Page 1: What is it
MasterCard is a payment technology and network company, operating the world‟s second
largest payment network connecting banks, consumers, and merchants in over 210 countries.
MasterCard was collectively owned by the banks until it became public in 2006 (Visa went public
in 2008).
MasterCard operates a duopoly in the electronic payments market. 85% of all retail transactions
globally are still in cash. MasterCard will benefit from a) the transition to electronic payments; b)
increase in personal consumption spending (PCE); c) rising middle class in Emerging Markets.
Page 2: How does the credit card ecosystem work:
At the highest level, the electronic payment ecosystem is funded indirectly through the Merchant
Discount Rate (MDR), a fee embedded in the sales price of products purchased at a retailer. The
MDR encompasses all the transaction related fees associated with processing, settling, and
clearing a transaction through all participants in the network – and is subtracted from the total
amount paid by the consumer when payment is remitted to the merchant.
The MDR is negotiated between a merchant acquirer and a merchant, and caries significantly
based on the merchant‟s purchase volume: the higher the merchant‟s purchase volume, the
lower the MDR.
Page 3: Payment system network
Page 4: What is the MDR
The MDR is composed of the following fees:
Interchange – Interchange typically comprises the largest portion of the MDR in a transaction,
and is intended to cover the cost of cardholder chargeoffs and most credit card fraud. At the low
end, interchange ranges between a flat fee of $0.23 (for a debit transaction), and 2.95% at the high
end (when a premium high-end credit card is used).
Interchange rates for various transaction and card types are set by the card networks, although
issuing banks receive the entire interchange fee, Visa and MasterCard do not receive any
portion of the interchange fee. Interchange received the greatest scrutiny of any aspect of the
electronic payment ecosystem over the past five years. As part of the Dodd-Frank financial
reform legislation in the United States, Congress sought to regulate the fees charged by banks for
consumer credit card transactions (see our discussion of regulation elsewhere in this report).
Page 5: MDR continued
Network and data processing fee – The network fee is charged by the card network for routing
the transaction, and is typically in the range of 4 – 25 bps of the purchase price.
Merchant acquiring/processing fees – The processing fee is charged by the merchant‟s credit
card processor for transaction handling and clearing on the merchant side, and is typically
assessed as a fixed fee (for example $0.003 - $0.10 per transaction, depending on volume). The
acquiring fee is changed by the merchant‟s acquiring bank for handling and settling the
transaction, and is intended to cover costs related to settling transaction balances with
merchants, as well as the cost of merchant fraud.
Page 6: Business Overview
MasterCard is a technology company in the global payments industry that connects consumers,
financial institutions, merchants, governments and businesses worldwide, enabling them to use
electronic forms of payment instead of cash and checks.
A typical transaction on their network involves four participants, in addition to MasterCard:
card holder, merchant, issuer (card holder‟s financial institution) and the acquirer (the
merchant‟s financial institution).
Page 7: Business Drivers
1. Consumption growth
2. Card Penetration into Cash economy
3. Growth in online / electronic payment
Page 8: Consumption Growth
Payment volumes rise and fall with personal consumption expenditure – PCE
Certain countries have higher growth in PCE, while others lag. In addition you have to
understand what types of PCE spending could a card be used.
Simplistically one can assume that 60% of global GDP is PCE and a then a smaller 80% of PCE is
Purchase PCE.
PCE that isn‟t „purchased‟: Housing expenses, healthcare (ex-out of pocket), Financial Services,
Social Security
If GDP grows 3% globally, then consumption grows ~5-6%per annum.
Page 9: Card Penetration
In terms of growth attribution, Visa and MasterCard estimate that – 50% comes from cash/check
penetration, 25% from PCE growth globally, and 25% from pricing. Management guided to for
2013-2015: 11-14% CAGR revenue growth, minimum of 50% operating margins and at least 20%
CAGR of EPS. Card penetration is estimated to be about ~40% currently, and is expected to grow
2-4% per annum.
Page 10: Cash to Electronic Transition:
Both Visa & MasterCard are focused on the singular growth opportunity surrounding cash
transaction volume.
According to Visa‟s estimate, of the ~$13 trillion PCE in Developed Markets, 41% is still in Cash
/ Check. This represent a ~$5 trillion opportunity, growing at 4% per annum. This implies that
PCE is growing at ~$500 billion per annum.
While in Emerging Markets, the PCE is ~$10 trillion, with 62% in Cash / Check. This represents a
~$6 trillion opportunity growing at 10% per annum. This means that only is there a ~$6 trillion
opportunity there today, but that PCE as a whole is growing at ~$1 trillion per annum.
Page 11: EM Penetration Levels:
Penetration levels of at least 60-70% are attainable, as some countries are there already – while
many lag far behind.
Page 12: Revenue Drivers:
Domestic assessments: fees charged to issuers and acquirers based primarily on the dollar
volume of activity on cards and other devices. The revenue here is a function of: a) assessment
fee b) GDV and c) rebates as a % of revenues. These fees have historically been 9-10 bps. GDV is
expected to grow as a function of a) number of cards issued and b) growth in mobile payments.
Broadly about a transition from cash to electronic payments.
Cross-border volume fees: cross border volume fees are charged to issuers and acquirers based
on the GDV of activity where the merchant country and issue country are different. MA charges
a cross-border fee equal to 0.8% of the transaction amount on all international purchases. In some
circumstances when the transaction is in a foreign currency, a currency conversion fee is also
charged. Cross-border volumes are a function of the travel market, as more people go abroad,
higher likelihood of cross border fees.
Page 13: Revenue Drivers (continued)
Transaction processing fees: fees charged for both domestic and cross-border transactions,
based on the number of transactions. The revenues here are a function of: a) MA connectivity fee
b) total transactions processed c) authorization / settlement and switch fee per transaction and
d) rebates as a % of revenues. Authorization fees have historically been 7 cents per transaction.
Connectivity fee of 0.5 cents per transaction.
Service fees: fees charged for consulting, research, compliance and penalties.
Page 14: Business Economics
Of the 1-4% fee charged at purchase, MasterCard gets about 20 bps. About 150 bps goes to the
buyers / customers bank. Another 30-50 bps to the hardware partner, the MSP (merchant service
provider), merchant‟s bank. Effectively by using the MasterCard network, the merchant and
buyer is signing up to pay them an incremental 20 bps. Not a high number, and not one likely to
change / impact purchase decisions.
MasterCard has significant operating leverage in the business, between 2009 and 2013, revenues
grew by 60-65%, but net income grew by over 100%, and earnings per share grew by over 130%
(due to buy backs).
Page 15: MasterCard's goals:
1) Increase their core businesses globally, both for products such as credit, debit, prepaid and
commercial – and increasing the number of payment transactions
2)
Seek new areas of growth in
1.New markets
2.Encourage current consumers / businesses to use MasterCard for new
payment areas
3.Bring in SMEs which have not historically used MasterCard products
4.Financial inclusion for the unbanked and under banked
3) Building new areas of business by:
1. Taking advantage of the opportunities from the convergence of physical
and digital worlds;
2. Using data analytics, loyalty solutions and fraud protection services to
add value
Page 16: Potential for disruption
Page 17: Understanding the duopoly & its impact
Both Visa and MasterCard make about 24-27 bps in net yield per transaction. This amount is
relatively stable, and slightly higher for Visa.
Net Yield = Net revenue (revenue after the impact of client incentives) per $100 purchase
volumes.
Page 18: What impacts yield
Yields are a dynamic equilibrium and are driven by the following forces:
Negative for yields:
1. Increased client incentives
2. Increasing debit mix
3. Lower mix of cross border volumes
Positive for yields:
1. Growth in online retail
2. Online has higher credit vs debit usage
3. Increase in international processing
Page 19: Long term risks to yield
The biggest risk to the industry is a loss of duopoly pricing power
This can come from a loss of price discipline or new technology
Page 20: Can margins grow?
These are high tech payment networks, so there should be a lot of room for margin growth with
growing volume and scale.
But what is the evidence?
Visa which is 2x the size of MA, has a higher margins than MA
MA: ~50%
JPM: ~60%
Page 21: Why the difference in margin
Page 22: Simple Model
Volume Growth:
8-10%
Revenue Growth:
8-10%
Net Income Growth: 13-16% (from operating leverage / margin expansion)
EPS Growth:
16-20% (from buy backs)
While PCE only grows at 5-6%, with growing penetration you can get 3-4% of additional volume
growth, especially a lot of the growth comes from EM countries where both PCE and penetration
are growing faster.
Page 23: MasterCard vs Visa?
Both are driven by the same big themes:
- Card penetration
- PCE growth
- Stable yields
- Buy backs
MasterCard also gives you potential for margin improvement / cost cutting and ex-US (EM)
share gain
Page 24: Impact of EURUSD
About 30% of MasterCard‟s revenue is non-USD, primarily earned in Europe.
This adds an additional layer of volatility and noise when EURUSD have large moves.
In 2015, when EURUSD depreciated significantly, top line & income growth was impacted.
Page 25: Valuation
MasterCard isn‟t cheap – if you can assume that valuation multiples can stay around 23-25x, then
you can buy this with a 2-3 year as a multi-year compounder.
Page 25: When to buy this stock
On weakness !
Page 26: When to buy this stock (cont’d)
In late 2014, the market was unsure about their business, and the stock had gone nowhere for
over a year. This seemed out of place to us given their growing top line. We began buying in the
high 70‟s.
In late 2015, around $95-100, we sold 25-30% of the position, since the multiple has re-rated
without a growth in earnings.
Even the best businesses and stocks have 10-20% moves in a year.
Do your work and then be ready.
Page 27: Appendix:
History of MasterCard:
1966: Founded as the Interbank Card Association (ICA)
1969: "Master Charge” purchased by the California Bank Association
1979: Renamed MasterCard to reflect a commitment to international growth
1985: Acquired an interest in EuroCard (predecessor to Europay International)
1988: Acquired the Cirrus® ATM Network
1991: Launched Maestro®, the world‟s first online point-of-sale debit network
1997: Launched “Priceless” advertising campaign
2001: Launched MasterCard Advisors, the largest global consultancy focused on the payments
industry
2002: Merged with Europay International
2002: Converted from a membership association to a private share corporation
2006: Transitioned to a public company with a new corporate governance and ownership
structure
MasterCard begins trading on the New York Stock Exchange under ticker symbol MA
The MasterCard Foundation was formed
2010: Ajay Banga named CEO
2010: Launched MasterCard Labs to promote greater innovation in electronic payments
2010: Acquired DataCash Group plc, to expand e-commerce payment solutions
2011: Completes acquisition of the prepaid card program management operations of Travelex
(now referred to as Access Prepaid Worldwide) and announced a joint venture with Telefónica
to offer mobile financial solutions in Latin America
2012: Acquired Truaxis, Inc., a California-based provider of credit and debit card-linked offers
made to consumers through merchants and financial institutions
2013-14: Introduced MasterPass, established HomeSend joint venture with eServGlobal and Bics,
and acquired Provus and C-SAM