MasterCard Overview And Key Trends To Watch (Part 2)

by Trefis Team
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Executive Summary

  • MasterCard is looking to capitalize on developments and growth in mobile phone payment technology.
  • Developing nations in Asia, the Middle East and Africa hold the key for MasterCard. These regions account for close to 30% of the GDV of transactions processed by the company.
  • Mobile phone payment technology is emerging as a means of extending financial services in developing nations. Nearly 85% of the world currently owns a mobile phone. This penetration is expected to increase to 90% by 2019.
  • Should 20% of the 6.7 billion mobile phone users by 2019 use a MasterCard payment account, there would be 1.9 billion MasterCard payment accounts by the end of our forecast period. With 33 transactions in a year per account, this would lead to 63 billion transactions processed by MasterCard.

In our last article, we looked at MasterCard’s (NYSE:MA) global payment solutions network and geographic distribution. To recap, the number of transactions processed by MasterCard for its financial clients and the gross dollar volume (GDV) of these transactions are key metrics for the company as it charges fees based on these statistics. Developing markets in Asia, the Middle East and Africa hold the key for future growth accounting for nearly 30% of MasterCard’s global GDV in 2012. The company reported a 21% year-on-year growth in GDV from these areas in 2012, in comparison, GDV from the U.S. and Europe grew by only 9%.

Our price estimate for MasterCard is $535, in-line with the current market price.

See Our Full Analysis for : MasterCard| Visa|American Express|Discover Financial

Mobile Phones Are The Key

Mobile phone payment technology has emerged as a means of extending financial services in developing countries. Research firm Statista expects the global value spent using mobile phones to reach $171 billion in 2013, up from around $106 billion in 2011. The firm predicts this will rise to about $617 billion by 2016. [1] Mobile phone transactions primarily involve SMS based payments, direct mobile billing using PIN and one time password (OTP) authentication and mobile web payments.

A substantial number of people across the world own a mobile phone. Considering the global population of 7 billion [2] and the total number of mobile phones in circulation, which is close to 6 billion, [3] we get the figure of 85% mobile phone penetration across the world. This is of course skewed by the fact that some people might own more than one mobile phone, but it gives us a reasonable estimate. In contrast, there are just 1.1 billion MasterCard cards and 2.1 billion Visa (NYSE:V) cards in circulation across the world.

Although developed nations like the U.S., U.K and Germany have mobile phone penetration of over 100%, developing countries like India and China have penetration rates close to 70%. [3] Both of these countries have a population of over a billion and are experiencing a period of strong economic growth, which has coincided with the proliferation of mobile phones and mobile payment technology. China has seen GDP growth near 10% in the last five years while India’s growth rate has been above 5%. [4]

Our Forecast

The global population is expected to rise to 7.5 billion by 2019. [5] Given that the current world mobile phone penetration is 85%, it is reasonable to assume that close to 90% of the world’s population will own a mobile phone by the end of our forecast period, leading to 6.7 billion mobile phones in use.

MasterCard is one of the leaders in payment solutions technology and has mobile wallet services like MasterPass and PayPass services. We expect that 20% of the mobile phones in use by 2019 will have a MasterCard payment account. This would lead to 1.4 billion mobile payment MasterCard accounts.

Adding this figure to the current number of MasterCard branded cards of 1.1 billion, we get around 2.5 billion MasterCard payment accounts by 2019. However, some of the mobile phone accounts would merely be replacing plastic cards. To account for this cannibalization effect, we assume that nearly half of the current plastic cards in circulation will be replaced by mobile phones while the rest will be augmented by mobile accounts. Using this methodology, we arrive at the figure of 1.9 billion MasterCard payment accounts by the end of our forecast period.

Currently, MasterCard processes around 29 transactions per card in a year. We expect this figure to grow with the proliferation of mobile payment technology. A survey by Deloitte shows that smartphone users are 14% more likely to complete a purchase at the point of sale than non-smartphone users. [6] Mobile phone transactions accounted for 5% of retail store sales in 2011, and this percentage is expected to grow 19% by 2016. We maintain a conservative forecast with the number of transactions per card in a year growing to 33 by 2019.

Multiplying the figures obtained for total MasterCard payment accounts – 1.9 billion and the number of transactions per account in a year – 33, we get close to 63 billion transactions processed by MasterCard by the year 2019.

Other Scenarios

In an extreme scenario where the cannibalization is 100%, or in other words, plastic cards are rendered obsolete. Going with our earlier assumption that MasterCard can maintain a market share of 20%, the total number of MasterCard payment accounts would be around 1.4 billion. Assuming that the number of transactions per card averages around 33, this would lead to 45 billion transactions processed by MasterCard by 2019. There is a 10% downside to our price estimate in this scenario.

You can modify the interactive chart above to gauge the effect a change in our estimate for the total number of transactions processed by MasterCard could have.

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Notes:
  1. Global mobile payment transaction volume from 2011 to 2016 (in billion U.S. dollars) []
  2. International Data Base, United States Census Bureau []
  3. List of countries by number of mobile phones in use [] []
  4. GDP growth (annual %), The World Bank []
  5. United States Census Bureau []
  6. Smartphones will influence 19pc of retailers’ sales by 2016: study, Mobile Commerce Daily, 28th June, 2012 []
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