Where Will Mastercard Be in 5 Years?

The payments network continues to play its cards right.

Matthew Cochrane
Matthew Cochrane
Jun 25, 2019 at 9:30PM
Financials

While discussing Mastercard Inc (NYSE:MA) and close rival Visa Inc (NYSE:V) on a recent episode of the Invest Like the Best podcast, investing legend Chuck Akre gushed, "There's not a word in the English language superlative enough to talk about their operating margins or return on capital." It's hard to deny Akre's point. Over the past ten years, Mastercard has appreciated 1,590%, compared to the S&P 500 index's 230%. Over the past five years, the tally stands at 260% for Mastercard, 50% for the S&P -- and the payment network's growth shows no sign of slowing down. Year to date, Mastercard has rallied 40% to the market's 17%.

So what's Mastercard's secret sauce? What makes the company so special that investing legends discuss it in hushed tones and cause its stock price to rocket past the S&P 500 for more than a decade running? Let's take a closer look at Mastercard's business model to see what's driving its amazing returns, and what the next five years might hold for it.

Close-up of blue credit card.

While Mastercard only collects a fraction of a percentage as a fee, this quickly compounds across Mastercard's millions of cards and the transactions facilitated with them. Image source: Getty Images.

Mastercard's business model

When consumers make purchases using Mastercard products (whether via a plastic card or digital platform), Mastercard collects a small percentage of the transaction as a fee. While merchants will ultimately miss out on about 2.5% to 3.5% of the total transaction amount, much of that missing total goes to the card issuers and the merchants' banks for their roles in the transaction. Smaller amounts go to the payment processing service (the provider of the hardware and software that allows merchants to accept cards at the point-of-sale) and the payment network (e.g. Mastercard).

Thus Mastercard only collects a fraction of a percentage as a fee -- but this quickly compounds across Mastercard's millions of cards and the transactions facilitated with them. In Mastercard's 2019 first quarter, the company's 2.54 billion cards were used to make 19.2 billion transactions worth almost $1.5 trillion. Small fees quickly add up when we're talking about these kinds of numbers!

The beauty of Mastercard's (and Visa's) business model is that, once the underlying infrastructure is in place, there is little additional cost for Mastercard to accept more payments. In other words, as Mastercard scales, increased transactions quickly add to the bottom line.

Mastercard's growth

As card and digital payments grow the use of cash and personal checks decreases, a trend which could be called the "war on cash." Several catalysts are driving this war on cash, directly leading to higher use of the Mastercard network, including e-commerce, mobile payments, and more acceptance of card and digital payment at physical points-of-sale.

Most of us intuitively understand that using cash or checks for online purchases is, at best, much more inefficient and cumbersome than card or digital payments. As e-commerce increasingly takes market share from brick-and-mortar retail, it provides a strong tailwind for Mastercard. As Visa CFO Vasant Prabhu explained the benefits of this trend:

E-commerce is growing 5-times as fast as face-to-face transactions. And in an e-commerce transaction, the propensity to use a Visa card is twice as high as a face-to-face transaction. So something growing 5-times as fast where your propensity to be used is twice what it might have been. That's phenomenal.

While Prabhu was talking about Visa, the same benefits also apply to Mastercard.

Mobile payments provide another catalyst to Mastercard. Nearly all popular digital wallet platforms in North America and Europe, including PayPal Holdings' (NASDAQ:PYPL) core platform and Venmo and Square Inc's (NYSE:SQ) Cash App, use the payment network rails provided by Mastercard and Visa to move money. (Important note: The same dynamics for Mastercard and Visa do not exist for many popular digital wallet platforms in Asia, such as Alipay, PayTM, and WeChat Pay.) Square's Cash App had more than 15 million monthly active users at the end of 2018, and PayPal reported 277 million active user accounts in its 2019 first quarter, more than 40 million of which were Venmo accounts. The popularity of these platforms for making purchases or sending friends money only increases the chance that Mastercard's rails are used for a transaction.

Finally, more merchants than ever before are able to accept cards as payments. Square made accepting card payments as easy as plugging a small dongle into a smartphone in the U.S., while iZettle, since acquired by PayPal, did the same in Europe. Meanwhile, QR codes, the black-and-white matrix images that can be scanned by smartphones, have been heavily adopted by merchants in emerging markets since they can be used without expensive hardware or a landline internet connection.

These catalysts have consistently driven Mastercard's top- and bottom-line growth. In Q1, revenue rose to $3.89 billion, a 13% year-over-year increase, while adjusted earnings per share (EPS) grew to $1.78, a 24% increase year-over-year.


Related Articles

Mastercard's future

So where will Mastercard be in five years? While my crystal ball is broken, I don't foresee too much happening to displace Mastercard's vital role in the payments ecosystem over the next few years. The company's network effect, which makes its platform more valuable the more users it has, makes it exceedingly difficult for a disruptive upstart or competitor to take its place.

Of course, due to its envy-inducing margins, there will always be those that try. Investors should definitely keep an eye on big banks and tech giants experimenting with new technology, such as Facebook Inc's (NASDAQ:FB) efforts with Libra. That being said, I would be very surprised if the next five years did not see Mastercard trouncing the S&P 500 again.