MasterCard Earnings Will Show Impacts of Mobile Growth And New Regulations

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MasterCard (NYSE:MA) has faced a lot of criticism recently with several merchants such as Wal-Mart opposing the proposed settlement to the seven year old lawsuit regarding interchange fees. [1] The company, along with industry peer Visa (NYSE:V), had offered a settlement to allow merchants to surcharge customers to offset the transaction fees charged by credit card companies. (See Visa And MasterCard Face The Heat To Reduce Fees) MasterCard’s earnings announcement, scheduled for August 1st, is likely to provide some insight into the company’s stance on the issue. We will keep a close eye on the report to dissect further developments regarding the dispute as well as some key performance metrics, which we  discuss below.

See Full Analysis for MasterCard Here

Debit Volumes Merit A Close Watch

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MasterCard’s PIN authorized debit transactions rose threefold in the first quarter of 2012, giving the company a huge 20% market share. (See Debit Card Growth Fuels MasterCard’s Q1 Results) This jump was primarily due to 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 transactions. [2]

Visa, which has historically dominated the market, reported a 9% fall in transactions executed via debit cards this quarter. (See Visa’s Global Growth Supports Its Outlook) We believe that some of this share might have gone to MasterCard along with competitors American Express (NYSE:AXP) and Discover Financial (NYSE:DFS). We expect a short term rise in MasterCard’s debit market share, which will stabilize in the long term as the compliance is adopted.

Mobile Phone Payments On The Rise

Mobile phone payments currently account for 5% of annual retail store sales in the U.S. With the growing popularity of smartphones like Apple’s (NASDAQ:AAPL) iPhone, this number is expected to reach 19%, by 2016 with over $600 billion in sales volumes, projected by Deloitte. [3] MasterCard is taking steps to position itself to benefit from this trend. Recent collaborations with popular mobile application provider shopkick and German phone company Deutsche Telekom AG will help it realize its goals.

We expect transaction volumes processed by MasterCard, which account for 22% of our price estimate for the company’s stock, to rise steadily over the next few years. For more details on how MasterCard intends to take on mobile phone payments technology, you can refer to our article Wallet Services Provide A Glimpse Into MasterCard’s Future.

Pre-Paid Volumes Also Noteworthy

Pre-paid debit cards have rapidly been gaining popularity in the U.S. Transactions executed via prepaid cards grew from $30.1 billion in 2004 to $75.7 billion in 2010. [4] MasterCard has taken several initiatives to capitalize on this trend such as the launch of MasterCard PayPass wristbands, which will use Radio Frequency Identification (RFID) technology and will be initially implemented in the Isle of Wight Festival. [5] We expect prepaid volumes to rise steadily through the next few years.

Our price estimate for MasterCard is $465, 10% above the market price. You can gauge the effect of a change in forecast by modifying the chart above.

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Notes:
  1. 2nd UPDATE: Wal-Mart Opposes Settlement with Credit-Card Networks, Wall Street Journal, 24th July, 2012 []
  2. The Durbin Amendment Explained []
  3. Smartphones will influence 19pc of retailers’ sales by 2016: study, Mobile Commerce Daily, June 28th, 2012 []
  4. Retail Payments Systems in the U.S. []
  5. Mastercard Inc : Isle of Wight Festival Goers to Receive First Ever Auto Top-up MasterCard® PayPass™ Wristband, 4-traders, 22nd June, 2012 []