Card giants Visa (
V
) and MasterCard (
MA
) are scheduled to announce earnings for the quarter ending
September on Wednesday, 31
st
October, 2012. Although MasterCard announced earlier in an
investor-community meeting that it expects revenue growth in the
second half of the year to be lower than the 9% growth observed in
the second quarter, we expect both companies to benefit from an
increase in consumer spending in the U.S. Our price estimates of
$135 for Visa
and
$451 for MasterCard
are both in-line with the current market price.
See Our Full Analysis for :
Visa
|
MasterCard
|
American Express
|
Discover Financial
The U.S. is the biggest market for both Visa and MasterCard,
accounting for 55% of Visa's net revenues. Revenues are earned by
charging quarterly service fees on the basis of payments volume and
data processing fees which include clearing, settlement and
transaction processing fees on the basis of the number of
transactions processed for a client. These fees are dependent on
transaction volumes, and the higher the number of transactions
processed, the higher the income generated.
In the first half of 2012, 31.6 billion cashless (through
credit, debit and prepaid cards) transactions were executed in the
U.S., an increase of 4.4% over the first half of 2011. Consumer
spending in the U.S. has since picked up as household spending,
which accounts for 70% of the GDP, increased 0.5% in August and
0.8% in September, the highest increase since February this
year.
Market Share
In credit card transactions in the first six months of 2012,
Visa maintained the highest market share of 48%, whereas MasterCard
accounted for 27% of credit card transactions in the U.S. American
Express (
AXP
) with 17% and Discover Financial (
DFS
) with 8% rounded up the top four credit card transaction
processors in the U.S. We expect this trend to continue this
quarter as Visa has an established reputation and a vast network of
banks which issue cards carrying its logo.
The major change last quarter came in the debit cards department
where for the first time is history, MasterCard debit transactions
exceeded Visa credit card transactions. This was due to the effect
of the Durbin amendment to the Dodd-Frank bill. The bill requires
banks with more than $10 billion in assets to use separate payment
processing networks for signature authorized and PIN authorized
debit card transactions. As a result, debit card transactions
processed through Visa's network were down 3% whereas MasterCard's
debit transactions increased by 17% allowing MasterCard to increase
market share to 27%. Debit card transactions account for 64% of all
transactions in the U.S. and gaining market share in this domain is
a big step forward for MasterCard.
International Growth
There is immense potential for growth outside the U.S., and Visa
estimates that over 30% of consumer spending worldwide ($10
trillion in gross dollar volume) is still carried out through cash
and checks. The biggest market is China where the penetration is
quite low, with only 285 million cards in circulation for a
population of over a billion. MasterCard estimates that card
spending in the country will grow from $1 trillion to $2.5 trillion
by 2025. Strict government regulations are the main deterrent for
growth. The Chinese government has greatly favored state-owned
domestic supplier, China UnionPay (CUP) by demanding every merchant
and ATM across the country to accept UnionPay cards and requiring
all cards issued in China to work with UnionPay, allowing the
company to maintain a monopoly in the industry. A WTO hearing
earlier this year has ruled in favor of Visa and MasterCard stating
that the Chinese government was violating its regulations by not
allowing the two to expand their businesses. This might turn the
tide in favor of the two giants and allow for future expansion in
the country.
Mobile phone transactions hold the key to future expansion
as there are about three times more mobile phones than payment
cards in the China. Visa and MasterCard are both aggressively
expanding their mobile payment solutions. For more details on the
payment industry in China, please read our article : MasterCard Is
Ready To Break New Barriers In China, But How Successful Will It
Be?
V.me is Visa's digital wallet service, which has recently
entered a partnership with PNC Financial Services Group Inc., with
plans to expand to 6.3 million accounts by next year. MasterCard's
counterpart is PayPass. Technological advancements in the mobile
domain are set to revolutionize the payment industry in the next
decade, Visa and MasterCard will have to move fast to evolve as the
industry does.
Submit a Post at Trefis Powered by Data and Interactive
Charts
|
Understand What Drives a Stock at Trefis