Mobile Phone Evolution Will Help Visa And MasterCard Enter Developing Economies

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Quick Take

  • Developing economies in Asia, Africa, Latin America and the Middle East account for 25% of the world’s cashless transaction volume
  • Transaction volume in these economies is expected to double in the next five years
  • Mobile phones will be key particularly in financially underdeveloped countries where mobile phones are more prevalent than credit and debit cards
  • Visa and MasterCard are positioning themselves to capitalize on this exciting technology
  • Both companies have maintained double digit growth rates over the last few years but with 85% of the world’s transactions still carried out through cash and checks, the potential for growth is immense and we expect the growth rate to remain high.

The Mobile World Congress which took place in Barcelona, Spain, this week highlighted the growing influence that mobile phone technology will have on cashless transactions in the coming years. While Visa (NYSE:V) announced a collaboration with Samsung to accelerate the development of near field communication (NFC) mobile payment technology on the manufacturers’ devices, MasterCard (NYSE:MA) unveiled a mobile wallet, MasterPass, to complement its PayPass services. In addition, MasterCard also announced that mobile payment technology providers, Oltio and eServGlobal, will be joining its Mobile Money Partnership Program (MMPP).

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We believe that mobile phone technology will be particularly important in extending the card giants’ reach in developing economies, particularly in Asia and Africa where mobile phones are more commonplace than credit and debit cards. According to statistics available from Statista, there are about 1.3 billion active credit and debit accounts worldwide and they are outnumbered by more than 5 billion mobile phone accounts. In Asia, there are about 85 million mobile accounts while Africa has 58 million mobile accounts. Mobile phones are emerging as a means of extending financial services in lieu of an underdeveloped banking system in various developing countries in these continents, with transactions involving SMS based payments, direct mobile billing using PIN and one-time password (OTP) authentication and mobile web payments. According to MasterCard, around 16% of the adults in Africa used mobile phones to pay bills or receive or send money last year.

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Expanding Customer Base

Developed economies in the U.S. and Europe currently dominate the cashless payment market. According to the Nilson report, cards issued in the U.S. account for 47% of the global purchase transaction volume while Europe accounts for 23%. In contrast, Asia Pacific has a market share of just 16%, Latin America accounts for 7% while the Middle East and Africa account for just 2% of the total volume. However, the projected growth rate for Asia, the Middle East and Africa is much higher than the U.S. and Europe. Transactions are expected to double in the next five years in Asia, Latin America, the Middle East and Africa while the growth rate for the U.S. is expected to be around 44% and that for Europe around 51%.

Mobile phones will be the key to this growth and MasterCard is positioning itself to capitalize. eServeGlobal has established itself as a mobile services provider in more than 50 countries worldwide, with more than 90 mobile and financial services customers. Oltio is a mobile payment service provider based in South Africa and will offer MasterCard’s open loop and remote payments solutions to merchants in the country. The two will add to the list of existing partners in MasterCard’s MMPP which includes Comviva, Gemalto, Sybase 365, Telepin and Utiba. The program is expected to reach around 2.5 billion customers in financially underdeveloped economies around the world.

Transactions and gross dollar volumes are key parameters for MasterCard and Visa and both companies charge their banking clients on the basis of these metrics. For a detailed analysis of the business operations, please read our articles, MasterCard’s Business Overview (Part 1): Assessment And Transaction Fee Income and MasterCard Overview (Part 2): Cross-Border Fees, Other Revenues And Rebates. The growth potential is immense as credit and debit cards gain more popularity. In its latest 10-K filling with the SEC, MasterCard estimated that 85% of all payment transactions are still paper-based transactions with cash or check being the primary media. Both Visa and MasterCard have maintained double digit growth rates in the last few years, and we expect this to continue in the coming years.

Samsung’s 19% Market Share Will Help Visa

Samsung has a 19% share of the global mobile phone market. Unlike its competitors, the manufacturer is not restricted to a single operating system and is expected to grow steadily in developing markets. This will help Visa capitalize on the expected growth in transaction volumes in these economies. We will analyze this aspect in an upcoming article. You can modify the interactive chart below to gauge the effect a change in Visa’s transaction volume growth rate will have on our price estimate.

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