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PayPal's Biggest Nightmare Is Coming True

By Steve Heller - Apr 9, 2013 at 9:00PM

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MasterCard and Visa are flexing their duopolistic muscles to undermine the online payment giant.

It seems that once you've grown large enough to disrupt business as usual for MasterCard (MA 1.19%) and Visa (V 0.84%), you run the risk of getting muscled. MasterCard recently announced plans to raise prices on intermediated payment processors (read: digital wallets) that chose to withhold valuable transaction details from MasterCard. In other words, this measure takes direct aim at eBay's (EBAY -0.69%) PayPal and other digital wallets such as Google Wallet that do not share transaction details with the payment processor.

Priceless data
The more transactional data a company can get its hands on, the more insight it has on consumer behavior. In an age where marketers are working to better connect the advertising world with the world of commerce, transactional data becomes the equivalent of marketing gold. Considering that PayPal conducted nearly $145 billion in transactions last year, it's not surprising to learn that MasterCard's fee could impact eBay's bottom line in the neighborhood of $0.03-$0.04 per share for the year. Should Visa follow suit, eBay investors can expect its earnings to be affected by another $0.07-$0.08 for the year.

Although a potential 4% impact on next year's earnings doesn't sound too detrimental to eBay's bottom line, MasterCard and Visa together command nearly 90% of the global payment market. In other words, this duopolistic regime commands a serious amount of pricing power, which they could use to bully companies like PayPal that happen to be growing transaction volume hand over fist.

Just a matter of time
At this time, Visa has no official plans to implement the same fee hike that MasterCard will be implementing this June, but this official statement came after the CEO of Visa called such a fee hike "appropriate." Should MasterCard's fee increase make it past regulators without any hiccups, it's likely just a matter of time until Visa follows suit.

The future may be costly
By 2015, eBay is expecting to enable $300 billion of global commerce, a 71% increase from its 2012 levels. For investors, this increase in activity should translate into a 50% increase in revenue, of which about half should come from PayPal. As PayPal continues its forward march, investors should expect that MasterCard and Visa will continue upping the price, unless PayPal decides to share more information with the payment cartel. Either way, it should be considered the price of doing business.

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Stocks Mentioned

Mastercard Incorporated Stock Quote
Mastercard Incorporated
$336.18 (1.19%) $3.96
eBay Inc. Stock Quote
eBay Inc.
$44.31 (-0.69%) $0.31
Alphabet Inc. Stock Quote
Alphabet Inc.
$2,178.16 (-1.34%) $-29.52
Visa Inc. Stock Quote
Visa Inc.
$199.03 (0.84%) $1.66

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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