The Role of Technology in Mastercard's Growth

Although established a lifetime ago in 1966, Mastercard (MA) is far from an outdated credit card company. On the contrary, it stands out among the world's most advanced financial technology (fintech) enterprises. It leverages cutting-edge technology to deliver innovative payment solutions globally to consumers, merchants, financial institutions, and governments.

Here's a look at how Mastercard is taking the lead in developing new payment technologies, as well as positioning itself for growth. As a result, it will be challenging for new fintech competitors to unseat Mastercard in the payments industry. 

It catches on to the latest payment trends early

The company employs experts who constantly monitor the ever-evolving payments landscape and quickly identify emerging trends. Mastercard also partners with various organizations, including financial institutions, merchants, and governments, to remain on the cutting edge and be among the first to establish itself in many lucrative areas of the payment industry.

Here are some payment trends that Mastercard discovered early:

• Increased use of contactless card payments.
  Mastercard was one of the first companies to offer contactless payments in 2008, well before contactless payments became popular during the COVID-19 pandemic due to consumers viewing them as safer and cleaner than cash. During its latest earnings report, Mastercard Chief Executive Office Michael Miebach said, "Over 100 markets have reached at least 50% contactless penetration, double the number three years ago." 
• The growth of mobile payments.
  The company has partnered with several mobile payment providers, such as Apple Pay and Alphabet's Google Pay, to make it easier for customers to make payments with their smartphones. Its latest innovation, Tap on Phone, enables businesses to approve payments from any contactless card or a mobile wallet using a device capable of near-field communication, making it easier for businesses of all sizes to accept contactless payments.
• The proliferation of artificial intelligence (AI) in payments.
  Mastercard is a leader in harnessing artificial intelligence (AI) to enhance the payment process. It uses AI in various ways, including fraud detection, customer service, and marketing. The company has invested heavily in AI and is collaborating with multiple partners to develop new payment solutions aided by AI.
• Central banks creating digital currencies.
  The company is a leader in creating solutions that can help central banks launch and manage a central bank digital currency (CBDC) for the public to use in day-to-day payments. Many governments would like to replace cash with CBDC. Mastercard has many experts working on various CBDC-related projects, including developing new payment rails, building new security features, and creating new compliance solutions.

One word of caution

Despite its considerable advantages as a first mover in many lucrative areas of the payments industry, Mastercard faces significant competition from various players in the market, including payment processors such as Visa (V) and Stripe and online payment companies like PayPal (PYPL) and Block (SQ). This competition poses a major risk to the company, and if it ever needs to lower its fees to remain competitive, that could result in decreased profits. Additionally, Mastercard may lose market share if competitors offer better products or services, leading to lower revenue.

The company counters competition by continuing to innovate to stay ahead. If any expertise is too expensive or will take too long to develop in-house, Mastercard will acquire companies with the technology.

Some exciting acquisitions

In recent years, Mastercard has made many tuck-in acquisitions to acquire exciting technology that helps keep it at the forefront of the payment industry's technological battles. A tuck-in acquisition is a small, strategic acquisition that complements an existing business.

One of the most important acquisitions was Aiia, a developer-first open banking technology. Open banking allows third-party financial providers, such as fintechs and personal financial management (PFM) apps, to access consumers' bank financial data, giving them more control and access to new and innovative financial services -- a potentially huge business.

Some of these services include personalized financial advice, such as recommendations for investments or savings products, while PFM apps allow users to view their financial data from all their accounts in one place, helping them track spending, discover ways to save money, and better understand their overall financial health. Additionally, third-party providers can use this data to facilitate faster, more convenient account-to-account payments, which are superior to traditional methods such as checks or wire transfers.

Allied Market Research valued the global open banking market size at $13.9 billion in 2020. It expects this market to grow at a compound annual growth rate (CAGR) of 22.3% from 2023 to 2031 to $123.7 billion.

Next, Mastercard's recent acquisition of Baffin Bay Networks is another excellent step in the company's multilayered approach to security. Baffin Bay Networks is an AI-enabled automated cloud-based security service that can stop cyberattacks related to malware, ransomware, and distributed denial of service (DDoS) attacks. This acquisition will allow Mastercard to provide its customers with even greater security and peace of mind.

Last, the purchase of Dynamic Yield was yet another vital acquisition for Mastercard. Acquiring Dynamic Yield will help the company strengthen its personalization capabilities and better compete with other payment technology companies. The platform uses AI to deliver personalized customer experiences that its clients can use to personalize websites, mobile apps, email marketing campaigns, and other customer touchpoints -- a wide range of businesses already use the platform, including McDonald's, Deckers Brands, and Sephora.

Does its technology provide a reason to buy the stock?

Mastercard's payment technology gives the company a competitive advantage. Its payment processing network is one of the most secure and efficient in the world. Moreover, throughout its history, it has committed to innovation and looking for new ways to better its services to exceed customer expectations. As a result, its technology gives investors many compelling reasons to consider buying the stock.