TOP CONTRIBUTORS

Athena Jiang

Kryssia Uraguchi

Jonathan J. Smith

MasterCard (MA) is the second largest electronic payments processor by purchase volume behind Visa in the world. MasterCard does not issue credit cards directly, but licenses its brand to banks, who then issue co-branded cards (such as the Chase MasterCard). MasterCard makes money by charging merchant fees on individual transactions and by charging the credit card issuers licensing fees and a small percentage of the total dollar amount spent on each card.

MasterCard is susceptible to the adverse economic environment because its revenues are highly concentrated within customers and countries. 31% of its total revenue was from its five largest customers and it’s five highest revenue generating countries besides the U.S. are the UK, Canada, Brazil, and Australia.^[1] Of the additional 200 countries and 160 currencies that it operates in, no country other than the United States accounts for more than 10% of its revenues. ^[1]. During the past few years, MasterCard’s revenue source has gradually shifted from card-based assessment fees to transaction and licensing fees. In 2007, 73.8% of net revenues came from transaction and licensing fees and 26.2% came from assessments ^[2]

MasterCard uses a four-party payment system to process transactions. A card-holder makes a purchase from a merchant using a card, and the merchant is paid the amount of the purchase after the interchange fee deduction by the merchant’s bank, or acquiring bank. The card-holder’s bank, the issuing bank, then pays the acquiring bank and charges the amount of the purchase to the card-holder. MA processed transactions increased 17.5% from 2005 to 2006 and 16.2% from 2006 to 2007.^[3]

^[4]

By increasing the number of cardholders and the dollar value of total transactions, MasterCard plans to flood the market with payment cards. Within the United States, the continued increase in use of payment cards provides MasterCard with a fertile field for growth in sales. Internationally, MasterCard will expand into regions experiencing rapid growth by promoting strong relationships with financial services firms and working to increase the number of merchants that accept MasterCard. To appeal to a wide range of customers, MasterCard offers a number of credit and debit payment plans. These may have different spending limits, third party services such as emergency travel assistance, and loyalty reward programs.

^[5]

Trends and Forces

Susceptibility to adverse economic environments due to revenue concentration

Client Concentration

In 2007, 31% of MA total revenue was from its five largest consumers^[6]. Loss of business from any of the five largest customers could present a significant setback for MasterCard. Since MasterCard depends on business agreements with its largest customers, consolidations may harm MasterCard’s business if a customer is acquired by another institution that does business with MasterCard’s competitors. In general, mergers reduce MasterCard's profitability since large banks are better able to negotiate prices than small banks.

In particular, J P Morgan Chase (JPM), which acts as MasterCard’s settlement bank, generated $59 billion, or 11% of total revenue ^[7]. In May 2009, J P Morgan Chase (JPM) shifted more than half of its portfolio of debt-card users to Visa. Most of the customers were part of Washington Mutual (WM), which was acquired by JP Morgan in September of 2008. The shift was motivated by Visa's superior debit platform.^[8]

Country Concentration

Although MA operates globally to shield itself from revenue concentration susceptibility, almost half of its total revenue is generated in the U.S., it’s largest geographic market.^[9] It’s five highest revenue generating countries besides the U.S. are the UK, Canada, Brazil, and Australia.^[9] Of the additional 200 countries and 160 currencies that it operates in, no country accounts for more than 10% of its revenues. ^[9] The volatility of the global markets have had both adverse and beneficial effects on foreign currency exchange rates , such as the weakened U.S. Dollar (USD) against the Euro (EUR) and the Brazilian Real. Overall, the Credit Crunch and global economic turndown have not significantly altered MA’s bottom line since it does not extend credit, but only develops payment solutions and processes transactions. However, the recession has had an effect on the number and size of credit transactions.

Consumer spending and the shift from paper based payments

Consumer spending has remained stagnant since its collapse in the Fall of 2008.^[10] The downturn in the economy, especially in the United States, puts increased pressure on MasterCard’s business since it's revenues depend on the level of overall consumer and business spending. For example, it's year-over-year cross-border volume fees were down 11.3% from $436M to $407M due to the decreased amount of activity, such as cross-border travel and currency conversion.

However, MA stands to benefit as consumers have increasingly shifted away from paper based payments, such as cash and checks, to credit cards and debit cards during the economic downturn. According to a Nilson Report, the global market for card purchase transactions grew at a compound annual growth rate (CAGR) of 14% from 2000 to 2006, and forecasts the market to grow an additional 11% from 2006 to 2012. Further, the latest trend has consumers shifting from credit cards to debit cards due to rising interest rates and uncertainty of future income due to rising unemployment rates. MasterCard's transaction possessing fees increased 7.1% year-over-year due to the increased amount of card transactions.^[9] In addition, to lower banks' vulnerability to defaults, they have lowered credit card limits for many of its consumers, which has further promoted debit card use.

Impact of credit card reform bill

On May 22, 2009, President Obama signed into law a wide the Credit Card Accountability, Responsibility and Disclosure (CARD) Act, a wide ranging credit card reform bill set to fully take effect in February 2010.^[11] However, the first stages of the reform take effect as early as August 20, 2009.^[12] Included in this bill are restrictions on interest rate increases, a 45 day notice before changing interest rates, restrictions on fees that can be charged, requirements for more disclosure, and limits on ability of those under the age of 21 to obtain cards, among others.^[13] Banks have warned that the new legislation will increase rates, decrease credit extended, and increase the use of annual fees for cards.^[14] Less credit likely means less transactions, transaction amounts, and thus a negative impact on earnings.

Competition

^[15]

MasterCard’s primary competitive advantages are brand name and pricing. The MasterCard brand is recognized worldwide, in part due to its global “Priceless®” marketing campaign. Although consolidation of banks may increase the bargaining power of MasterCard’s largest customers, MasterCard will rely on brand loyalty to impose higher prices on customers with less bargaining power.

In addition to electronic payments, MasterCard competes across all payment methods, including paper-based transactions (cash and checks). In the US, its largest competitors are Visa, American Express Company (AXP), and Discover Financial Services (DFS). Visa maintains a much larger GDV than MasterCard and its competitors. American Express and Discover have a competitive advantage because they have direct relationships with both cardholders and card issuers, and are not affected by regulation of interchange fees. Globally, foreign competitors have significant market share in their respective countries, such as JCB in Japan and China Union Pay in the People’s Republic of China.

MasterCard also faces growing competition from electronic funds transfer (EFT), or PIN-based networks, which allow the cardholder to authorize transactions from his or her bank account to the merchant by entering a PIN. This system may be perceived as more secure, since each transaction must be authorized at the time of sale, and are sometimes less expensive since a flat fee is charged for each transaction. Visa currently holds a dominant market share in this sector.

Notes

1. ↑ ^{1.0 1.1} MasterCard Quarterly Report 3Q2009 Selected Financial Data
2. ↑ 2007 MA 10-k, Item 1: Business, page 8
3. ↑ MA 2007 Annual Report
4. ↑ Google Finance: MA
5. ↑ MasterCard News Center
6. ↑ 2007 MA 10-k, Item 1A: Risk Factors, page 32
7. ↑ 2006 MA 10-k, Item 1A, pg. 32
8. ↑ Bloomberg, "MasterCard Said to Lose Users After JPMorgan Shift," 05/22/09"
9. ↑ ^{9.0 9.1 9.2 9.3}
10. ↑ Weekly Gallup "Economic Wrap: Job Creation, Spending Unimproved," Frank Newport, 07/28/2009
11. ↑ Obama signs sweeping credit card reform bill. John Poirier. Reuters.
12. ↑ Credit card rules change Thursday. MSN Money.
13. ↑ Key provisions of credit card reform bill. MSNBC.
14. ↑ Credit-Card Fees Curbed. Sudeep Reddy. The Wall Street Journal.
15. ↑ Credit Card Industry Facts