In this note, we will look at cross-border transactions and other revenue sources and also analyze the expenses incurred by MasterCard (NYSE:MA). These segments account for just under 30% of our $540 price estimate for MasterCard.
In MasterCard’s Business Overview (Part 1): Assessment And Transaction Fee Income, we analyzed MasterCard’s fee structure, focusing primarily on assessment fees and transaction fees which account for 65% of the company’s revenues. To summarize, transaction fees are charged from issuers (card-holder’s financial institution) and acquirers (merchant’s financial institution) based on the number of transactions carried out by the financial institutions using a MasterCard product, and assessment fees are charged based on the gross dollar value (GDV) of the transactions carried out by the financial institutions. Assessment fees are charged when the issuer and the acquirer are based in the same country.
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When the acquirer’s country and the issuer’s country are different, MasterCard charges fees based on the aggregate volume of the transactions carried out between the two. The income from these fees accounts for a quarter of the company’s revenues. The transaction volume is first converted to a billing currency (usually U.S. dollar) equivalent. This amount is then multiplied by a price based on various factors like the number of cards issued by the bank, development of merchant relationships, brand promotion at point-of-sale, cross-border usage and other marketing developments. MasterCard also charges volume fees to issuers for currency conversion. The average cross-border fee is around 0.8% of gross dollar volume (GDV) of the transaction while the currency conversion fee is around 0.2% of GDV.
With increasing acceptance of credit, debit and pre-paid cards around the world, MasterCard has seen high growth in cross-border GDV over the last few years. The company reported a 10% year-on-year increase in cross-border GDV on a U.S. dollar converted basis in the first nine months of 2012.
MasterCard also provides other services such as card insurance, assistance for lost cards and locating ATMs, fraud detection and prevention and professional advisory services. The company also earns income from pre-paid card users in the form of ATM withdrawal fees, foreign exchange margin and other commissions. Revenues from these streams account for 10% of MasterCard’s gross revenues. The company reported a 15% increase in other revenues in the first nine months of 2012, primarily due to the acquisition of Access Prepaid Worldwide in April 2011.
MasterCard provides incentives to its customers in the form of rebates based on the customer’s performance in terms of volumes, the launch of new programs and issuance of cards. The company has paid around 25% of its revenues in rebates in the last five years. Apart from rebates, the major expenses borne by the company are general and administrative expenditures, which are around 25% of gross revenues, and sales and marketing expenses which are around 10% of gross revenues.