MasterCard (NYSE:MA) has seen a steady rise in debit card transaction volume over the last few years (See Debit Card Growth Fuels MasterCard’s Q1 Results) that has coincided with the rising popularity of non-cash payments. Debit card usage in the U.S. grew by an average of 18% for the last 10 years, surpassing credit card usage in volume for the first time in 2009, and debit payments account for more than 35% of all non-cash payments.  Customers in the U.S. have been more reluctant to spend money on credit in the current economic environment and prefer to use their own money, through debit cards. 
This trend, however, might see a dramatic change as the Durbin amendment to the Dodd-Frank bill that came in effect last October reduced the interchange fees charged by banks on debit card payments to 21 cents plus 0.05% of the transaction, a reduction of nearly 50% from the earlier value. This regulation cuts into the banks’ profits and discourages them from issuing debit cards. Visa (NYSE:V) was hit hard by the amendment, as it reported a decline of 12% in debit spend in April. 
MasterCard, however, will now have a chance to increase its market share for debit transactions, which has historically been dominated by Visa as the bill requires banks with more than $10 billion in assets to use separate payment processing networks for signature authorized and PIN authorized debit card transactions.  The company reported a 10% increase in U.S. payment volumes from April 1 to May 28, 2012. 
Demand for Prepaid Cards
Prepaid debit cards have been gaining popularity in the U.S. and, unlike debit cards, they are not covered by the Durbin amendment. Prepaid debit card transactions grew from $30.1 billion in 2004 to $75.7 billion in 2010, an increase of more than 50%.  The cards are now actively being promoted by card companies, banks and retail stores, as they are more profitable than traditional debit cards.
MasterCard has launched several promotional schemes such as contactless prepaid MasterCard PayPass wristband, which uses Radio Frequency Identification (RFID) technology and will be implemented in the Isle of Wight Festival.  The company will also be the platinum sponsor and official card of the Food Network New York City Wine & Food Festival, offering card holders presale access to purchase tickets for over 120 events during the festival taking place October 11 – 14 this year.  The positive publicity generated will boost MasterCard’s reputation in the U.S., and we expect it to fuel a rise in its transaction volumes. Transaction fees account for 22% of our price estimate for MasterCard’s stock.
Our price estimate for MasterCard is $465, which is in-line with the market price. You can gauge the effect of a change in the forecast on our price estimate by modifying the chart above.Notes:
- Interchange and the Durbin Amendment, MarterCard [↩]
- The 2010 Federal Reserve Payments Study [↩]
- 3rd Update: Visa Shares Slip As Debit-Card Spending Declines, May 30th, 2012 [↩]
- The Durbin Amendment Explained [↩]
- Card Issuers Have Some Issues, 247 Wall Street, 31st May, 2012 [↩]
- Retail Payments Systems in the U.S. [↩]
- Mastercard Inc : Isle of Wight Festival Goers to Receive First Ever Auto Top-up MasterCard® PayPass™ Wristband, 4-traders, 22nd June, 2012 [↩]
- MasterCard Cardholders Gain Exclusive Access to the 2012 Food Network New York City Wine & Food Festival presented by FOOD & WINE, Press Release, June 11th, 2012 [↩]