MasterCard (NYSE:MA) reported strong earnings for the fourth quarter of 2012, posting 18% growth in net income helped by 20% growth in processed transactions and a 14% growth in gross dollar volume (GDV) of transactions. The U.S., which accounts for 40% of MasterCard’s revenues, saw a 7% GDV growth even though retail sales were adversely affected by concerns over the possible fiscal cliff. The company’s research revealed that consumer confidence levels in the U.S. declined 11% through the quarter, but a recovering housing market helped the growth in transactions.
Our price estimate of $539 for MasterCard’s stock is in line with the current market price. We will shortly update our model to reflect the latest earnings. Please read our article: MasterCard’s Business Overview (Part 1): Assessment And Transaction Fee Income for a detailed analysis of MasterCard’s business operations.
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MasterCard is a global company with operations throughout the world. The company reported 14% worldwide growth in GDV, with 18% growth outside the U.S. The APMEA (Asia Pacific Middle East and Africa) region reported 23% growth in GDV, with 20% growth in purchase transactions. The European GDV increased by 15%, while the GDV in Latin America grew by 14%.
MasterCard charges an average assessment fee of 0.1% of the gross dollar volume of transactions processed for its banking clients and also charges clearing, settlement and transaction processing fees of around $0.08 per transaction. We expect higher growth in GDV and number of transactions processed in the coming years as economic conditions in developed economies like the U.S. improve, and the company penetrates developing nations like India and China. Please read our article: Will Visa And MasterCard Be Able To Capitalize On Mobile Wallet Technology? for more on growth prospects.
Cross-Border Transactions Also Increasing
MasterCard earns a quarter of its revenues from cross-border fees that is charged on a transaction in which the acquirer and the issuer’s bank are in different countries. The volume of the transaction is first converted to its billing currency (usually U.S. dollar) equivalent. This amount is then multiplied by a price based on various factors like number of cards issued by the bank, development of merchant relationships, brand promotion at point-of-sale, cross-border usage and other marketing developments. MasterCard also charges volume fees to issuers for currency conversion.. The cross-border fee is around 0.8% of the GDV of the transaction, while the currency conversion fee is around 0.2% of the GDV.
The company reported a 17% year-on-year increase in cross-border transactions in the December quarter, leading to a 14% increase in income through fees. India, China, Australia and South Africa contributed to the growth in volumes.