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Mastercard (MA)Stock (Credit Services Industry, Financial Services Industry, Services Industry)
 MasterCard (MA) is the second largest processor of electronic payments 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. Despite strong revenue growth (79% from 2002-2006), MasterCard's profitability has suffered in recent years due to rising expenses and a series of lawsuits. The company was sued by American Express for blocking its client banks from issuing AMEX branded cards. The suit, which was decided in AMEX's favor, has already resulted in a $2.1B settlement from Visa (MA's co-defendant) and could also have a dramatic impact on MasterCard's future earnings. In June 2008, it was announced that Discover Financial Services (DFS) was suing Mastercard and Visa (V) for $6 billion; the trial is scheduled for September 2008.[1]
[edit] Business OverviewMasterCard 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. MasterCard collects revenue from both transaction-processing and brand-licensing fees and from a percent assessment fee on the money flow, or gross dollar volume (GDV), on individual cards. During the past five years, revenue has steadily grown in part due to organizations around the world switching from paper-based to card-based payment methods. In 2006, the GDV of all transactions made using MasterCard branded programs was approximately 2 trillion USD, and MasterCard collected over 3.3 billion USD in revenue [2]. During the past few years, MasterCard’s revenue source has gradually shifted from card-based assessment fees to transaction and licensing fees. In 2006, 73.1% of net revenues came from transaction and licensing fees and 26.9% came from assessments [3]. 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. In 2003 MasterCard lost a lawsuit to its merchants. As part of the settlement the company was forced to pay $125MM in 2003 and $100MM every year after until 2014. [6] During the second quarter of 2006, MasterCard completed an initial public offering (IPO) on the New York Stock Exchange, issuing 61.5 million shares at 39.00 USD [7]. 395 million USD worth of stock was donated to the MasterCard Foundation, a charitable organization [8]. The stock offering coincided with the election of a new Board of Directors. [edit] Trends and Forces
Secondly, a review of interchange fees in the US Congress may result in litigation that makes MasterCard's four-party business model less competitive. Although MasterCard does not collect interchange fees, MasterCard's customers receive revenue from interchange fees during each money transfer. If new laws prevent banks from collecting interchange fees, fewer customers may be willing to participate in MasterCard's four-party system, resulting in lower transaction volume, fewer cards issued, and lower revenues for MasterCard.
[edit] CompetitionMasterCard competes with all payment methods, which include paper-based transactions such as cash and checks as well as other electronic payments. Globally, its largest competitors are Visa, American Express Company (AXP) , and Discover Financial Services (DFS), with Visa enjoying a much larger GDV than MasterCard. American Express and Discover have a competitive advantage over MasterCard because they have direct relationships with both cardholders and card issuers and are not affected by regulation of interchange fees. Certain country-specific payment companies also hold a significant market share in their respective countries; these include JCB in Japan and China Union Pay in the People’s Republic of China. In addition, MasterCard 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 because a flat fee is charged for each transaction. Visa currently holds a dominant market share in this sector. MasterCard’s primary competitive advantages are brand name and pricing. The MasterCard brand is recognized across the world, in part due to its global “Priceless®” marketing campaign. Although consolidation of banks may increase the bargaining power of MasterCard’s largest customers, MasterCard can rely on brand loyalty to impose higher prices on customers with less bargaining power. Selected 2006 financial data comparing MasterCard and American Express is shown below. Data is unavailable for Discover because it was formed as a spin-off of Morgan Stanley at the end of 2006.
[edit] Market Share [edit] Notes
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