MasterCard (NYSE:MA) is a relatively simple business that boils down to two metrics: transaction volume and average fees. But some small nuances are best understood with the insight of the management team.
Here are three things MasterCard executives highlighted on the recent conference call.
1. Cross-border is MasterCard's wheelhouse
Cross-border transactions are high margin and help support a processor's moat. Being able to use the same card in the U.S. that you use in China is a huge benefit for the consumer. So, it should come as little surprise that MasterCard talks about these transactions so frequently.
MasterCard CEO Ajay Banga highlighted some of the company's key initiatives in growing cross-border volume.
In this quarter, we announced a partnership with Transforex. This is a company that is working with 7 leading tax groups in China to launch the largest tax refund platform in China. Chinese travelers leave as much as [3 billion euros] worth of tax refunds unclaimed. The idea of this new platform will make the tax refund process much easier for the Chinese travelers by enabling them to receive their refund back to their MasterCard and do it all from the comfort of their own home when they return from that trip.
In South Africa, our prepaid program manager, Access Prepaid Worldwide is working with the VAT Refund Administrator of the South African revenue service to migrate their single currency refund card to a four-currency MasterCard prepaid program allowing tourists to reclaim their VAT as they leave the country.
2. Surcharges should just pass on by... hopefully
In Australia, there has been talk of the rise of surcharges added on to small transactions when customers pay by card. The surcharge insulates retailers from bearing the cost of the transaction fee on small purchases, but it may encourage consumers to use cash when they otherwise would have preferred to pay by card.
Banga doesn't seem too concerned that this will be a big problem for MasterCard, however.
You get surcharging in a great deal from online transactions where people don't have much choice. And that's always been an issue. But in the real world out there, yes, surcharging is but it's a small number. It changes over the period of quarters and I don't consider that to be an issue [...] I believe that consumers should be able to pay with whatever way they like to pay without having to face surcharges, and then by the way, the Australian central bank has come back and put in restrictions on the level of surcharge for that very reason.
This is something to watch carefully, as it's not just an Australian event. If surcharges catch on, it could come at the price of the processor's pricing power. For now, though, it's just a blip on the radar.
3. Chase's move to Visa is affecting U.S. growth
MasterCard is a growth story. So, when something big like, say, the loss of the largest card issuer on the planet happens, investors take notice. Chase is leaving MasterCard for Visa, which has strained domestic growth. This is evident in the fact that the company's card volume grew only 7% in the United States, well off growth in previous quarters.
Banga explained that this headwind will continue into 2015:
Additionally, while the pace of the Chase card attrition year to date has been essentially in line with our internal projections, the volume shift has been a bit slower than we initially anticipated. Therefore we now estimate less than half of the volume to roll-out this year with the remainder in 2015.
Later, he gave more detail into the timing of the move:
So you would still have some impact for 2015 and the way that it has been rolling off as we said before we didn't see much in the first and second quarter, we saw more in the third quarter. And I think you should see more in the fourth quarter.
In short, MasterCard's domestic growth will be hampered by Chase's move to Visa, but I think there is an underappreciated bright spot here. MasterCard grew its domestic business at 7% this quarter, and growth will likely remain positive, despite the fact that the biggest card issuer on the planet signed an exclusive deal with Visa. That says something about the durability and diversification of MasterCard's business.