MasterCard's Logo
MasterCard (MA) Stock | NYSE: MA

Covered by Stratosphere

Master of Payments

MasterCard Inc. ("MasterCard") is an American financial technology company that enables consumers, merchants, banks, businesses, and government organizations to connect easily through its own global electronic payments network. MasterCard is not a credit or debit card company, but rather a host of payment rails that authorizes, clears, and finally settles transactions.

Disruptors would rather partner with MasterCard than attack it and consumers leave stores that do not accept MasterCard-branded products. This is what makes MasterCard one of the best businesses in the world.

Stratosphere Score

9

Growth

5

Valuation

7

Quality

9

Margins

10

Dividend

8

Balance Sheet

4
Adrian Iwanicki

Author

Adrian Iwanicki

Equity Analyst

Investment Thesis

  1. MasterCard hosts one of the most powerful network effects in the world. As merchants and consumers increasingly shift towards cashless means of payments, more merchants and consumers adopt MasterCard-branded products.

  2. MasterCard does not issue debit or credit cards or credit to individuals and businesses. The company operates a payment network on which global transactions flow and change hands. The business model is extremely lean, generating high margins and massive profits.

  3. Around 80% of the world’s transactions are still conducted with traditional payments methods like cash and cheque. Emerging markets use the most cash – growth in these regions and MasterCard’s efforts in these areas will bring cash usage way down and cashless methods way up.

  4. Financial technology ("fintech") is advancing at a rapid pace and may pose a threat to MasterCard. However, MasterCard's mind-blowingly large and flexible open-loop network is too strong for disruptors to disrupt. Instead, many of these firms are partnering with or getting acquired by MasterCard to grow and succeed. Despite this, new innovators still use and rely on the payments "rails" networks that MasterCard and Visa have built.

Key Company Metrics

A set of metrics we constantly keep updated to monitor the investment thesis.

Competitive Advantages

Two-Sided Network Effect

As the second largest global payments network fueling the cashless economy alongside Visa, MasterCard benefits from similar two-sided network effects to its larger peer.

Merchants and consumers alike benefit from MasterCard’s open-loop network, a network that supports general-purpose payment methods like debit and credit cards. This powerful concept, in unison with MasterCard's trusted and globally recognized brand name, spurred mass consumer uptake of MasterCard payment methods. 

As MasterCard users grow, this prompts more and more merchants to find ways to accept MasterCard payment methods to enable these consumers to pay with their MasterCard products and buy their goods and services. This works inversely as well - as more merchants accept MasterCard, consumers are enticed to snap up MasterCard-branded products to pay for things.

In contrast, a closed-loop payments network generally allows a consumer to deal with an individual merchant or select group of merchants. Closed-loop networks generally limit a broad, global network effect from ensuing in the first place due to its local focus.

MasterCard's open-loop network has high switching costs - for consumers and merchants to leave the MasterCard network for other services such as Buy Now, Pay Later ("BNPL"), those alternative payment services would have to convince enough consumers and merchants to scale down usage of their MasterCard-branded products. When shopping in-store and online is made so easy with MasterCard, it would take a substantial amount of time and effort for merchants to overhaul their systems and processes, and consumers would have to forego the simplicity inherent in using MasterCard products and seeing all their transactions in one place.

They would also have to beat the unit economics of MasterCard (and Visa) to make that happen, which is no easy feat. Merchants may be unwilling to adopt some of these services as they would be much smaller in size and provide services at a higher cost than MasterCard.

As a result, new innovators in the fin-tech space usually choose to leverage the MasterCard (or Visa) network as opposed to trying to fix a massive open-loop network that is far from broken or ripe for disruption in our view.

The Payment Rails Duopoly

Visa and MasterCard own about virtually the entire market (excluding UnionPay in China) together as measured by purchase transaction amounts made on network cards. MasterCard owns about a third of the market itself.

This duopoly position allows MasterCard to reap the benefits of pricing power stemming from high barriers to entry. Smaller players have a tough time competing with the monstrous unit economics of MasterCard. As a result, many of these smaller players partner with MasterCard or get acquired by it rather than try to overpower a business deeply entrenched in the flow of money all over the world.

Protective Margins

MasterCard has incredible unit economics that are a direct result of its globally recognized name, high switching costs, and powerful network effects. Free cash flow margins consistently above 40% are unbelievably high, and this allows MasterCard to conduct business in ways that many businesses could only dream of.

These margins and resulting cash flows allow MasterCard to easily pivot into new verticals, reinvest into its business, and innovate in the payments space organically and through M&A.

Opportunities Ahead

  • Take a look around - the world is becoming cashless. The world has already been trending in this direction and the COVID-19 pandemic simply accelerated it further. Both consumers and merchants opted for digital forms of payment and e-commerce usage drastically increased as well, forcing many individuals and businesses to use MasterCard products or become customers of MasterCard for the first time. Global non-cash transaction volume is expected to surpass 1 trillion total transactions by 2023. Consumers and merchants are abandoning cheques and cash for more efficient electronic methods of payments online and in-store.

  • Mature economies like the US and Sweden have largely dropped cash usage in favour of digital methods. Emerging markets, however, still have relatively high cash usage. Emerging markets make up about 85% of the global population and almost 90% of people under 30 around the world live in emerging regions. MasterCard has been making strides in emerging markets as part of the company's long-term focus established in the early 2010s. Recognizing that these regions are oftentimes underbanked, MasterCard has a tremendous amount of opportunity to establish the technologies customers and merchants need to go digital.

  • MasterCard has the payment rails that financial technology firms only wish they could build. Because of the MasterCard network's sheer size and open-loop capabilities, many fin-techs choose to operate on or with MasterCard rather than try to get around its network. With this, we see trends in BNPL and cryptocurrencies as tailwinds rather than headwinds, as these have been expanding MasterCard's payment rails use cases until today.

  • All while MasterCard is investing for growth, whether that is organically or through partnerships and acquisitions, management is encouraged to return capital to shareholders. With free cash flow margins above 40%, MasterCard has tons of cash it can distribute to shareholders or perform incredible acquisitions that further shield the company from competition.

Risks

New Technologies

The fin-tech and payments industries are seeing a plethora of new entrants that appear to be disrupting traditional banks and possibly the payments rails. Although we believe these risks are overblown, concepts like BNPL, cryptocurrencies, and decentralized finance may ultimately develop and scale to a size large enough to allow consumers and merchants to circumvent the payments rails. These technologies are still relatively nascent, so we view this risk as a potential "terminal risk" (i.e., a large risk that may materialize but after a long period) that we will closely monitor, especially if these alternative technologies can compete on price.

Cyclicality

MasterCard's business model is effectively being a "taxman" on global cashless transactions. The main driver for revenues and growth are the number of transactions hosted on its payment network. Economic recessions, closures, lower cross-border travelling, and any other events that could possibly harm any region’s aggregate spending appetite will hinder MasterCard’s growth.

Pricing

Although MasterCard does not make money through interchange fees, MasterCard sets these fees in compliance with local governments. Several governments and merchant groups have pushed MasterCard to lower interchange rates. Lower interchange rates may impact a local issuer's willingness to promote MasterCard-branded products, ultimately harming MasterCard's business.

Disintermediation

Fin-techs, governments, and other technology companies pose a competitive risk that may affect pricing or how MasterCard competes against them. Protective regulation, such as PSD2 in Europe, enables smaller players to create disruptive payment models that banks can adapt to and roll out to the public. These sorts of regulations can route payment transactions away from the MasterCard network or foster an extremely competitive environment in which MasterCard may be able to compete in a fashion that will sustain its growth and profits.

Regulation

MasterCard is a massive player in a duopoly. The company faces antitrust risks that may block solid strategic acquisitions or partnerships that regions or governments perceive as predatory. They may also block certain internal initiatives that attract additional market share to it. With the shift to cashless, we believe risks in this regard will only increase as MasterCard and Visa grow larger.

Join our stock investing newsletter

Investing articles and ideas in your inbox

We won't send you spam. Unsubscribe at any time.