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Why India, Not China, is Mastercard's Biggest International Growth Opportunity

By Matthew Cochrane – Feb 13, 2017 at 8:43AM

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For years, China has blocked and stifled Mastercard and Visa from operating within the country. Meanwhile, India is pushing its country towards digital payments in a big way.

In what has become the norm, Mastercard Inc (MA -1.18%) recently reported another solid quarter. Total net revenue came in at $2.76 billion and diluted EPS was $0.86, both representing a 9% increase year over year. Worldwide gross dollar volume rose a healthy 9% once recent EU regulatory changes were taken into account and switched transactions increased 17% year over year.

Someone holding a smartphone using MasterPass to pay for food at a coffee shop counter

Image source: Mastercard Inc Newsroom

Revenues from Mastercard's services also continued to show out-sized gains, increasing 21% year over year. Collectively accounted for under Mastercard's "other revenue" category, this sector includes numerous discrete services such as fraud protection, consulting, loyalty and reward program management, and data analytics.

But it's not just Mastercard's consistent revenue growth and healthy business fundamentals that should enthuse investors. It's also the company's massive opportunity in one of the world's most populous countries -- and not the one you think.

Purgatory in China

In the spring of 2015, China's State Council issued regulations that paved the way for Mastercard and Visa Inc to operate in the world's most populous country. The next year, China followed up the original set of instructions with additional rules, providing more guidelines on what was expected before the two companies could apply for domestic licenses. Among other provisions, these regulations required that foreign operated companies be locally based, have one billion yuan in registered capital in a local business, and meet the Chinese government's security standards.

Unfortunately, these rules were probably intentionally vague. Since the Chinese government provided these rules last summer, the two companies have been stuck in a sort of purgatory, trying to obtain clarification on the meaning of some of the regulatory details while still waiting to apply for a domestic license. In Mastercard's most recently reported quarterly conference call, while commenting on the domestic opportunity in China, CEO Ajay Banga stated, "We are continuing to speak with the regulators there to better understand the entry requirements and to clarify our options and how best to approach that market."

When one door closes another opens

But while the progress in China has been frustratingly slow for Mastercard shareholders, another opportunity in Asia offers plenty of upside that is within reach now, not years down the road.

Last August, in an effort to modernize India's economy, Prime Minister Narendra Modi made a rather drastic move by demonetizing existing 500 and 1000 rupee notes. This move did not stop with ceasing to print these notes, but declared existing bills in these denominations would be deemed worthless in the not-too-distant future. This move is exacerbated by the fact that about 95% of purchases in India are still made with cash and the two notes being taken out of circulation constitute about 86% of the currency in circulation.

While this might "soften" India's economy in the short term, it opens up a huge opportunity for Mastercard in one of the world's fastest growing economies and second most populous country as digital payments take a more prominent role. In Mastercard's 2016 fourth quarter conference call, Banga remarked on this opportunity several times:

In India, the government has recently implemented a plan to ... to help drive the shift from cash to electronic forms of payment. Now given the heavy reliance on cash in that economy, this is expected to soften consumer spending in the short term but could well fuel economic growth and modernize the payment system in the long term.

In the same conference call, CFO Martina Hund-Mejean said Mastercard was already seeing the effects of this policy change, stating that purchase volumes were up 75% year over year.

A long runway of growth

In the conference call, Banga estimated there are about 60 million merchants in India and only 1.4 million point-of-sale terminals that accept digital payments. He attributed the 75% increase in purchases this past quarter to more Indian consumers using the existing payment terminals. In the quarters ahead, however, Mastercard plans large investments to increase merchant coverage of all types of digital payments.

Mastercard's ambitious plans call for doubling the number of point-of-sale terminals over the next three to six months and increasing the total number of terminals to five million in the next two years. Banga noted this was a concerted effort; one where other entities including the Indian government, banks, and Visa were all playing important roles.

In a recent interview, Mastercard's senior vice-president of marketing for Asia Pacific, Sam Ahmed, noted that the company had increased its investment in India by 30% the past two years and that it was committed to increasing that amount even more. This continued investment indicates that management understands the enormous opportunities available when one of the world's fastest-growing economies and second-most populous country deliberately shifts to digital payments.

While the total addressable market might not be quite as large as the one in China, the Indian government is encouraging investment in digital payments, not hindering it with Byzantine regulations. This makes the long-term potential in India more easily attainable and predictable. For long-term Foolish shareholders in Mastercard, it represents another huge global growth opportunity lying ahead.

Matthew Cochrane owns shares of Mastercard. The Motley Fool owns shares of and recommends Mastercard and Visa. The Motley Fool has a disclosure policy.

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