically cause every credit card agreement to be rewritten because it wouldn't really be just a Visa or MasterCard anymore. Every card would have to have at least two networks

that merchants could choose from, and they couldn't both be Visa and MasterCard. Regardless, experts say that MasterCard's future success lies in relying on what it is they do best, providing a valuable service to its customers. We step back and think about how MasterCard stays most relevant in their space. We think it's by expanding their network across merchants. It's making sure that they are where the customer

wants to be, when they want to pay and that they can pay the way the customer wants. That is the critical factor for MasterCard to stay relevant. They're doing a great job of it now and we don't expect that to change in the future.