Most investors think of Mastercard (MA -0.08%) primarily as a high-margin, low-risk credit card processing network that is worthy of a premium valuation due to its commanding market position. After all, Mastercard controls 21.6% of all credit card transaction volume in the U.S. and 38.82% of American adults had a Mastercard credit card in 2020. That makes for a strong investment thesis all by itself and explains why Warren Buffett has been so bullish on this value stock.
But Mastercard is also quietly building out its crypto business, recognizing that the future of crypto payments has the potential to disrupt the entire industry. Mastercard is starting to consider how credit cards will evolve in the era of crypto, blockchain, and digital assets like non-fungible tokens (NFTs). The good news for investors is that Mastercard has already figured out the hidden growth opportunity in crypto.
Mastercard and NFTs
Most notably, Mastercard is at the forefront of making it easier for people to purchase NFTs. The idea of paying for an NFT with a credit card might seem simple, but it is actually quite innovative. Until recently, if you wanted to purchase an NFT, you had to set up a digital crypto wallet, purchase some cryptocurrency, and then connect your digital crypto wallet to an NFT marketplace. But what if you don't want to buy crypto? Or what if the idea of setting up a digital crypto wallet is too intimidating?
Image source: Getty Images.
In January 2022, Mastercard announced a partnership with Coinbase Global, Inc. (NASDAQ: COIN), making it possible to purchase NFTs on the new Coinbase NFT marketplace with a credit card. Then came another announcement in early June that Mastercard had partnered with a variety of other NFT marketplaces (including Nifty Gateway and Mintable) to enable the same functionality. If you want to buy an NFT on one of these marketplaces, you can now use a credit card to bypass the hassle of dealing with crypto. Suddenly, the process of buying an NFT online is as simple as buying anything else online. In a market downturn, when people are more cautious about holding crypto, that's actually a big deal.
Merging of traditional and crypto payments
Where things get really interesting is the merging of the traditional card payments space with the crypto payments space. Again, Mastercard seems to be the front runner. It has partnered with companies to offer crypto-linked credit cards. It is also developing "crypto rewards" for credit card customers. These are permutations on a single idea: Some people would prefer to pay and get rewarded with crypto than with U.S. dollars.
Imagine paying for a summer vacation with crypto. Well, your favorite airline or hotel brand might not accept Bitcoin (CRYPTO: BTC), but they will surely accept Mastercard. They will never know that the dollars used to fund your purchase came from your crypto portfolio. That's the powerful idea behind crypto-linked credit cards: They enable the merging of traditional and crypto payments in a seamless manner.
Regulatory and fraud concerns with crypto
Right now, Mastercard seems to be taking baby steps into crypto, and for good reason. There are many regulatory and compliance issues to consider. And there are also fraud issues to consider. Chargebacks have always been a big concern for credit card companies, and when you combine that with the number of scams that exist in the largely unregulated crypto space (such as fraudulent NFTs), you can see why this could become a huge problem.
To minimize this risk, Mastercard has been acquiring crypto start-ups with expertise in this area. For example, in September 2021 Mastercard acquired cryptocurrency intelligence company CipherTrace in order to help spot potentially fraudulent crypto transactions.
Outlook for Mastercard
As long as people are downbeat on crypto, Mastercard probably won't tout its crypto strategy openly. However, in order to maintain a premium valuation going forward, Mastercard needs to be seen as more than just a traditional card network. Mastercard needs to be seen as a pioneer in the digital currency space and a proponent of innovative payment mechanisms. That's why the hidden growth opportunity in crypto makes so much sense for Mastercard to pursue.