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World’s biggest payment card issuer challenges US rivals Visa and Mastercard


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.

In 2010, MasterCard reported an income of $1,847 million, a 26% increase over the previous year's $1,463 million.[1]

MA's debit card services has a strong growth opportunity because of the trend away from cash and checks for debit cards. Consumers are even shifting away from credit cards as Interest Rates and U.S. Unemployment continue to increase. It is important for MA's long term viability to develop a strong debit card platform as another outlet for revenue from the increased use of debit cards since consumers are shifting away from credit card use. In addition, President Obama recently signed a bill regarding stricter credit card controls, which could affect the amount of credit extended and the volume of transaction fees for MA.

Business Overview

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.[1]

Domestic Assessments 47.7 of 2010 Net Revenue

Domestic assessments are fees charged to issuers and acquiers based on the volume of activity on MasterCard and Maestro-branded cards where the merchant country and cardholder country are the same. They also include card assessments, which are fees charged on the number of cards issued or assessments for specific purposes such as acceptance development or market development programs. Acceptance development fees are mainly charged to U.S. issuers based on components of volume.

Cross-Border Volume Fees 34.8% of 2010 Net Revenue

Cross-border volume fees are fees charged to issuers and acquierers based on the volume of activity on MasterCard and Maestro-branded cards where the merchant country and cardholder country are different. They also include fees charged to issuers for performing currency conversion services.

Transaction Processing Fees 39.7% of 2010 Net Revenue

Transaction processing fees are fees charged for both domestic and cross-border transactions and are primarily based on the number of transactions. They include authorization fees, clearing and settlement fees, switch fees and connectivity fees.

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.

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.

Trends and Forces

Susceptibility to adverse economic environments due to revenue concentration

Client Concentration

Mastercard receives a significant portion of its revenue from its 5 largest customers. Loss of business from any of the five largest customers could present a significant setback for MasterCard.[1] 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.

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.[2] It’s five highest revenue generating countries besides the U.S. are the UK, Canada, Brazil, and Australia.[2] Of the additional 200 countries and 160 currencies that it operates in, no country accounts for more than 10% of its revenues. [2] 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

Mastercard depends crucially on consumer spending.[3] 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.

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. 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. [2] 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 Financial Reform on Credit Card Companies

Durbin Amendment limits interchange fees

The Durbin Amendment, which was enacted as part of the Financial Reform bill which passed in July 2010, gives the federal government control over credit card interchange fees charged to merchants. Interchange fees are charged to merchants by banks for every transaction made through the credit card company. Prior to the passing of the bill, banks were allowed to set their own fees; however, with the amendment in place, the government can effectively set a cap on such fees, thereby reducing potential revenues for banks.

The cost imposed by the government would inevitably force such companies try to force credit card companies to change fee structures such as cut network fees in order to make up for the lost revenues. Credit card companies may also be enacting policies such as raising annual card rates and reducing membership rewards to make up for losses in card revenue. News has speculated that the Federal reserve may cut interchange fees by as much as 40-60%.[4]

A new clause inserted into the Durbin Amendment was designed to protect credit card companies by prohibiting the use of a network fee to directly or indirectly compensate an issuer or from being used to circumvent or evade the Fed's rules. This means that that issuers cannot force networks to cut their network fee and reap the economics of that reduction.[5]


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.


  1. 1.0 1.1 1.2 2010 MA 10-k
  2. 2.0 2.1 2.2 2.3
  3. Weekly Gallup "Economic Wrap: Job Creation, Spending Unimproved," Frank Newport, 07/28/2009
  4. American Banking and Market News "Bank of America Corp. (NYSE: BAC) Details Impact of Durbin Amendment, But Regionals May Feel the Most Pain" 7/20/10
  5. The Street "Visa, AmEx Get Interchange Escape Clause" 11/26/10
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