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Mastercard's Mission to Become a Full-Service Payments Network

By Matthew Cochrane – May 13, 2017 at 1:09PM

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Mastercard is adding innovative new products and services in its quest to offer more value to its banking and retail clients. Is the strategy working?

Mastercard Inc's (MA -1.35%) shares are now near all-time highs, as its consistent and steady growth has driven the stock to amazing heights since its IPO a little more than a decade ago. Since going public, Mastercard's stock price has skyrocketed more than 2,400%! More recent investors have nothing to complain about either as shares have increased nearly 13% year-to-date. Its recent quarter is just another impressive benchmark in its life as a public company. 

Mastercard continued its winning ways with a first quarter earnings report that showcased impressive year over year growth. Net revenue came in at $2.7 billion, a 12% increase, and adjusted EPS rose 17% to $1.01. Mastercard's other business metrics looked healthy too. For instance, it reported 14.7 billion switched transactions, an incredible 17% increase over last year's first quarter numbers.

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Yet what might be even more exciting to long-term investors in Mastercard than its robust growth, is the vision management laid out in its quarterly conference call. Throughout the call, CEO Ajay Banga talked about the full suite of service and product offerings that Mastercard would be able to offer its clients that he did not believe could be matched by competing payment networks. While the revenue earned from these bundled services is already significantly contributing to the company's top and bottom lines, Banga believes the best might be yet to come. It was against this backdrop that leadership highlighted the company's two most recent acquisitions, closed just this quarter, that the company thinks decidedly augments the value it offers its customers.  

Two newest members of the Mastercard family

The first acquisition Banga highlighted was NuData Security, a company specializing in the use of passive biometrics to discover fraudulent activity occurring on accounts. As Banga put it, by seeing "how fast a password is typed or the way a user holds a smartphone" the company can determine if the rightful account holder or a fraudster is performing activity on the account. In other words, gone are the days of annoying passwords that must contain eight alphanumeric characters split evenly between upper and lower case letters, one punctuation mark, and two emoji characters.

A lady taking a selfie with the Mastercard logo in background.

Mastercard is introducing several new innovative services and products, like its payment method that uses a selfie as a security measure.Image source: Mastercard Inc.

The second acquisition Banga referred to was VocaLink, a company that "has been successful in deploying Fast ACH in both developed and emerging markets." ACH, Automatic Clearing House, is an electronic payments network that works great for things like payroll, insurance payments, and electronic bill payments. It's also free but has traditionally been extremely slow, which is why you might still see money in your bank account for a few days after you pay a bill online. It sometimes helps to think of ACH money transfers as electronic checks.

VocaLink is working to make ACH payments happen in real time. In the United Kingdom, for instance, VocaLink is rolling out a pay-by-bank app, that uses debit, but no card, to make payments from customers to merchants.

The holistic payment network vision

Mastercard leadership believes these two companies can be neatly folded into the corporate umbrella that will then enable Mastercard to bundle a complete set of payment services that will offer a value to customers that no other payment company can match. This topic was addressed during the conference call and Banga stated:

I just think the opportunity to be able to go to any customer in the world and both the bank and a merchant and even a consumer eventually, and show them... from a MasterCard card to using Mastercard Send for P2P to using ACH capability. As we get the capability from VocaLink embedded across our system and as we can do it at different levels of complexity in different countries ... But you'll find us over the next year or two, at least at the front end trying to put as much as we can of our skills and capabilities across full payment ranges, add to it what we can do with ESS fraud safety, artificial intelligence, decision analytics and put all that and bundle it together. That's our real work in the integration.

In other words, by adding VocaLink's Fast ACH capabilities and NuData Security's fraud protection services to its full suite of services, Mastercard believes it will be able to confidently approach any customer with a corresponding value that will be hard to beat by competitors.

Driving revenue with a bundled value

Consumer using MastePass at a sales checkout at a store.

Consume using Mastercard's digital wallet, MasterPass, at a checkout. Image source: Mastercard Inc.

Mastercard has been offering these types of services to its customers, namely the financial institutions that brand its cards with the Mastercard logo, for a long time. Mastercard classifies revenue from these services as "Other Revenues" in its quarterly presentations. This quarter, Other Revenues grew to $561 million, a healthy 13% increase year over year. It would have been more, up to an 18% gain, on an apples-to-apples basis but, as CFO Martina Hund-Mejean explained, a reclassification of loyalty services in Asia made the growth trend lower than recent quarters.

If this revenue category continues to grow by double-digit percentages every quarter, it will soon grow into a significant source of revenue stream for Mastercard. As it stands, it already represents nearly 15% of revenue Mastercard brings in before subtracting out rebates and incentives.

Mastercard is working hard to develop extra streams of revenue beyond its bread-and-butter payment network services. Along with external acquisitions like NuData and VocaLink, the company has developed new products and services internally as well, such as its new biometric credit card with a built-in fingerprint reader or its AI-powered Decision Intelligence platform. Still, smart acquisitions are a natural way for a company to acquire talent and add value to its services. And, when they naturally fit into the company's larger plans and grand vision, so much the better. 

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

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