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Alex Middleton

Information Technology Team | MasterCard (NYSE:MA) HOLD Pitch

Investment Thesis

MasterCard is positioned for steady growth in the credit card processing industry due to a substantial growth in
online purchases, total transaction volume, and a global shift from cash payments to card payments. The growth of
digital wallets have aided the companys success with large corporations such as Apple, working directly with
MasterCard to ensure a safe transaction for all customers. The iconic brand, ranked 76 of all brand within the world,
has the second largest market share in the United States and is poised to grow in international markets both through
organic and inorganic growth.

Business Description

MasterCard Incorporated provides financial transaction


processing services. The Company offers payment
processing services for credit and debit cards, electronic
cash, automated teller machines, and travelers checks.
MasterCard serves customers worldwide. Serving about
22,000 member financial institutions around the world,
MasterCard is the #2 payment system in the US. The
company does not issue credit or its namesake cards;
rather, it markets the MasterCard (credit, debit, and
prepaid cards) and Maestro (debit and prepaid cards,
mainly in Europe) brands, provides a transaction
authorization network, establishes guidelines for use, and
collects fees from members. The company provides its services in more than 210 countries and territories, and its
cards are accepted at more than 35 million locations around the globe. MasterCard also operates the Cirrus ATM
network. MasterCard processes transactions and provides a range of payment-related products and services. In
2015, it made 32% of its revenue from transaction processing fees, 30% from domestic assessments, and 24%
from its cross-border volume fees. Other products and services accounted for the remaining 14% of revenue.

MasterCard processes transactions in more than 150


currencies across 210 countries and territories in the
Asia Pacific, Middle East and Africa; Europe; Latin
America & Caribbean; and North America (Canada
and the US). The US is MasterCard's largest market,
accounting for nearly 40% of revenue. No other
country generated more than 10% of revenue.
MasterCard markets itself through advertising,
promotion, sponsorship (with sporting, entertainment,
and charity-related organizations), and social media
activities. Its "Priceless" campaign has run in more
than 50 languages in around 110 countries.

Davis Center for Portfolio Management


University of Dayton
Alex Middleton

Industry Analysis
Landscape
Visa and MasterCard dominate the card payment industry. Visa, MasterCard, and their partners have spent billions of
dollars over decades to create their brands. While American Express and Discover are still industry competitors, they
do not have the same national and international presence of Visa and MasterCard. With billions of transactions
representing trillions of dollars processed every year, Visa and MasterCard possess unmatched scale that serves as a
barrier to entry for many competitors globally.
When analyzing market share, Visa is the leading provider in the United States and internationally. In the United
States, Visa controls 57.9% of volume compared to MasterCards 25.7%. American Express holds an 11.7% market
share within the United States and serves as the nations third largest card processing company in terms of volume.
Discover primarily operates within the U.S. with a 4.7% control of market share of total volume.
Outside of the United States, the order of the companies in regards to market shares stays constant in terms of ranking
in market share. Visa controls 56.6% of total volume compared to MasterCards 39%. American Express has a 4%
global reach and Discover has under 1% share.

Competitors
As stated above, MasterCards four main competitors include Visa,
Discover and American Express. While all own market share in the
U.S. and internationally, their business plans do differ. In general,
the global payments industry is highly competitive. MasterCards
programs compete against all forms of payment, including cash and
checks; electronic, mobile and e-commerce payment platforms;
cryptocurrencies; ACH payment services; and other payments
networks, which can have several competitive impacts on the
business as a whole.
First, the main competitor and opportunity for MasterCard going
forward is the cash and check aspect of payments. According to
MasterCards 10k, 85% of the world is still using cash or check
when making transactions. This number isestimated to
substantially decrease in the next five years due to card payments
growth, mobile payments, and the global acceptance of online
transactions. Banks continue to coerce consumers from using
checks and cash in an effort to automate and streamline the
processing of funds as much as possible.

After cash and check, the next tier of competitors are considered general purpose payment networks. This tier includes
the names mentioned above, including Visa, American Express and Discover, among others internationally. The
international names include networks such as JCB in Japan and UnionPay in China have leading positions in their
domestic markets.

Davis Center for Portfolio Management


University of Dayton
Alex Middleton

Discover Financial Services


Spun off by Morgan Stanley in 2007, Discover Financial Services is best known for issuing Discover-brand credit
cards, which are used by more than 25 million members. The company's cards, which include several levels of business
and consumer accounts, repay cardholders a percentage of the purchase price each time they use their cards. DFS has
two operating segments. Direct Banking is the largest, accounting for 97% of its revenue in 2015. It includes Discover-
branded credit cards issued to individuals and small businesses, as well as other consumer products and services, such
as private student loans, personal loans, home loans, prepaid cards, and other consumer lending and deposit products.
Visa
Visa Inc. operates a retail electronic payments network and manages global financial services. The Company also
offers global commerce through the transfer of value and information among financial institutions, merchants,
consumers, businesses and government entities. Visa operates the world's largest consumer payment system and
boasts nearly 2.5 billion credit and other payment cards in circulation across more than 200 countries. Visa is
MasterCards main competitor both internationally and her in the United States. Visa currently is .81% of the S&P
500 and is in the information technology sector.
American Express
American Express Company is a global payment and travel company. The Company's principal products and
services are charge and credit payment card products and travel-related services offered to consumers and
businesses around the world. American Express charge and credit cards are the main segments of business.
American Express has $161 billion in assets, $1 trillion in annual billed business, and has about 118 million cards in
circulation in 140-plus countries worldwide. American Express is a significantly smaller operation compared to
MasterCard and Visa and is part of the financial sector.

Competitive Position

MasterCards business strategy is to grow, diversify and build. MasterCard is focused on growing the core business
globally in the coming years. The company looks to diversify its customer base in new and existing markets by
working with governments, merchants, technology companies and other businesses. MasterCards competitive
advantage lies within their brand name. Originally founded in 1966, MasterCard is one of the most trusted brand
names within the payment processing industry. With this industry footprint, MasterCard is able to have a highly
adaptable global acceptance network, which is one of the worlds fastest. Payment processing companies have
difficulty-gaining market share due to the fact that they must go through merchants. Within the card payment
industry, the only way a card is successful and attractive to merchants is if it is widely incorporated which is more
towards American Express business strategy. Visa and MasterCard directly work with the bank allowing for easier
market penetration and ultimately user friendliness. This is a direct advantage against American Express and
Discover, which are forced to work directly with merchants and are therefore exposed to credit risk that
MasterCard is shielded from.

Davis Center for Portfolio Management


University of Dayton
Alex Middleton

Investment Positives

International Growth
The Credit Card Processing industry is
considered a mature market in the United
States. From 2012-2017, the market grew
at a rate of 4.1% and is projected to slow to
3.4% for 2017-2022. MasterCards business
and market share will continue to
maintain/grow slightly within the United
States, however international growth is key
for the company. MasterCard has been
acquiring global companies to gain
exposure in international markets.

Looking to build its business in high-


growth markets, MasterCard in early 2014
purchased Provus Biliim Hizmetleri, one of
Turkey's top independent payment and
processing providers. Later that year, it
acquired India-based payments processor
ElectraCard Services. That unit serves
banks, retailers, and other customers in 25
countries worldwide.

In 2015, MasterCard acquired Applied Predictive Technologies (APT), a cloud-based analytics provider, for $600
million. APT's Test & Learn platform helps companies tailor investments using analytics. This deal adds to
MasterCard's strategy of delivering more services to merchants and fits with the 2014 acquisition of 5One, a retail
consulting and analytics firm.

In 2016, the company bought a 92% stake in UK-based payment processing firm VocaLink for some $920 million.
Europe presents a large opportunity for MasterCard in the coming years. In 2005, 82% of transactions were
completed with cash in Europe. In 2015, that number minimized to 71%. In 2020, it is estimated that cash
payments will only make up 60% of all transactions across Europe.

E-Commerce Sales
United States

Although the overall adaption growth of credit cards is slowing within the United States, the E-commerce market is
expected to substantially grow in the next five years. In 2017 alone, The National Retail Federation stated that total
retail sales would grow 3.7%-4.2%. E-commerce sales are estimated to grow 8-12%. Business Insider's premium
research service, forecasts that U.S. consumers will spend $385 billion online in 2016. Moreover, BI Intelligence

Davis Center for Portfolio Management


University of Dayton
Alex Middleton

predicts that number will grow to


$632 billion in 2020. In 2016, the
U.S. retail growth was roughly 2%,
but the growth for e-commerce
was 16%. This is good news for
MasterCard, a company that
benefits from pure volume of
transactions.

International

The worlds largest online market is China. Chinas growth is estimated to be staggering with ecommerce sales at
$750 billion in 2016 sales, coming from 460 million online shoppers, and projects a CAGR of 23% through 2020
nearly triple the rate of offline sales. Goldman Sachs increased its previous forecast for Chinese ecommerce sales in
2020 by 15% to $1.7 trillion, and upped its projection of online penetration that year from 22% to 25%, from 16%
currently. Chinas market thrives on fast-moving consumer goods with upgraded technology, which directly
translates to improving logistics infrastructure over the next few years. China is expected to have an additional 200
million online shoppers between 2017 and 2020.

The United Kingdom, France and Germany are the major ecommerce countries in Europe, contributing to 60% of
the total e-commerce. With 157.1 billion euros, the UK is leading when we look at the size of the B2C ecommerce
market, but in terms of the number of online shoppers, its Germany who has a greater market presence than their
British counterparts (51.6 million versus 43.4 million). Aside from the predicted 509.9 billion euros the industry is
expected to be worth in 2016, Ecommerce Europe also looked at the more distant future. For 2017 the organization
forecasts total online sales of goods and services being worth 598 billion euros, while in 2018 a total online revenue
of 660 billion euros is predicted.

Davis Center for Portfolio Management


University of Dayton
Alex Middleton

Strategic Partners
MasterCard works with a variety of stakeholders including banks, governments, merchants and end users. MasterCard
provides financial institutions with solutions to help them increase revenue by driving preference for Mastercard-
branded products. The company provides data insights to improve business group and to help the customer.
MasterCard partners with technology companies such as digital players and mobile providers to deliver digital payment
solutions powered by technology, expertise and security protocols. MasterCard aids national and local governments
by driving increased financial inclusion and efficiency, reduce costs, increase transparency to reduce crime and
corruption and advance social programs. Ultimately, this business strategy provides a safe transaction for the user and
the financial institution. These strategic partnerships along with the continued developments of digital wallets will
help the company not only gain market share in the United States but also in international markets as well.

Investment Risks
Government Regulation
Government regulation influences key aspects of MasterCards business. MasterCard is subject to regulations that
affect the payments industry in the many countries in which the companys cards and payment devices are used.
Interchange fees associated with four-party payments systems like MasterCards are being reviewed or challenged in
various jurisdictions around the world via legislation to regulate interchange fees, competition-related regulatory
proceedings, central bank regulation and litigation. MasterCard may be subject to regulations related to our role in
the financial industry and our relationship with our financial institution customers. Aspects of our operations or
business are subject to privacy and data protection laws in the United States, the European Union and elsewhere
around the world. Overall, government regulation influences MasterCards business in legal and regulatory ways,
which directly affects the companys operations.

Consumer Spending
Consumer spending directly affects MasterCards business. In the event of a recession, growth can slow down and
even stop in some circumstances. Growth expectations with e-commerce and mobile payment applications have
been attributed with high growth rates in the coming years that can also adversely affect business in the event in an
economic slowdown.

Technology
Technology has aided growth in the past years for MasterCard but can also adversely affect growth in the future.
MasterCard would be negatively impacted if there were to be a new technology that eliminated the intermediary,
MasterCard, and ensured a safe transaction between the bank and end user in a more efficient manner. This risk is
more prevalent in China where their applications incorporate a wider array of functions with all-in-one
applications.

Information Security and Service Disruptions


MasterCards operations rely on secure processing, transmission and storage of highly confidential, proprietary and
other information in the companys computer systems and networks. Information security risks for payments and
technology companies such as MasterCard have significantly increased in recent years in part because of the
proliferation of new technologies, the use of the Internet and telecommunications technologies to conduct financial
Davis Center for Portfolio Management
University of Dayton
Alex Middleton

transactions, and the increased sophistication and activities of organized crime, hackers, terrorists and other external
parties. These threats may derive from fraud or malice on the part of our employees or third parties, or may result
from human error or accidental technological failure. These threats include cyber-attacks such as computer viruses,
malicious code, phishing attacks or information security breaches.

Mergers and Acquisitions


Much of MasterCards growth will be through inorganic acquisitions that the company has already completed and
will complete in the future. If these acquisitions do not work out, it may strain the companys financials along with
the future growth prospective.

Price Objective / Valuation Methodology


Discounted Cash Flow

Davis Center for Portfolio Management


University of Dayton

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