Sensitivity Analysis of MasterCard on Regulatory Concerns & Mobile Threat

MasterCard (NYSE:MA) is one of the largest global payment solutions company in the world and provides a variety of services to support the credit, debit and related card payments of over 24,000 financial institutions globally. Its main competitors are Visa (NYSE:V), American Express (NYSE:AXP), Discover (NYSE:DFS), JCB and Diners Club. Transaction processing is the major revenue source for MasterCard and constitutes about 32% of the $293 Trefis price estimate for MasterCard’s stock.

Below we look at upside and downside scenarios due to key issues such as: 1) regulatory overhang, 2) competition of mobile payment methods, and 3) spending trends due to macro developments.

Dodd-Frank Reforms Overhang

The primary factor concerning the overall payment services industry is the recent Dodd-Frank financial reforms. Last year, in the wake of 2008-09 financial crisis, the U.S. government approved a sea of changes in the financial services industry under the Dodd-Frank Wall Street Reform and Consumer Protection Act. The regulators sought to reduce interchange fees which card issuers charge merchants on every transaction. In addition, card networks providers such as MasterCard won’t be able to prevent retailers from accepting alternative modes of payments through discounts or minimum purchase requirements.

The regulations are scheduled to be implemented in July this year and could substantially hurt MasterCard’s revenue from transaction fees. However, the debit card industry along with the U.S. Republicans are campaigning furiously in Washington to delay or repeal the Dodd-Frank reforms. ^[1] It remains to be seen when this issue is cleared but a couple of years delay could result in higher transaction fees for MasterCard.

Rise of Mobile Payments

The number of mobile payment users have been rising fast with 351 million users in 2009 which is estimated to reach 1.06 billion by 2014 at a compound annual growth rate of 20.5%. Global mobile payments transactions are expected to rise to $1.13 trillion in 2014 from $37.4 billion in 2009, at an annual growth rate of 98%. ^[2]

Greater use of mobile payments and electronic payments on card networks will benefit MasterCard and would substantially boost its transaction volumes but if mobile payments are linked to bank accounts or Paypal instead of card networks, growth in transaction volumes would decline. Chris McWilton, Head of U.S. Markets, MasterCard, jokingly referred to mobile payments as ‘the death star’ of the card networks. ^[3]

Macro Economic Outlook

Emerging markets like China have a booming middle class population which provides a tremendous growth potential for card payment business but the Chinese market is inaccessible for foreign card networks as only China UnionPay is allowed to handle card payments in China. The US card companies such as Visa and American Express are protesting against the monopoly of UnionPay in China and the US government is planning to take up this issue at the World Trade Organisation. MasterCard has partnered with UnionPay last year but would still benefit China opens up its market. ^[4]

However, a slow and choppy economic recovery in the US could overshadow the growth in China. According to Chris McWilton, “It’s slow; it’s erratic — the statistics we see suggest it is a slow recovery. People continue to be cautious with what they spend. Confidence is building, but at a fairly slow rate.”

Rising crude oil prices could further curb spending which would result in lower transaction volumes for MasterCard. ^[5]

+68 – Upside Scenario

1) The connectivity fee stays the same until 2012 (assuming that changes are not pushed through) and then resumes the trend we forecast in our base case

2) The authorization settlement and switch fee remain stable assuming the Dodd-Frank proposals get delayed or reversed somehow

3) Transaction volumes increase dramatically as international growth in markets like China, for instance, outpace current assumptions

This would imply a price estimate of $361, or 23% upside to our already rosy outlook combining for a potential total return of 44% ahead of the market price.

– $62 Downside Scenario

On the other hand if some of the key issues go against MasterCard such as:

1) MasterCard’s ‘authorization, settlement and switch fees’ and ‘connectivity fee’ decline due to harsh regulations

2) Transaction volumes decline if mobile payments are linked to bank accounts directly bringing on the pending ‘death star’ combined with lower spending going forward due to macro concerns or an oil price shock

Together this could knock $62 off our price estimate, which is about 8% below the market price.

See our full estimates for MasterCard

1. MasterCard: Delay processing-fees rule, Reuters [↩]
2. 3Q.2010 Global Mobile Payment Market Forecast, 2010 – 2014, IE Market Research [↩]
3. MasterCard’s straight shooter aims at U.S. regulations, Reuters, Mar. 1, 2011 [↩]
4. U.S. Takes China to Task Over Cards, WSJ [↩]
5. MasterCard exec says U.S. recovery “erratic”, Yahoo [↩]