Google’s Wallet Expansion Could Help MasterCard

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Google (NASDAQ:GOOG) recently unveiled a prepaid debit card linked to Google Wallet. [1] The card is available in the U.S. and will allow users to transfer funds and make purchases via their Google Wallet accounts. While this move might help Google gain some ground in the burgeoning mobile Wallet market, we believe it can be even more beneficial for MasterCard (NYSE:MA), which provides the back end of Google’s Wallet services. [2] To understand why, below we take a look at the transaction process associated with cards and the Wallet.https://www.trefis.com/articles/wp-includes/js/tinymce/plugins/wordpress/img/trans.gif

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How Do Card Companies Work?

A normal transaction via a debit card or a credit card involves four parties: The cardholder, the merchant, the cardholder’s bank (also called the issuer) and the merchant’s bank, or the acquirer. Visa (NYSE:V) and MasterCard primarily operate networks serving as communication channels between the financial institutions involved, facilitating services like data processing, authorization, clearing and settlement.

Image From MasterCard's 10-K Filing

True to its name, the issuer bank issues cards bearing the Visa or MasterCard logo to cardholders, who can then use these cards for transactions. These transactions are then authorized by the issuer using the payment processing network, after which the institution pays the acquirer the amount of the transaction and charges an interchange fee from the acquirer (for debit cards, this fee is capped at 21 cents and 0.05% of the value of the transactions). The acquirer, in turn, charges a discount fee from the merchant to cover the interchange fee it has to pay to the issuer.

MasterCard and Visa do not earn any money from cardholders or merchants, but instead charge fees from the issuer and the acquirer. The fees can be classified into three broad classes: Assessment Fees, Transaction Fees and Cross-Border Fees. Assessment fees 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. The average assessment fee is around 0.1% of the gross dollar volume of transactions. Transaction fees account for 30% of the company’s net revenues and are charged on both domestic and cross-border transactions based on the number of transactions processed for each customer. The total average transaction fee charged by MasterCard is around $0.095 per transaction. Cross-border fees are charged when the issuer and acquirer are in different countries and are not in the scope of this discussion.

What Does This Have To Do With The Google Wallet?

Google Wallet is basically a replacement for your physical Wallet, meant to store all kinds of information. Users can enter their card details for any card, be it Visa, MasterCard, Discover Financial (NYSE:DFS) or American Express (NYSE:AXP) into Google Wallet and even link it directly to their bank account. The Google Wallet then essentially becomes a fifth party in the aforementioned transaction system, acting as a virtual MasterCard card with Bancorp as the issuer. [3]

When a user makes a transaction using Google Wallet, details of the virtual card are passed on to the merchant via Near-Field Communication (NFC) technology. Bancorp facilitates the transaction between the merchant and Google through the MasterCard network.  The Wallet then deducts the transaction amount from the user’s card or linked bank account, this time acting as the acquirer. Although the terms of the agreement have not been revealed by either of the three parties, we believe that Bancorp is likely to collect interchange fees for the first half of the transaction, which are then passed on to MasterCard  as assessment and transaction fees.

What Is The Potential?

Research firm Gartner reported that worldwide mobile payment transaction values were around $163.1 billion last year and are expected to reach $235.4 billion in 2013. [4] Around 16% of this volume comes from North America. Services using NFC technology like Google Wallet are still gaining traction and account for 2% of the total transaction volume from mobiles. This could be one of the main reasons that Google is issuing a physical card to facilitate its Wallet services. A familiar medium such as the debit card would allow for easier market adaption to its Wallet services.

Gartner predicts that the mobile payment market will reach $700 billion by 2017, with NFC services accounting for 5% of the total transaction volume. However, this forecast seems conservative since mobile transactions are currently less than 1% of the personal consumption expenditures (PCE) in the U.S. [5] This share is likely to go up if Google’s Wallet-linked debit card gains popularity. Electronic payment solutions account already for more than 60% of the PCE in the U.S. [6] Visa and MasterCard account for 22% and 10% of the PCE in the country, respectively, and have launched their own Wallet services named V.me and PayPass. If Wallet services gain traction in the coming years, then they might be able to capture a market share of 15% of the PCE, generating $1.8 trillion in transaction volume by 2017.

A recent study by comScore, Inc. (NASDAQ: SCOR) suggests that 8% of mobile Wallet users in the U.S. currently use Google Wallet whereas around 3% use PayPass. [7] Given Google’s brand image and the fact that the Google Wallet is closely linked to the Play store for Android phones, we expect Google to gain market share in the coming years. If the company’s market share reaches 50%, then Google can reach a transaction volume of $900 billion from mobile payments alone. For MasterCard, this means an additional $900 plus million revenue opportunity from assessment fees. The average dollar value of a transaction on the MasterCard network is around $100, suggesting an additional 9 billion transactions will take place on the network, leading to additional revenue of $900 million from transaction fees. If MasterCard is able to retain its current market share in the U.S., there is a 20% upside to the company’s stock in this scenario.

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Notes:
  1. Google Inc : Google unveils prepaid debit card, 20 November, 2013 []
  2. Google, Citi, MasterCard, First Data and Sprint Team Up to Make Your Phone Your Wallet []
  3. Google Wallet FAQ []
  4. Gartner Says Worldwide Mobile Payment Transaction Value to Surpass $235 Billion in 2013 []
  5. Personal Consumption Expenditures, U.S. Department of Commerce: Bureau of Economic Analysis []
  6. Visa investor meeting for 2013 []
  7. comScore Study Highlights Digital Wallet Market Potential and Current Adoption Barriers []
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