Transaction and International Fees Are 60% of MasterCard’s Value

-2.16%
Downside
481
Market
471
Trefis
MA: Mastercard logo
MA
Mastercard

MasterCard (NYSE:MA) is the second largest global payment solutions company in the world after Visa (NYSE:V) and provides a variety of services to support the credit, debit and related card payments of over 24,000 financial institutions globally. MasterCard and Visa have grabbed headlines recently given the Fed’s hopes of limiting the interchange fees that card companies remit to card issuing banks like Bank of America (NYSE:BAC) and JP Morgan (NYSE:JPM).

MasterCards fees are broken down into three buckets: (i) Transaction Fees (ii) International Fees and (iii) Assessment Fees, and these account for around 79% of the stock value. The Fed’s recent announcements regarding caps on the interchange fee would reduce the Assessment Fees, which we discussed last week in an article (Could MasterCard’s Stock Fall Further from Fee Limits?) and concluded that the bad news was largely priced in. This segment accounts for 20% of the stock value.

In this note, we examine the Transaction and International Fees which account for around 60% of the Trefis price estimate of $214, which is slightly below the current market price.

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37% of Stock – Transaction Fee

In a typical card transaction, MasterCard charges issuers and acquirers a fee for the network and the services it provides for the transaction to go through. Transaction Processing is one the major revenue source for MasterCard. The Transaction Processing includes Authorization, Settlement and Switch charges as well as connectivity charges.

Authorization fees are charged to the card issuing bank (issuer) and the merchant’s bank (acquirer) for the authorization process that MasterCard performs for each transaction. Authorization is the process by which MasterCard validates the card, and Settlement fees are charged to issuers for the exchange of funds between issuers and acquirers.

Switch fees are the charges for the use of the MasterCard Debit Switch (MDS).  The MDS transmits financial messages between acquirers and issuers and provides transactional and statistical reporting and performs settlement between customers and other debit transaction processing networks. These fees are primarily paid by issuers.

The authorization and settlement fees are most prone to competition, and we expect these fees to decline in the near future since Visa, the nearest competitor to MasterCard, has been reducing its authorization and settlement fees.

Connectivity fees are charged to issuers and acquirers for network access, equipment, and the transmission of authorization and settlement messages. These fees are based on the volume of information being transmitted and the number of connections to MasterCard systems. MasterCard increased the connectivity fees from 0.5 cents per transaction in 2009 to nearly 2 cents per transaction in 2010 under a new name “Network Access and Brand Usage (NABU)” fees. However, due to regulatory restrictions, we expect the connectivity fees to decline moving forward.

23% of Stock – International Fees

In addition to the transaction fees, MasterCard charges cross-border fees and currency conversion fees for international transactions. The Cross Border Fee is assessed on all international purchases, credit vouchers, and cash disbursements regardless of whether they were originated in foreign currencies or the US currency. Cross Border fee charged by MasterCard is under strong pressure from European Union and Federal Reserve. Regulatory measures are expected to force MasterCard to lower its cross border fees if not eliminate it.

Currency Conversion Fee is another fee charged by MasterCard for facilitating currency conversions, whenever an international transaction is made. Some card issuers like Capital One (NYSE:COF) do not charge its card-holders any currency conversion fee, and the CARD Act, MasterCard may have to lower its Currency Conversion Fee to more competitive levels.

While the market focused on recent legislation regarding the interchange fees, we believe it’s worthwhile to look at the other businesses. While regulation could impact some areas outside of the interchange fees, the negative impact to the card companies will likely be less than expected.

See our full estimates here.