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Investment Overview for MasterCard (NYSE:MA)
Below we look at key drivers for MasterCard and the potential upside or downside for the company's stock.
- Cross Border Fees: The company collects a fee on all international transactions which has historically been about 0.8% of the total transaction amount. The company has been under regulatory pressure to reduce these fees, and we currently forecast a slight decline over our forecast period. However, should the company be forced to cut fees to below 0.6% by the end of the Trefis forecast period there could be a downside of about 6% to our current price estimate.
- Authorization, Settlement and Switch Fees: MasterCard charges issuers and acquirers fees for the authorization process through which MasterCard validates credit cards for each transaction. The company also charges settlement fees for the exchange of funds between issuers and acquirers as well as switch fees for the use of the MasterCard debit switch, which transmits financial messages between issuers and acquirers. These fees are charged on a per-transaction basis. While debit card fees were raised in the past few years, we currently forecast these per-transaction fees declining from $0.08 to 2006-2007 levels of about $0.07 by the end of our forecast period. However if the company is able to combat pricing pressure and keep these fees constant, there would be an upside of nearly 5% to our price estimate.
MasterCard is the second-largest global payment solutions company in the world. It provides a variety of services to support credit, debit and related card solutions of over 24,000 financial institutions globally. The company processes more than 20 billion transactions every year, and generates revenue by charging fees for transaction processing and other services. The company's brands include MasterCard, Maestro and Cirrus.
MasterCard generally charges its customers on a per-transaction or percentage of transaction basis, so its revenues are largely impacted by the number of transactions it processes and total dollar volume of purchases made using its cards.
MasterCard's revenues primarily come from the following sources:
Transaction Processing Fees
MasterCard acts as a transaction processing service for its customers. The company authorizes, clears and settles all transactions made using its cards. MasterCard also allows customers to use its network and infrastructure to carry out transactions. In exchange for these services, MasterCards charges a Transaction Processing Fee.
International Transaction Fees
A major part of MasterCard's revenues come from the fees it levies on cross-border transactions. A cross-border transaction is a transaction in which the cardholder's country is different from the merchant's country. MasterCard levies a cross-border fee and a currency conversion fee for any transaction made outside of the cardholder's country.
Assessment fees are charged to the bank which issued the card. These fees are based on the gross dollar volume (GDV) for a specific time period. The rates vary depending on the nature of transactions and the region.
For our analysis, we have included acceptance development fees, warning bulletin fees, consulting and research fees and other fees such as penalty fees, hologram and publications fees as services fees.
Rebates and Incentives (Contra-Revenues)
Rebates and incentives are paid to customers and merchants to encourage card issuance, for the acceptance of MasterCard branded cards. These are contra-revenues and vary with the Gross Dollar Volume. Rebates are given both on operations fees and also on assessments.
Rapid growth in electronic, cashless payment solutions
MasterCard provides cashless payment solutions to customers worldwide. These include payments done using credit cards, debit cards, and prepaid cards. The market for such transactions is growing at a rapid pace as growth in emerging economies outpaces that of the U.S. Card transactions have experienced explosive growth in the Asia-Pacific region, now representing about 25% of global card volume. While we expect this growth to slow relative to the recent levels, the region should still see strong growth as more people and merchants adopt credit and debit cards.
Mobile payments on the rise
MasterCard offers special payment solutions to enable the payment of bills from mobile phones. Mobile payments have been growing at an impressive rate and we expect this to continue as mobile payment solutions become more secure and more consumers use smartphones. This should provide a substantial growth opportunity for the company. MasterCard has unveiled plans launch its digital wallet service, PayPass, later this year.
Dodd-Frank Reforms Overhang
Regulation such as the Dodd-Frank financial reforms, which aimed to cap the fees that card issuers can charge per transaction, has been the biggest issue facing the payment services industry of late. The industry, in addition to many politicians, have protested vehemently against many of these regulations, but should they remain in place MasterCard's fee revenues would likely be constrained.
Sluggish growth in developed markets has overshadowed the strong growth in cashless payments being witnessed in emerging markets, and with a full recovery unlikely in the immediate term we expect limited growth in transaction volumes for MasterCard in the next one to two years.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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