Mastercard (MA +0.49%) is a key player in the payment processing industry -- one of two companies that control the merchant acceptance "rails" for credit cards (the other, of course, is Visa).
In a real sense, it benefits directly from global economic growth and rising consumer spending. The more people spend -- and use credit cards in those transactions -- the more money Mastercard makes in transaction fees. So it wasn't a surprise that the credit card giants were significantly impacted by the recession that was set off by the COVID-19 pandemic. With people canceling travel plans en masse, avoiding shopping trips, and growing more concerned about their finances, there was a natural decline in the number of credit card transactions.
However, the silver lining for the credit card companies was that much of that lost in-person spending was replaced by transactions that used e-commerce and other forms of contactless payment, which still provided lucrative fees to them. While Mastercard may lose some transaction business from the lack of travel and in-person spending, it may be able to make up for that and then some with digital and contactless payments. In other words, Mastercard's business is proving quite resilient despite the significant headwinds created by COVID-19.
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Mastercard's rough Q2 2020 earnings
There is no question that the pandemic hurt Mastercard's financial performance in the second quarter. During the first quarter, it began to feel the impact of COVID-19 as governments around the world began to implement travel restrictions and lockdown orders. However, those headwinds were blowing at full force for the entire second quarter, which will likely make it the weakest segment of the year in terms of transactions processed and revenue earned.
| Financial Metrics | Q2 2020 | Q2 2019 | Change |
|---|---|---|---|
| Net Revenue | $3.3 billion | $4.1 billion | (19%) |
| Operating Income | $1.7 billion | $2.4 billion | (29%) |
| Net Income | $1.4 billion | $2.0 billion | (31%) |
Source: Mastercard Financial Statements.
2020 has been a sharp reversal for Mastercard, which previously put up many years of double-digit revenue and earnings growth. The cross-border transaction category was hit hardest -- those were down more than 50%. Overall, Q2 was rough, but the company's business has actually been improving from the low point it tumbled to in April.
Obviously, those steady improvements since the height of the pandemic shutdowns are good signs.
Moving into the future of payments
While the overarching trends for Mastercard were negative, the pandemic did accelerate the growth of the company's value-added services such as cybersecurity and data analytics. Revenue from its "other" category -- which mainly comes from those value-added services -- grew by 12%.
| Revenue source | Q2 2020 | Q2 2019 | Change |
|---|---|---|---|
| Domestic assessments | $1.474 billion | $1.680 billion | (12%) |
| Cross-border volume fees | $637 million | $1.374 billion | (54%) |
| Transaction processing | $1.901 billion | $2.053 billion | (7%) |
| Other revenue | $1.081 billion | $962 million | 12% |
Source: Mastercard financial statements.
As the table shows, the company saw a 54% decline in cross-border transaction fees due to international restrictions on travel. Cross-border revenue primarily occurs when a customer pays for something in person while in a country other than the one in which their card was issued.
Separately, the company disclosed that the volume of transactions occurring on its network where the card was present fell by more than 10% compared to the prior year. In contrast, transaction volume from payments where the card was not present was up by about 20%.
In addition to processing more transactions virtually, Mastercard has seen the number of contactless payments rise. These include payments made through a digital wallet (such as Apple Pay) or payments made through card antenna chips. An obvious reason that use of these payment methods has been growing is that merchants and consumers are more reluctant to handle cash while the transmission of COVID-19 via surface contacts remains a risk.
Mastercard is happy to see its customers using contactless payment tools as well, because it collects higher fees from those compared to traditional card swipes. The question is whether people will continue to use contactless payments and e-commerce tools at the same rate once the pandemic is over.
A steady recovery
This year has been the ultimate test for Mastercard. Its business model has been turned on its head in some ways. Historically, it has relied on international travel and in-person spending. Now it's leaning on its ability to facilitate e-commerce transactions and contactless payments. In other words, investors should increasingly view Mastercard as a fintech company rather than simply an old-school payments network.
The good news is that despite the shock to the system, Mastercard has remained profitable. Even better news its steady recovery since the economic lows seen in March and April. As economic activity revives, Mastercard will be looking for consumers to keep spending with their cards. The company will come out of this tough year in better shape if the habits people developed during it persist in the future.
