Here's Why Mastercard Could Get Much Bigger

Payment network giant Mastercard (MA 0.01%) moves trillions of dollars around the globe each year, so you might think it's about as big as it can get. But you'd be wrong. In this Fool Live video clip, recorded on Jan. 25, Fool.com contributors Jason Hall and Matt Frankel, CFP discuss what investors should know about Mastercard and why it could still have tons of room to grow in the coming years. 

Jason Hall: I got Mastercard next here guys, ticker MA. So, Mastercard is one of my favorite companies actually, and it's one that I think is really interesting because no matter what the future of money is, Mastercard is going to play a huge role in how consumers, merchants, and lenders conduct transactions. It has one of the largest and most secure electronic payments networks on Earth. It sits right in this massive confluence of the shift from cash to cashless transactions, because cash is still king around the world. I think it's pretty easy to overlook that if you're in a developed country and you pull out of card or use your smartphone to pay for stuff. That's still not what the way most transactions globally are done. Mastercard felt the impact of the coronavirus recession last year. I think revenues fell about 8% over its last four reported quarters. It makes sense, because especially in the second and third quarters of the year the global economy was down, transactions were down, the tollbooth business that makes money on a per transaction basis. But that's starting to shift already, and I think 2021 is set up to be a really big year as the transaction base just recovers, but also as the global middle class gets more entrenched, and e-commerce and buying things online become more a part of the way people buy. The bottom line is that people need to keep their money somewhere or they have credit and it's not just a person with money giving it to a person that needs it. There are usually three parties involved. There's a merchant, there's a financial institution, and there's a consumer. The network effect power of Mastercard is really big because everybody wants to access to everybody else, so that's really powerful. Matt, this is probably something you could talk a little bit about, too. But they're really focusing on business-to-business transactions and also international transfers. These are two areas that have not really gotten a lot of the focus from the technology. They're expensive, they take time, and Mastercard is really focusing on making those better and cheaper and faster. I think it could be another great place to grow those businesses. Last thing and then Matt I'd like for you to talk about those two things. This is a cash cow. I mean, gross margins are steadily above 70%, operating margins, turning those revenues into usable cash flows above 50%. It's enormous considering the size of the business, Matt.

Matt Frankel: Well, the stats I would give you on that is that the card payment market, meaning debit cards and credit cards, is roughly $40 trillion in size.

Hall: T, with a trillion.

Frankel: Meaning that the amount of money that's just being spent on various payment cards around the world. When you include things like business-to-business, person-to-person payments, and Internet and cross-border money transfers, that figure jumps up to $185 trillion.

Hall: It's a little bigger than 40.

Frankel: That's why Visa (V 0.03%) and Mastercard have historically neglected those areas of the business just because they're pretty new areas and their card payment business, there's nothing wrong with it.

Hall: It's a $40 trillion business. [laughs]

Frankel: Right. Now, they're really trying to put some effort into these other areas that they are seeing some of the other companies have a lot of success with like the Squares (NYSE: SQ) and PayPals (NASDAQ: PYPL) like we'll talk to in a minute, which are the masters of person-to-person payments in the U.S. They're really trying to capitalize on that opportunity which essentially quadruples their addressable market opportunity. It's no wonder that Mastercard is prioritizing this. I think that's going to be a growth driver. When you see the market caps of these companies like Mastercard, and people think that they've exhausted their growth potential, that's one area that the market's really overlooking, the potential with business-to-business and person-to-person payments.