MasterCard (NYSE:MA) is one of the leading payment solutions providers in the world. With more than one billion MasterCard branded cards worldwide, the company is third in terms of the number of cards in circulation behind China UnionPay and Visa (NYSE:V). MasterCard’s customers are primarily financial institutions, called issuers, which issue branded cards. The card-holders can use these cards to carry out a transaction with a merchant at the point-of-sale (POS), online or to withdraw money via ATM. The merchant’s financial institution is termed as the acquirer.
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MasterCard charges fees from both the issuer and the acquirer based on a number of factors including the type of authorization used: PIN based or signature based, the place where the transaction originated and the place where the transaction completed. For a domestic transaction, where the issuer and the acquirer bank are based in the same country, the main fees charged are assessment fees and transaction fees.
Assessment fees account for around 35% of MasterCard’s revenues and 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. Transaction fees account for 30% of the company’s net revenues and are charged on the basis of the number of transactions processed for each customer.
Clearly, the number of transactions processed on MasterCard’s network and gross dollar volume (GDV) of these transactions are key metrics for MasterCard. In this article, we analyze the trends governing these parameters.
Our price estimate for MasterCard is $535, in-line with the current market price.
International Expansion Driving Growth
The financial downturn of 2008 affected MasterCard as the number of MasterCard branded cards in circulation dropped from 981 million in 2008 to 966 million in 2009 while total GDV of transactions dropped 3% over the year. However, it must be noted that the company still saw a 7% year-on-year increase in the total number of transactions processed as the annual number of transactions per card increased from 21.4 in 2008 to 23.2 in 2009.
The company has since recovered and has been able to revive growth. In 2011 and 2012, the number of MasterCard branded cards increased by 9% year-on-year and stood at 1.1 billion at the end of 2012. The annual number of transactions per card grew at a double digit rate in the last two years, reaching 29.5 by the end of 2012. Although the total GDV of transactions processed by the company has actually increased at a double digit growth rate, international expansion and differences in currency values around the world have had a detrimental effect on the GDV per transaction, which fell 10% in 2012 to $106.80.
The Breakdown Of Key Businesses
Credit cards are MasterCard’s primary product. There are around 686 million consumer credit and charge cards around the world bearing the famous MasterCard logo. These cards account for around $1.8 trillion or 50% of MasterCard’s GDV. The total number of consumer credit and charge cards grew by 5% from 2011 to 2012. The GDV generated per consumer credit card in a year is around $2,600.
Although credit cards have historically been more important for MasterCard, the company has seen higher growth in debit cards. The total number of MasterCard branded debit cards rose 21% year-on-year in 2012, reaching 436 million by the end of the year. This growth was driven by the Durbin amendment to the Dodd-Frank bill. The bill requires banks with more than $10 billion in assets to use separate payment processing networks for signature authorized and PIN authorized debit card transactions.  This helped MasterCard siphon away market share from its main competitor, Visa (NYSE:V). Debit cards accounted for 42% of the GDV of transactions processed by MasterCard through the year. The GDV generated per debit card in a year is around $3,440.
Commercial credit and charge cards are the third line of payment solutions offered by MasterCard. These cards are offered to large corporations, mid-sized companies, small businesses and government entities and are used to manage company expenses and spending. Although there are only 36 million MasterCard branded commercial credit cards in circulation worldwide, the GDV generated per card is much higher than the consumer credit and debit lines. MasterCard processes close to $8,000 in GDV per commercial credit card.
MasterCard is looking to capitalize on the developments in the mobile phone payment domain to expand into new markets. The potential is immense, particularly since mobile phone penetration is higher than payment card penetration. There are about 1.1 billion active MasterCard credit and debit accounts and 2.1 Visa accounts worldwide. In contrast, the number of mobile phones in circulation worldwide is close to 6 billion. ((List of countries by number of mobile phones in use))
MasterCard is expanding its mobile contactless payments program in developing countries in Asia, the Middle East and Africa where mobile phone has emerged as a means of extending financial services in lieu of an underdeveloped banking system.  Countries like Saudi Arabia and U.A.E. have more mobile phones than people. ((List of countries by number of mobile phones in use))
The results of MasterCard’s efforts are evident. The company reported a 21% year-on-year increase in GDV processed from Asia, the Middle East and Africa in 2012. In contrast, the growth was 9% in Europe and the U.S. The developing markets now account for 27% of MasterCard’s global GDV.
In our next article, we discuss the growth potential that these areas offer with a focus on mobile phone technology. You can modify the interactive chart below to gauge the effect a change in our forecast for MasterCard’s GDV can have on our price estimate.Notes: