Mastercard Stock Analysis: New Battlefield

The conclusion of Our MasterCard Stock analysis is it makes the acquisition expand to B2B payment.
MasterCard blueprint as Payment Platform

Mastercard is Visa with a smaller size. But recent development shows this assumption is not about scale. Through our Mastercard stock analysis, we try to explain what happens.

In This Issue

Mastercard Stock Analysis Begin With Understanding Its Business Model: Similarities With Visa.

Same Business as Visa. Source: MasterCard Annual Report 2020. Data in millions USD

Visa and Mastercard are similar in most manners. Both exploit the same business model as middlemen that connect another party who need transaction and payments. As consequence, Mastercard also shares the same competitive advantage as Visa. It enjoys network effect, economies of scale, and some level of switching cost.

The difference between these two is their scale. The Harrison-based company has a smaller scale compared with Visa. To put it simply, last year, Visa generated 28.5 Billion in revenue, capping Mastercard with 15.3 Billion. Another point which Visa lead is its operating efficiency. The Calif-based payment Giant operates at a 38% profit margin while Mastercard at 27%.

Segment Contribution of MasterCard. Source: Annual report 2020. Data in millions USD

But, in the last few years, the strategy of these two Network Giants has diverged.

25 Trillion Market: Mapping the Opportunity is Important When Composing Mastercard stock analysis.

We remember Ajay Banga in an interview ever said that B2B (Business to Business) payment is too inefficient, so it is an attractive opportunity to enter. Furthermore, according to Mastercard, this industry will be worth 25 trillion annually in the US alone in the next few years.

We doubt the number but agree with the trend. We prefer the number from Globenewswire that said the market size for The B2B payments transaction will be around US$ 70 billion by 2030. This behemoth size exceeds Visa and Mastercard revenue combined. Thus, it will be unsurprising if both of them will pursue this juicy market.

Though having lower cost against card network, B2B payment is slower. It is because there are many different kinds of transactions held. In B2C (Business to Consumer), you just buy using credit. In business, we may find the account payable and account receivable. Handling this account required more parties to validate and authorize, making the whole transaction much slower.

Both Visa and Mastercard smell the blood – and they will compete for one each other again,

Diverging Strategy.

They take a different route. Mastercard’s ambition is to build its own clearinghouse designated specifically to handle B2B. Visa prefers to believe its own existing network as an alternative for the clearinghouse, that is, Visa Direct pushes payment rails.

ACH (Automatic Clearing House)

Before continuing MasterCard move in this new battlefield, we think we need to introduce you to ACH. Especially for readers with no financial basics. ACH, along with paper checks, wire transfers, and cash, are one of the most common payment processes that deal with B2B. In simple terms, ACH itself is a bank-to-bank payment. It is used widely especially when a company pays their worker on regular basis. It also includes payment for mortgage, a car loan for the worker who takes the loan.

The statistic for ACH is impressive in the B2B payment field. In 2019, It accounted for 93 percent of workers’ payments via direct deposit to the bank (almost 25 Billion processed). It is also estimated to be dominated more than 50% of B2B payments in the near future.

Let do simple math. If in 2030 B2B payment business worth around 70 Billion, ACH would take share about 35 billion. Leaving the rest 35 billion for wire transfer, check cash. Visa and Mastercard challenge the though opponent. An entity with massive scale and lower cost.

Mastercard ACH: Cash Flow Statement in MasterCard Stock Analysis

Let’s focus on Mastercard for a moment.

In the last three years, Mastercard spent around 12 Billion on acquisition. One of the notable names is Nets for 3.19 Billion. The purpose is to strengthen the MasterCard network for real-time payments. Nets will serve as the upfront interface for payment, while Vocalink – which was acquired in 2017, focuses on the infrastructure and software. Mastercard has strengthened its end-to-end network through this corporate action.

Outside The US.

Revenue Contribution Based on Geography. Source: MasterCard Annual Report 2020. Data in millions USD

By geography, it is not the US that contributes the largest revenue for MasterCard as you can see in the figure above. Digging deeper, Mastercard has  576 million cards in circulation globally excluding the US, surpassing Visa with 546 million. Ajay Banga knows his company’s advantage and is willing to strengthen it.

In our perspective, B2B that targeted by MasterCard begins in Europe, as its largest acquisition comes from the same continent: Vocalink from UK and Nets from Danish. We think it is logical since Visa has more Network Effect as an economic moat than MasterCard. Defeating Visa, its server, and its network at home are extremely difficult. Relying on its network outside the US is a more feasible choice.

Bigger Picture of Mastercard Stock Analysis.

Let’s get to the point.

Case for MasterCard

  1. It is a good strategy for MasterCard to build its ACH as a B2B payment outside the US. It bolsters Mastercard strength. In the payment industry, the network plays a crucial role, and the MasterCard network outside the US is good enough.
  2. MasterCard is really serious to live beyond the card as it transforms to become a payment platform.

Case against MasterCard

  1. The B2B payment market in Europe is not big as the US. In the financial world, the US still takes the lead over the rest of the world. It is difficult to imagine Europe will dethrone the US as the largest economy in the world. If Visa transitions into a payment platform get done, we will see Mastercard once again lag behind its bigger rival.
  2. Another challenge outside the US is the government is not always on your side. The payment Giant will face resistance. Whether it is due to government programs to promote domestic payment services or because of antitrust things.

Peeking Valuation

Visa has a 25% higher market cap over MasterCard, but with almost double revenue – wider network, and a stronger position in the US. With B2B payment is projected to explode as an opportunity. Also, Visa pursues the transition to becoming a payment platform. The Plaid acquisition is capitalizing on its commitment.