) is one of the largest global payment solutions company in the
world and provides a variety of services to support the credit,
debit and related card payments of over 24,000 financial
institutions globally. Its main competitors are Visa (
), Discover (
), JCB and Diners Club. Transaction processing is the major revenue
source for MasterCard and constitutes about 32% of the
$293 Trefis price estimate for MasterCard's
Below we look at upside and downside scenarios due to key issues
such as: 1) regulatory overhang, 2) competition of mobile payment
methods, and 3) spending trends due to macro developments.
Dodd-Frank Reforms Overhang
The primary factor concerning the overall payment services
industry is the recent Dodd-Frank financial reforms. Last year, in
the wake of 2008-09 financial crisis, the U.S. government
approved a sea of changes in the financial services industry under
the Dodd-Frank Wall Street Reform and Consumer Protection Act. The
regulators sought to reduce interchange fees which card issuers
charge merchants on every transaction. In addition, card networks
providers such as MasterCard won't be able to prevent retailers
from accepting alternative modes of payments through discounts or
minimum purchase requirements.
The regulations are scheduled to be implemented in July this
year and could substantially hurt MasterCard's revenue from
transaction fees. However, the debit card industry along with the
U.S. Republicans are campaigning furiously in Washington to
delay or repeal the Dodd-Frank reforms. It remains to be seen when
this issue is cleared but a couple of years delay could result in
higher transaction fees for MasterCard.
Rise of Mobile Payments
The number of mobile payment users have been rising fast with
351 million users in 2009 which is estimated to reach 1.06 billion
by 2014 at a compound annual growth rate of 20.5%. Global mobile
payments transactions are expected to rise to $1.13 trillion in
2014 from $37.4 billion in 2009, at an annual growth rate of
Greater use of mobile payments and electronic payments on card
networks will benefit MasterCard and would substantially boost its
transaction volumes but if mobile payments are linked to bank
accounts or Paypal instead of card networks, growth in transaction
volumes would decline. Chris McWilton, Head of U.S. Markets,
MasterCard, jokingly referred to mobile payments as 'the death
star' of the card networks.
Macro Economic Outlook
Emerging markets like China have a booming middle class
population which provides a tremendous growth potential for card
payment business but the Chinese market is inaccessible for foreign
card networks as only China UnionPay is allowed to handle card
payments in China. The US card companies such as Visa and American
Express are protesting against the monopoly of UnionPay in China
and the US government is planning to take up this issue
at the World Trade Organisation. MasterCard has partnered with
UnionPay last year but would still benefit China opens up its
However, a slow and choppy economic recovery in the US could
overshadow the growth in China. According to Chris McWilton,
"It's slow; it's erratic - the statistics we see suggest it is a
slow recovery. People continue to be cautious with what they spend.
Confidence is building, but at a fairly slow rate."
Rising crude oil prices could further curb spending which would
result in lower transaction volumes for MasterCard.
+68 - Upside Scenario
1) The connectivity fee stays the same until 2012 (assuming that
changes are not pushed through) and then resumes the trend we
forecast in our base case
2) The authorization settlement and switch fee remain stable
assuming the Dodd-Frank proposals get delayed or reversed
3) Transaction volumes increase dramatically as international
growth in markets like China, for instance, outpace current
This would imply a price estimate of $361, or 23% upside to our
already rosy outlook combining for a potential total return of 44%
ahead of the market price.
- $62 Downside Scenario
On the other hand if some of the key issues go against
MasterCard such as:
1)MasterCard's 'authorization, settlement and switch fees' and
'connectivity fee' decline due to harsh regulations
2) Transaction volumes decline if mobile payments are linked to
bank accounts directly bringing on the pending 'death star'
combined with lower spending going forward due to macro concerns or
an oil price shock
Together this could knock $62 off our price estimate, which is
about 8% below the market price.
See our full estimates for MasterCard