After years of struggling against stringent regulations in China, MasterCard (NYSE:MA) may finally have a chance to capitalize on one of the world’s biggest and fastest growing economies. Following the World Trade Organization’s (WTO) ruling to open up the Chinese electronic payment service market,  the credit card company has launched two new card programs – the PremierMiles USD card, targeted at the affluent frequent travelers and the Rewards card targeted at the mass affluent and emerging affluent segment of customers, in collaboration with Citibank (NYSE:C).  Citibank is the first foreign bank to be granted a stand-alone issuing license in China and also the first to issue credit cards in the country.
Our price estimate for MasterCard is $451, in-line with the current market price.
Earlier this year, the WTO had ruled that China violated WTO regulations by prohibiting foreign card companies such as MasterCard and Visa (NYSE:V) from clearing Chinese RMB (Yuan) denominated transactions. This allowed state-owned domestic supplier, China UnionPay (CUP), to maintain a monopoly in the market. The government also backed UnionPay by demanding every merchant and ATM across the country to accept UnionPay cards and requiring all cards issued in China to work with the UnionPay network. These regulations restricted both payment giants from expanding in an economy which they entered more than 20 years ago. Although MasterCard and UnionPay signed a Memorandum of Understanding (MoU) for collaborative expansion in 2010, the American company has hitherto been unsuccessful in the Chinese market.
Cross-border electronic payment services are still restricted to domestic service providers, a huge blow for MasterCard as it won’t be able to capitalize on increased tourist activity in China.
Tremendous Potential For Expansion
With a population of over 1 billion and a GDP annual growth rate around 8%,  China is one of the biggest markets in the world. MasterCard estimates that credit card spending in the country will grow from its current value of $1 trillion to $2.5 trillion by 2025.  Penetration is still quite low in the country with only around 285 million cards in circulation, most of which are restricted to Tier 1 cities like Beijing and Shanghai. Last year, 55 million new cards were issued in the country, up 20% from the figure in 2010. This trend is expected to continue over the next few years.
Fighting The Incumbent
Nurtured and protected by the Chinese government, UnionPay has established a commanding share of the Chinese market and has also expanded globally. The company now operates in over 130 countries with 700 merchants outside china accepting the card. In the ten years since its inception in 2002, it has surpassed Visa as the leading card payment solutions company in the world. With 2.5 billion cards in circulation worldwide, the company’s logo appears on 29.2% of all cards worldwide, higher than Visa at 28.6%.
MasterCard and Visa will have to rely on superior technology to battle the incumbent; the two have developed payment cards using integrated chip technology, whereas most Chinese cards still rely on magnetic stripes that have been in use since the 1960’s.
Mobile Phones Hold The Key
Mobile payments also present an area for growth. Both MasterCard and Visa have made forays into the mobile payment industry and might well leverage their experience in the field for growth in china. (See MasterCard Targets its Next Billion Customers through Mobile Partnerships for more details on MasterCard’s mobile strategy) Due to low penetration of the financial services in China and the high investment in telecommunications services, there are about three times more mobile phones than payment cards in the country.  Collaborations with mobile networks might thus hold the key to displacing UnionPay off it’s perch.
Based on China’s history of protecting its home-grown companies, we maintain a conservative outlook for MasterCard’s penetration in the country. The collaboration with Citibank is a huge step for the company, but the path ahead is nonetheless challenging.
We currently forecast the number of transactions processed by MasterCard to grow to 48 billion by 2019, mostly due to a global economic recovery encouraging people worldwide to spend more. There is a potential upside of 10% to our price estimate, should MasterCard’s incursion in China realize its potential, driving transaction volume beyond 70 billion. You can gauge the effect of a change in transaction volume on our price estimate by modifying the interactive chart below.Notes:
- WTO China UnionPay Ruling Paves Way for Visa, MasterCard, China Briefing, 6th September, 2012 [↩]
- MasterCard Debuts First Single-branded Cards in China with Citibank, Press Release, 19th September, 2012 [↩]
- China GDP Annual Growth Rate, Trading Economics [↩]
- Visa, MC still face hurdles in China after WTO ruling, Reuters, 18th July, 2012 [↩]
- China, MasterCard Mobile Payments Readiness Index [↩]