Mastercard Inc's (NYSE:MA) business continues to hum: When the company recently reported its third-quarter earnings, there was a lot for investors to like. Net revenue rose to $3.4 billion, an 18% increase year over year, while earnings per share were up to $1.34, an even more robust 24% increase year over year. The revenue and earnings growth were driven by increases in gross dollar volume and switched transaction counts, up 10% and 17%, respectively, from 2016's third quarter. The market reacted to the news only mildly, probably because Mastercard shares have already had an incredible run-up this year. As I write, shares are up more than 44% year to date and almost 15% since the start of August.
After reading through the company's conference call transcript provided by S&P Global Market Intelligence, here are three more catalysts shareholders in the global payments network can look forward to in the quarters and years ahead.
1. Other Revenues show strong growth again
In its quarterly earnings presentations, Mastercard breaks out its cross-border fees, domestic assessments, and transaction processing fees so that investors can see how much each contributes to the company's top line. These are essentially fees Mastercard collects as tolls on its vast payment network and are based on factors such as the number of transactions that occur across its network and dollar volume that passes through. Collectively, these streams of revenue accounted for about 85% of Mastercard's revenue for the quarter before rebates and incentives are backed out.
The remaining 15% of revenue, which Mastercard descriptively calls "Other Revenues," accounts for other services Mastercard provides its financial institution and merchant clients, such as reward-program management, data analytics, and fraud prevention. This quarter, Mastercard's Other Revenues once again showed strong growth, jumping to $747 million, a 21% increase year over year.
Here's how Mastercard's Other Revenues' growth compares to the company's overall growth:
|Mastercard Metric||Q3 2017||Q3 2016||Year-Over-Year Growth|
|Net revenue||$3.40 billion||$2.88 billion||18%|
|Diluted earnings per share||$1.34||$1.08||24%|
|Other Revenues||$747 million||$620 million||21%|
|Gross dollar volume||$1.35 trillion||$1.22 trillion||10%|
|Switched transactions||16.85 billion||14.45 billion||17%|
One of the areas in which Mastercard has put in the most work in this space is real-time fraud detection. During the company's conference call, Mastercard CEO Ajay Banga talked about the company's new flagship security platform, Safety Net:
In the past, we've talked about and shown you Safety Net, which identifies large-scale fraud attacks and blocks transactions in realtime, trying therefore to save our customers from significant losses. This quarter, we added to our toolsets with what we call the early detection system, which alerts issuers to accounts that are at risk of future fraudulent activities, even before they have been used in an unauthorized transaction. Like Safety Net and all our fraud products and services, this predictive tool leverages the power of the Mastercard network to supplement issuers' own fraud defenses. But early detection system also combines external data and insights to generate confidence levels to help our customers determine the appropriate action to take ...
The more Mastercard can offer merchants and financial institutions these types of services, the more the company will be able to earn in this growing revenue category.
2. New deals
Besides boosting the company's top line, a major benefit of the company's supplemental services, which complement its core payment network, is that they are helping the company win new deals from banks. When highlighting new deals in the company's second-quarter conference call, Banga said, "Our innovative solutions and value-added services were key differentiators for us." This quarter didn't disappoint and brought more new deals to investors' attention.
Of course, the biggest win of the quarter was announced a few weeks earlier, at Mastercard's Investor Day: The company said it had won Bank of America's cash rewards and non-rewards credit card portfolio. Craig Vosburg, Mastercard's president of North America operations, said of the deal, "This win adds to our growing partnership with Bank of America, which covers all of their payments business lines."
In the conference call following the quarterly release, Banga added that Mastercard has secured new deals with the National Commercial Bank, one of Saudi Arabia's largest banks, as well as with the Banque Travelex in France, and will be Costco Wholesale's exclusive co-brand partner in Japan starting in early 2018.
3. The place to be is B2B
Earlier this summer, Mastercard launched its B2B Hub, a platform the company envisions will allow smaller and medium-sized businesses to digitize all of their payments, not just card payments. Mastercard CFO Martina Hund-Mejean estimated the global B2B payments market to be about $124 trillion, of which "only" $20 trillion is facilitated at the point of sale. The rest is negotiated via other means, like cash, checks, or ACH (Automatic Clearing House, a vast electronic payments network commonly used for transactions like direct deposit and payroll). The company believes this platform will appeal to businesses as a way to simplify their accounts payable processes.
This quarter, Mastercard announced its first B2B Hub customer, Fifth Third Bancorp. Moreover, the company announced it was specifically researching, experimenting, and investing in blockchain technology because it strongly believes there are more applications for blockchain in this space than with consumer-facing payments. Banga said:
So we've signed a number of patents in the space in our own blockchain and our own platform. We have developed APIs, and we've also done things like making investments ... which enable us to look at the way other people are innovating using their blockchains ... But the idea is that we will open this up to financial institutional merchants, so they can connect into our settlement network ... The initial focus is on the B2B space because we continue to believe that the challenges of speed, of transparency and costs, both in domestic and cross-border payments in B2B, are more interesting than trying to find technology looking for a problem to solve in consumer payments that consumers do not perceive.
For shareholders, it is good to see Mastercard looking at every new emergent technology to gain an advantage in such a potentially huge new market for the company.
Mastercard's stock is already up a great deal in 2017 and now sports a P/E ratio of almost 35; that is certainly a high price for such a mature company. But I believe the company is worthy of such a high valuation. Mastercard still has a long runway of growth ahead as digital and electronic payments become more and more common around the world. What makes Mastercard even more appealing to investors is the fact is that it is currently offering services that boost the top line and is securing new deals while exploring massive opportunities in the B2B-payments arena. With these catalysts in place, Mastercard investors should be looking at market-beating returns for a long time to come.