Will Transaction Processing Fees Continue To Drive Mastercard’s Revenues In 2020?

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Transaction Processing Fees contribute the most to Mastercard’s (NYSE: MA) top line, with an average revenue share of almost 35% over the last 3 years. It has added around $2.3 billion to net revenues over 2016-2018, which is 55% of the total figure. Further, we expect Transaction Processing Fees to continue its growth trajectory and add $2.1 billion over 2019-2020, which is 50% of the $4.2 billion in net revenue the company is expected to add. Trefis details the key components of Mastercard’s Revenues in an interactive dashboard, along with our forecast for 2019-2020.

Transaction processing business, which involves routing of payment information and related data to facilitate authorization, clearing, and settlement of transactions on Mastercard’s network, is expected to contribute $9.5 billion to Mastercard’s 2020 revenues – making it the single largest component of Mastercard’s net revenue figure of $19.1 billion for the year. It must be mentioned here that Mastercard’s net revenue figure Net Revenues takes into account Rebates & Incentives which the company reports as a contra-revenue in its income statement. You can make changes to our forecast for individual revenue streams in the dashboard to arrive at your own forecast for the company’s revenues.

What To Expect From Mastercard’s Revenues?

  • Mastercard has added around $4.2 billion to its net revenues over the last two years.
  • Net Revenues have grown 1.4x from $10.8 billion in 2016 to almost $15 billion in 2018, and is expected to cross $19 billion by 2020.
  • This growth of about $4.19 billion over 2019-2020 would be driven by about $2.12 billion from Transaction Processing, $1.7 billion from Domestic Assessments, $1.43 billion from Cross-Border Volume and $1.07 billion from Other division, partially offset by an increase of $2.13 billion in Rebates & Incentives (a contra-revenue item).
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Details about how trends in Mastercard revenues compare with peers Visa, American Express and Discover Financial are available in our interactive dashboard.

 

 (A) Transaction Processing Fees are expected to increase $2.12 billion over 2019-2020

  • It involves routing of payment information and related data to facilitate authorization, clearing, and settlement of transactions on Mastercard network.
  • Transaction Processing is Mastercard’s largest revenue stream.
  • The segment revenues have increased 44% over the last two years, from $5.1 billion in 2016 to $7.4 billion in 2018.
  • This was mainly driven by a 23% jump in payment volumes – an increase of $0.8 trillion in absolute terms, followed by a 2 bps rise in Data Processing Fee as % of payment volumes.
  • The reason behind this growth in Payment Volumes was an increase of 226 million in the number of cards in circulation and a 12% increase in payment volume per card.
  • Going forward, we expect payment volumes to increase by $1.1 trillion over 2019-2020. This coupled with a 1 bps increase in Data Processing Fee as % of payment volume should help Transaction Processing Fees to cross $9.5 billion by 2020 – up by $2.12 billion.

(B) Domestic Assessments are expected to add $1.7 billion to net revenues over 2019-2020

  • These are fees charged to clients (Issuer & Acquirer) based on dollar volume of activity on Mastercard-branded products for domestic transactions.
  • These fees have grown 39% over the last 2 years, from $4.4 billion in 2016 to $6.1 billion in 2018.
  • Further, we expect these fees to cross $7.8 billion by 2020 –up by $1.7 billion.

Our interactive dashboard for Mastercard details what is driving changes in revenues for Mastercard’s Domestic Assessment division.

 

(C) Cross Border Volume Fees are expected to increase $1.43 billion over 2019-2020.

  • These are fees earned on cross-border transaction processing and currency conversion services based on dollar volume of activity on Mastercard-branded products.
  • These fees have grown 40% from $3.6 billion in 2016 to $5 billion in 2018.
  • Moving forward, we expect the revenues to grow at an average annual rate of 14% and cross $6.4 billion by 2020.

 

(D) Other Revenues are expected to add $1.1 billion over 2019-2020.

  • It represents income from additional services offered along-with payment services such as: consulting, data analytics, rewards solutions, etc.
  • The segment revenues have grown 38% from $2.4 billion in 2016 to $3.3 billion in 2018.
  • Moving forward, we expect the revenues to grow at an average annual rate of 15% and cross $4.4 billion by 2020.

 

(E) Rebates & Incentives are expected to increase 1.3x (about $2.1 billion) over 2019-2020, with its share of Gross Revenues remaining roughly constant

These are rebates offered to financial institutions for entering into a long-term contract with Mastercard to enhance the acceptance of Mastercard branded products.

 

Trefis estimates Mastercard’s stock (shows cash and valuation analysis) to have a fair value of $278, which is 5% lower than the current market price.

 

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