The Business of Mastercard
Mastercard is a financial technology company that specializes in transaction processing and payment-related products and services. It operates globally, facilitating payment transactions, and offering various payment solutions for account holders, merchants, financial institutions, and other organizations. Mastercard and Visa together dominate the digital payment market. Mastercard is active in more than 200 countries and is processing more than 125 billion transactions annually.
A visual representation of how Mastercard earns money:
If you want to learn more about how the card networks operate, I highly recommend this YouTube video:
The Market
Mastercard is well positioned in the payment transaction process to benefit from an increase in digitalization of currency use. As an example, Norway uses less than 5% of its transactions from physical cash, where 95% is via card or other digital payment methods. The rest of the world is adopting this trend gradually, which increases the market size for Mastercard.
The total digital payment market is set to grow 20.8% annually from 2023 to 2030 according to Skyguestt. Mastercard is positioned to benefit from this trend as it owns a global infrastructure that processes payments on behalf of consumers, merchants, and other financial institutions.
How Mastercard earns money
Mastercard earns a processing fee on every transaction that goes through its global network as well as value-added services. In the US, about 43% of the population has a Mastercard according to Nilson Report.
Mastercard makes 65% of its revenue from the US, and 35% from International Markets.
The company's revenue is generated from 4 segments:
Transaction Processing
Domestic Assessments
Cross-Border Assessments
Other Network Assessments
Transaction Processing ($12.067B in 2023): Mastercard earns a transaction fee when processing credit and debit cards globally. There are several ways Mastercard owns a fee: merchants that use their network, interchange fees from merchant’s banks, and other services related to processing payments.
Domestic assessments ($9.566B in 2023): Processing fees earned by Mastercard when processing debit and credit cards in a specific domestic area, such as a country or region.
Cross-border transactions ($8.409B in 2023): Extra fees that are charged by Mastercard on payments made by cardholders in different countries and different currencies.
Other Revenue ($963M in 2023): Data analytics services, advisory, loyalty programs, consulting, mobile payments, and more.
Sustainable competitive advantage
MasterCard possesses a robust competitive advantage rooted in its global network. Visa and Mastercard are dominating their market, as they have been building their infrastructure and network for several decades. The two businesses together create an Oligopoly, which is often attractive for investors, as 2-3 actors are dominating the market with no real competition.
One key driver for Mastercard is the network effect stemming from its extensive global payment infrastructure. As more merchants and consumers participate in the MasterCard network, the value of the network increases, fostering a self-reinforcing cycle that attracts even more participants. This creates a formidable barrier to entry for potential competitors.
Additionally, MasterCard's commitment to innovation and technological advancements enhances its competitive edge. The company continually invests in cutting-edge payment solutions, including contactless payments and digital wallets, staying ahead in the rapidly evolving fintech landscape.
Furthermore, MasterCard's brand reputation and established relationships with financial institutions contribute to its competitive advantage by instilling trust among consumers and partners. The combination of these factors not only solidifies MasterCard's current market position but also positions it favorably for future growth and resilience in the dynamic financial industry.
Mastercard’s competitive advantage is obvious from its margins and capital efficiencies:
They are converting +95% of operating cash flow into free cash flow. Their operating margins have been consistently between 50-60%, and their free cash flow margins have been north of 40% consistently. Mastercard is a cash-generating machine.
Mastercard has a ROIC and ROCE that is consistently above 35%, in 2023 it was above 40%. This indicates to us that Mastercard is of high quality.
The Stock
Mastercard is a fantastic growth story. It has compounded by 30.5% since its inception in 2006. In the last 10 years, the return has been 20.7%, and in the last 5 years, it has been 17%.
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