VALUATION HIGHLIGHTS

1. Services Fees constitute 27% of the Trefis price estimate for MasterCard's stock.
2. Transaction Fees constitute 26% of the Trefis price estimate for MasterCard's stock.
3. Domestic Assessments constitute 24% of the Trefis price estimate for MasterCard's stock.

WHAT HAS CHANGED?

Latest Earnings

In Q4 2023, MasterCard reported net revenues of $6.5 billion, which was 13% more than the previous year. The growth was driven by an 18% jump in the cross-border volume, followed by a 10% increase in the gross dollar volume (GDV) and a 12% rise in the switched transactions.

Mastercard suffered in 2020 due to lower consumer spending levels and travel bans in the wake of the Covid-19 pandemic. However, it witnessed a recovery in 2021. Overall, Mastercard's revenues for full-year 2021 were $18.9 billion. The top line continued to improve over 2022 and 2023, with the company posting total revenues of $22.24 billion and $25.1 billion respectively.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Below we look at key drivers for MasterCard and the potential upside or downside for the company's stock.

• Transaction Processing Revenue: MasterCard charges a transaction processing fee from its customers for providing them with its network and infrastructure to carry out transactions. The company's revenue from transaction processing has increased from $8.5 billion in 2019 to $10.6 billion in 2022, growing at almost 8% on an average annual rate. Given the healthy macroeconomic environment, we expect the company's revenue from the division to grow strongly in the near term and gradually in the long run. We expect the revenue to increase to $23.3 billion by the end of the forecast year. However, if the global markets become volatile and the transaction processing revenue reaches only $20 billion by the end of our forecast period, there could be a downside of 7% to our current price estimate.


• Cross-border Revenue: A significant part of Master Card's revenues come from the fees it levies on cross-border transactions. A cross-border transaction is a transaction in which the cardholder's country is different from the merchant's country. MasterCard levies a cross-border fee and a currency conversion fee for any transaction made outside of the cardholder's country. The company's revenue from cross-border transactions has increased from $5.6 billion in 2019 to $6.6 billion in 2022.
  Given the healthy macroeconomic environment, we expect the company's revenue from the division to grow strongly in the near term and gradually in the long term. We expect the revenue to increase to $17.5 billion by the end of the forecast year. However, if the global markets become volatile and the transaction processing revenue reaches only $12.8 billion by the end of our forecast period, there could be a downside of 5% to our current price estimate.

BUSINESS SUMMARY

Master Card is the second-largest global payment solutions company in the world. It provides a variety of services to support credit, debit, and related card solutions of over 24,000 financial institutions globally. The company generates revenue by charging fees for transaction processing and other services. The company's brands include Master Card, Maestro, and Cirrus. MasterCard processed more than 125.7 billion transactions and $6.57 trillion of purchase volume in 2022.

SOURCES OF VALUE

Master Card generally charges its customers on a per-transaction or percentage-of-transaction basis, so its revenues are primarily impacted by the number of transactions it processes and the total dollar volume of purchases made using its cards.

Master Card's revenues primarily come from the following sources:

Transaction Processing Fees

Master Card acts as a transaction processing service for its customers. The company authorizes, clears, and settles all transactions made using its cards. MasterCard also allows customers to use its network and infrastructure to carry out transactions. In exchange for these services, MasterCards charges a Transaction Processing Fee.

Cross-border Volumes

A major part of Master Card's revenues comes from the fees it levies on cross-border transactions. A cross-border transaction is a transaction in which the cardholder's country is different from the merchant's country. Master Card levies a cross-border fee and a currency conversion fee for any transaction made outside of the cardholder's country.

Domestic Assessment Fees

Assessment fees are charged to the bank which issued the card. These fees are based on the gross dollar volume (GDV) for a specific period. The rates vary depending on the nature of transactions and the region.

Other Revenue - Services Fees

For our analysis, we have included acceptance development fees, warning bulletin fees, consulting and research fees, and other fees such as penalty fees, hologram, and publications fees as services fees.

Rebates and Incentives (Contra-Revenues)

Rebates and incentives are paid to customers and merchants to encourage card issuance for the acceptance of Master Card branded cards. These are contra-revenues and vary with the Gross Dollar Volume. Rebates are given both on operations fees and also on assessments.

KEY TRENDS

Rapid growth in electronic, cashless payment solutions

Master Card provides cashless payment solutions to customers worldwide. These include payments made using credit cards, debit cards, and prepaid cards. The market for such transactions is growing at a rapid pace as growth in emerging economies outpaces that of the U.S. Card transactions have experienced explosive growth in the Asia-Pacific region, now representing over 25% of global card volume. We expect this growth to gain momentum as more people and merchants adopt credit and debit cards.

Mobile payments on the rise

Master Card offers special payment solutions to enable the payment of bills from mobile phones. Mobile payments have been growing at an impressive rate, and we expect this to continue as mobile payment solutions become more secure, and more consumers use smartphones. This should provide a substantial growth opportunity for the company. Master Card's digital payment platform, MasterPass, was launched in 2013 and is gaining widespread acceptance. Master Card has also tied up with Apple and Samsung Pay to further foray into the mobile payment segment.