MasterCard’s U.S. Growth Might Slow This Quarter As Dodd-Frank Benefit Wanes

MasterCard (NYSE:MA) is scheduled to report earnings for the second quarter of 2013 on July 31. ^[1] The payment solutions company has been riding on a worldwide shift to plastic and reported a 9% year-on-year increase in gross revenues for the first quarter of the year, helped by an 11% increase in gross dollar volume (GDV) across the world.

In the U.S., the company was helped by the implementation of the Durbin amendment to the Dodd-Frank bill, which requires banks with more than $10 billion in assets to use separate payment processing networks for signature authorized and PIN authorized debit card transaction. ^[2] The new regulations allowed MasterCard to seize some market share from Visa (NYSE:V), with an 11% growth in U.S. transactions through the first quarter, primarily driven by signature processed debit transactions.

In contrast, Visa’s debit growth was slow through most of 2012 and the first quarter of 2013. Visa reported a 3% decline in debit payment volume for the December quarter, followed by nominal growth of 0.3% through the three months ending March. However, with the market adapting to the new regulations, Visa saw a revival in debit purchase volume growth in the last quarter. The company’s U.S. debit volume grew 12.4% through the three months ending June. As the trend normalizes, we expect MasterCard’s U.S. growth to slow down this quarter. Debit cards account for half of MasterCard’s GDV in the U.S.

Our price estimate for MasterCard is $547, in-line with the current market price.

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

MasterCard primarily earns revenue by charging fees from both the issuer or cardholder’s bank, and the acquirer or the merchant’s bank. For a domestic transaction, where the issuer and acquirer bank are based in the same country, the main fees charged are assessment fees and transaction fees. Transaction fees account for 30% of the company’s net revenues and are charged on the basis of the number of transactions processed for each customer. Assessment fees account for around 35% of MasterCard’s revenues, and are charged to issuers and acquirers as a percentage of the billing currency (generally U.S. dollars) equivalent of transactions carried out by the institution using MasterCard products.

MasterCard has around 1.2 million cards in circulation worldwide, of which around 436 million are debit cards, 686 million are consumer credit cards, used by individuals and 36 million are commercial credit cards, offered to corporations. Consumer credit cards account for nearly half of the GDV processed by the company while debit cards account for 40% and commercial credit cards account for the remaining 10%. The company processes around 30 transactions per card in a year, with a total of 34 billion transactions processed annually. MasterCard charges an authorization, settlement and switch fee of around $0.08 per transaction and connectivity fee of $0.008 per transaction.

U.S. Growth

According to our analysis, MasterCard has maintained a market share of 10% of the personal consumption expenditures (PCE) in the U.S. ^[3] The U.S. has one of the highest electronic payment adoption rates in the world, with electronic payment solutions accounting for more than 60% of the personal consumption expenditures. ^[4] The country’s economy is on the road to recovery, following the 2008 financial crisis. The unemployment rate recently reached a four-year low of 7.5% in April and stayed around that level in May and June, after a peak of 10.1% during 2009. ^[5] Higher employment will lead to growth in disposable income and as a result, growth in spending. PCE as a percentage of disposable income has improved to 94% in the last two years, after falling to 91% in 2008 and 2009. With its strong market position, we expect MasterCard to gain from the recovery in the U.S. economy.

For a detailed analysis of the company’s prospects in the U.S., please read: The Big Trends Behind MasterCard’s U.S. Business Outlook

Expanding Outside

Developing areas 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%. Emerging markets like India, China, Mexico, Brazil, Russia, Indonesia, South Africa and UAE generate combined PCE of around $10 trillion. With the exception of China, electronic payment penetration is quite low in these countries with paper-based transactions accounting for 62% of the PCE. The Chinese market is dominated by China UnionPay (CUP) which has expanded rapidly in the country, allowing for high penetration. Electronic payments account for 62% of the personal expenditures in the country.

We expect MasterCard to leverage its global processing network to tap into these potential markets, allowing for international growth despite the European Commission’s plans to limit interchange fees charged from merchants by banks on the use of credit and debit cards. ^[6] For more on growth prospects, please read our series : The Potential For Credit Card Growth Outside The U.S. – Part 1 and The Potential For Credit Card Growth Outside The U.S. – Part 2

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1. Calendar of Future Events, Investor Relations [↩]
2. The Durbin Amendment Explained [↩]
3. Personal Consumption Expenditures, U.S. Department of Commerce: Bureau of Economic Analysis [↩]
4. Visa investor meeting for 2013 [↩]
5. U.S. Department of Labor, Labor Force Statistics from the Current Population Survey [↩]
6. EU Plans Limit on Credit-Card Fees, Wall Street Journal, July 17, 2013 [↩]