Stock Story: Mastercard

April 2023

Mastercard is one of the most recognisable brands in the world. You may know Mastercard as the card in your wallet that can be used at merchants globally, or perhaps it’s from their memorable multi-decade ‘priceless’ marketing campaign. The network’s global penetration of nearly 100m merchants and 3.1 billion cards creates a seamless and ubiquitous payments  experience  that  is  ‘priceless’ to network participants, which makes it extremely valuable to shareholders.

Since Mastercard was formed in 1966 the network has been part of the payments revolution. Mastercard along with peers Visa, American Express and, more recently, PayPal have been transforming payments, and commerce more broadly. We’ve moved from the confines of paying in cash and cheque and signing to having ready access to credit and digital cash (debit) to swiping to tapping, e-commerce, mobile payments, digital wallets and real-time payments. The innovation has been remarkable, and beneficial, to consumers, merchants, governments, and shareholders.

Over the last decade Mastercard’s payment volumes, merchant network and card reach have more than doubled. This  growth  has  generated  attractive  15% annual compounded returns for shareholders.

The consistency and strength of the business are due to several layers:

5. Financial inclusion – Mastercard is a socially aware company, prioritising financial inclusion for underbanked members of societies. To date, Mastercard, across 94 countries, has brought more than 675 million people into the digital economy, 18 million female-led businesses and more than 10 million small and medium-sized enterprises. Mastercard has achieved this through investment in communities, non-traditional partners and industry groups, assisting with technology and new solutions. This investment is valuable for the poor and unbanked, lifting them from a dangerous and rapacious informal financial system and into the modern, efficient, and safeguarded financial system. Importantly, this investment grows Mastercard’s end market for decades to come.

The attractive dynamics of the payments industry continue to attract investment from competitors. However, to take market share from the four incumbents, any newcomer to the global payments business would need consumers and merchants to simultaneously accept its card, have banks/financial institutions to issue the cards and be connected to the merchant’s bank/financial institution. To achieve that, the entrant would need to achieve mass awareness, offer a simple means of payment, have ubiquitous technology, have positive consumer appeal (for example, fraud protections or associated rewards programs), be trusted (even though the issuing bank bears the risk of theft and fraud), meet regulatory requirements in every country in which it wished to operate, and fulfil arduous customer and merchant servicing needs. With these elevated barriers to entry, we’ve seen mixed attempts to drive competition:

• Thus far the barriers to entry have been too challenging for many well-funded fintech and technology companies outside of China. Apple, Meta, Alphabet and Samsung have all stepped into payments, but they are leveraging the payment companies’ infrastructure. Likewise, buy- now-pay-later and remittance companies rely on the incumbents. Cryptocurrencies are no threat either because payments this way are, so far, too slow and insecure to take market share and they face major regulatory impediments. Their volatile prices are another risk to adoption.
   
• Central banks, however, have different motivations. Their policy goals typically include safeguarding their domestic payments system, competition and efficiency (i.e., lower cost) in payment mechanisms. They have recognised the possible threats posed by American-owned payments networks on their policy goals. This has led many of them to support domestically owned real-time payment systems, which enable transfer of funds from one bank account to another within seconds at very low cost. These could pose competitive threats to Mastercard, particularly its debit business. However, while investment in real-time payments isn’t new, it is extremely complex to develop and drive adoption. As a result, there has been mixed success globally. This year is somewhat of a milestone, with the U.S. Federal Reserve launching FedNow, its real- time payments network that has been more than five years in the making. While this is a milestone, in its initial form it is not targeting consumer payments. It will take many years for the Fed to be connected to the thousands of U.S. banking institutions, to have a comparable consumer offering and have a comparable proposition for financial institutions. Connecting FedNow to payments globally will be an even bigger hurdle. With less than 10% of Mastercard’s revenue estimated to be linked to domestic debit transactions, this risk is likely to be manageable in the near term.

Mastercard faces risks beyond that of consumer spending levels and government investment in payments infrastructure. One risk is excessive regulation as governments move to protect privacy and competition. Evidence of this includes ongoing investigations from the Department of Justice into anti-competitive practices, regulation of interchange rates and developing countries regulating how banks interact with global networks.

But let’s not forget, these watchful eyes from regulators and competitors are driven by the strength in business quality and the necessity of an efficient payments system. Mastercard’s relentless focus on its network reach and capabilities has been priceless for consumers in its network, and extremely valuable to shareholders. While Mastercard will need to continue to invest in its network, we’re confident that shareholders will continue to benefit from Mastercard’s high-quality business model.

By Elisa Di Marco, Portfolio Manager

Source: Mastercard website