netrashetty
Netra Shetty
MasterCard Worldwide (NYSE: MA) is an American multinational corporation with its headquarters in the MasterCard International Global Headquarters in Purchase, Harrison, New York. Throughout the world, its principal business is to process payments between the banks of merchants and the card issuing banks or credit unions of the purchasers who use the "MasterCard" brand debit and credit cards to make purchases. MasterCard Worldwide has been a publicly traded company since 2006. Prior to its initial public offering, MasterCard Worldwide was a membership organization owned by the 25,000+ financial institutions that issue its card.
MasterCard, originally known as MasterCharge, was created by several California banks as a competitor to the BankAmericard issued by Bank of America, which later became the Visa credit card issued by Visa Inc. The original banks behind MasterCharge were United California Bank (later First Interstate Bank and subsequently merged into Wells Fargo Bank), Wells Fargo, Crocker National Bank (also subsequently merged into Wells Fargo), and the Bank of California (subsequently merged into the Union Bank of California).
MasterCard (MA) is the second largest electronic payments processor by purchase volume behind Visa in the world. MasterCard does not issue credit cards directly, but licenses its brand to banks, who then issue co-branded cards (such as the Chase MasterCard). MasterCard makes money by charging merchant fees on individual transactions and by charging the credit card issuers licensing fees and a small percentage of the total dollar amount spent on each card.
MasterCard is susceptible to the adverse economic environment because its revenues are highly concentrated within customers and countries. 31% of its total revenue was from its five largest customers and it’s five highest revenue generating countries besides the U.S. are the UK, Canada, Brazil, and Australia.[1] Of the additional 200 countries and 160 currencies that it operates in, no country other than the United States accounts for more than 10% of its revenues. [1] The merging of its bank customers has caused it to lose customers. For example, in May 2009, MA lost half of its largest customer's business to debit-leading Visa due to J P Morgan Chase (JPM) acquiring Washington Mutual, one of its clients.
MA's debit card services has a strong growth opportunity because of the trend away from cash and checks for debit cards. Consumers are even shifting away from credit cards as Interest Rates and U.S. Unemployment continue to increase. It is important for MA's long term viability to develop a strong debit card platform as another outlet for revenue from the increased use of debit cards since consumers are shifting away from credit card use. In addition, President Obama recently signed a bill regarding stricter credit card controls, which could affect the amount of credit extended and the volume of transaction fees for MA.
Contents
1 Business Overview
1.1 Domestic Assessments 46.7%
1.2 Cross-Border Volume Fees 29.6%
1.3 Transaction Processing Fees 40%
2 Trends and Forces
2.1 Susceptibility to adverse economic environments due to revenue concentration
2.1.1 Client Concentration
2.1.2 Country Concentration
2.2 Consumer spending and the shift from paper based payments
2.3 Impact of Financial Reform on Credit Card Companies
2.3.1 credit card reform bill limits fees
2.3.2 Durbin Amendment limits interchange fees
3 Competition
4 Notes
Business Overview
MasterCard collects revenue from both transaction-processing and brand-licensing fees and from a percent assessment fee on the money flow, or gross dollar volume (GDV), on individual cards.[2]
Domestic Assessments 46.7%
Domestic assessments are fees charged to issuers and acquiers based on the volume of activity on MasterCard and Maestro-branded cards where the merchant country and cardholder country are the same. They also include card assessments, which are fees charged on the number of cards issued or assessments for specific purposes such as acceptance development or market development programs. Acceptance development fees are mainly charged to U.S. issuers based on components of volume. Domestic assessment fees decreased by .2% in 2009 due to changes in exchange rates. GDV increased 1.4% during 2009, when measured in local currency terms, and declined 3.3% when measured on a U.S. dollar-converted basis, versus 2008.[2]
Cross-Border Volume Fees 29.6%
Cross-border volume fees are fees charged to issuers and acquierers based on the volume of activity on MasterCard and Maestro-branded cards where the merchant country and cardholder country are different. They also include fees charged to issuers for performing currency conversion services. Cross-border volume fees decreased by 2.5 in 2009 to $1.5 billion due to changes in exchange rates. The impact of foreign currency relating to the translation of domestic assessments from our functional currencies to U.S. dollars contributed approximately 2 percentage points to the decrease in 2009. [2]
Transaction Processing Fees 40%
Transaction processing fees are fees charged for both domestic and cross-border transactions and are primarily based on the number of transactions. They include authorization fees, clearing and settlement fees, switch fees and connectivity fees.[2]
[3]
During the past five years, revenue has steadily grown in part due to organizations around the world switching from paper-based to card-based payment methods. In 2009, the GDV of all transactions made using MasterCard branded programs was approximately 2.5 trillion USD, and MasterCard collected over 5 billion USD in revenue. [2] MasterCard’s transaction processing fees has gradually grown to become a more signifcant portion of the company's total net revenue. From 2008 to 2009, transaction processing fees increased by 14.9% to $2 billion and contributing to 40% of total net revenue.[2]
In 2009 and 2008, gross revenues grew 4.0% Revenue growth in 2009 was primarily due to changes in pricing, increased transactions and increases in the volume of activity on cards carrying the MasterCard brand, partially offset by unfavorable foreign currency exchange impacts. Price changes related to transaction processing fees increased 2009 revenues by 6% alone. The revenue growth in 2008 was the result of increased transactions and GDV, as well as price increases and currency fluctuation.[2]
MasterCard uses a four-party payment system to process transactions. A card-holder makes a purchase from a merchant using a card, and the merchant is paid the amount of the purchase after the interchange fee deduction by the merchant’s bank, or acquiring bank. The card-holder’s bank, the issuing bank, then pays the acquiring bank and charges the amount of the purchase to the card-holder. MA processed transactions increased 6.9% in 2009. [2]
By increasing the number of cardholders and the dollar value of total transactions, MasterCard plans to flood the market with payment cards. Within the United States, the continued increase in use of payment cards provides MasterCard with a fertile field for growth in sales. Internationally, MasterCard will expand into regions experiencing rapid growth by promoting strong relationships with financial services firms and working to increase the number of merchants that accept MasterCard. To appeal to a wide range of customers, MasterCard offers a number of credit and debit payment plans. These may have different spending limits, third party services such as emergency travel assistance, and loyalty reward programs.
[4]
Trends and Forces
Susceptibility to adverse economic environments due to revenue concentration
Client Concentration
In 2009, 28% of MA total net revenue or $1.4 billion was from its five largest consumers[5]. Loss of business from any of the five largest customers could present a significant setback for MasterCard. Since MasterCard depends on business agreements with its largest customers, consolidations may harm MasterCard’s business if a customer is acquired by another institution that does business with MasterCard’s competitors. In general, mergers reduce MasterCard's profitability since large banks are better able to negotiate prices than small banks.
In particular, J P Morgan Chase (JPM), which acted as MasterCard’s settlement bank, generated $59 billion, or 11% of total revenue in 2006 [6]. In May 2009, J P Morgan Chase (JPM) shifted more than half of its portfolio of debt-card users away from Mastercard to Visa. Most of the customers were part of Washington Mutual (WM), which was acquired by JP Morgan in September of 2008. The shift was motivated by Visa's superior debit platform.[7]
Country Concentration
Although MA operates globally to shield itself from revenue concentration susceptibility, almost half of its total revenue is generated in the U.S., it’s largest geographic market.[8] It’s five highest revenue generating countries besides the U.S. are the UK, Canada, Brazil, and Australia.[8] Of the additional 200 countries and 160 currencies that it operates in, no country accounts for more than 10% of its revenues. [8] The volatility of the global markets have had both adverse and beneficial effects on foreign currency exchange rates , such as the weakened U.S. Dollar (USD) against the Euro (EUR) and the Brazilian Real. Overall, the Credit Crunch and global economic turndown have not significantly altered MA’s bottom line since it does not extend credit, but only develops payment solutions and processes transactions. However, the recession has had an effect on the number and size of credit transactions.
Consumer spending and the shift from paper based payments
Consumer spending has remained stagnant since its collapse in the Fall of 2008.[9] The downturn in the economy, especially in the United States, puts increased pressure on MasterCard’s business since it's revenues depend on the level of overall consumer and business spending. For example, it's year-over-year cross-border volume fees were down 11.3% from $436M to $407M due to the decreased amount of activity, such as cross-border travel and currency conversion.
However, MA stands to benefit as consumers have increasingly shifted away from paper based payments, such as cash and checks, to credit cards and debit cards during the economic downturn. According to a Nilson Report, the global market for card purchase transactions grew at a compound annual growth rate (CAGR) of 14% from 2000 to 2006, and forecasts the market to grow an additional 11% from 2006 to 2012. Further, the latest trend has consumers shifting from credit cards to debit cards due to rising interest rates and uncertainty of future income due to rising unemployment rates. MasterCard's transaction possessing fees increased 7.1% year-over-year due to the increased amount of card transactions.[8] In addition, to lower banks' vulnerability to defaults, they have lowered credit card limits for many of its consumers, which has further promoted debit card use.
Impact of Financial Reform on Credit Card Companies
credit card reform bill limits fees
On May 22, 2009, President Obama signed into law a wide the Credit Card Accountability, Responsibility and Disclosure (CARD) Act, a wide ranging credit card reform bill set to fully take effect in February 2010.[10] However, the first stages of the reform take effect as early as August 20, 2009.[11] Included in this bill are restrictions on interest rate increases, a 45 day notice before changing interest rates, restrictions on fees that can be charged, requirements for more disclosure, and limits on ability of those under the age of 21 to obtain cards, among others.[12] Banks have warned that the new legislation will increase rates, decrease credit extended, and increase the use of annual fees for cards.[13] Less credit likely means less transactions, transaction amounts, and thus a negative impact on earnings.
Durbin Amendment limits interchange fees
The Durbin Amendment, which was enacted as part of the Financial Reform bill which passed in July 2010, gives the federal government control over credit card interchange fees charged to merchants. Interchange fees are charged to merchants by banks for every transaction made through the credit card company. Prior to the passing of the bill, banks were allowed to set their own fees; however, with the amendment in place, the government can effectively set a cap on such fees, thereby reducing potential revenues for banks.
The cost imposed by the government would inevitably force such companies try to force credit card companies to change fee structures such as cut network fees in order to make up for the lost revenues. Credit card companies may also be enacting policies such as raising annual card rates and reducing membership rewards to make up for losses in card revenue. News has speculated that the Federal reserve may cut interchange fees by as much as 40-60%.[14]
A new clause inserted into the Durbin Amendment was designed to protect credit card companies by prohibiting the use of a network fee to directly or indirectly compensate an issuer or from being used to circumvent or evade the Fed's rules. This means that that issuers cannot force networks to cut their network fee and reap the economics of that reduction.[15]
Competition
[16]
MasterCard’s primary competitive advantages are brand name and pricing. The MasterCard brand is recognized worldwide, in part due to its global “Priceless®” marketing campaign. Although consolidation of banks may increase the bargaining power of MasterCard’s largest customers, MasterCard will rely on brand loyalty to impose higher prices on customers with less bargaining power.
In addition to electronic payments, MasterCard competes across all payment methods, including paper-based transactions (cash and checks). In the US, its largest competitors are Visa, American Express Company (AXP), and Discover Financial Services (DFS). Visa maintains a much larger GDV than MasterCard and its competitors. American Express and Discover have a competitive advantage because they have direct relationships with both cardholders and card issuers, and are not affected by regulation of interchange fees. Globally, foreign competitors have significant market share in their respective countries, such as JCB in Japan and China Union Pay in the People’s Republic of China.
MasterCard also faces growing competition from electronic funds transfer (EFT), or PIN-based networks, which allow the cardholder to authorize transactions from his or her bank account to the merchant by entering a PIN. This system may be perceived as more secure, since each transaction must be authorized at the time of sale, and are sometimes less expensive since a flat fee is charged for each transaction. Visa currently holds a dominant market share in this sector.
MasterCard, originally known as MasterCharge, was created by several California banks as a competitor to the BankAmericard issued by Bank of America, which later became the Visa credit card issued by Visa Inc. The original banks behind MasterCharge were United California Bank (later First Interstate Bank and subsequently merged into Wells Fargo Bank), Wells Fargo, Crocker National Bank (also subsequently merged into Wells Fargo), and the Bank of California (subsequently merged into the Union Bank of California).
MasterCard (MA) is the second largest electronic payments processor by purchase volume behind Visa in the world. MasterCard does not issue credit cards directly, but licenses its brand to banks, who then issue co-branded cards (such as the Chase MasterCard). MasterCard makes money by charging merchant fees on individual transactions and by charging the credit card issuers licensing fees and a small percentage of the total dollar amount spent on each card.
MasterCard is susceptible to the adverse economic environment because its revenues are highly concentrated within customers and countries. 31% of its total revenue was from its five largest customers and it’s five highest revenue generating countries besides the U.S. are the UK, Canada, Brazil, and Australia.[1] Of the additional 200 countries and 160 currencies that it operates in, no country other than the United States accounts for more than 10% of its revenues. [1] The merging of its bank customers has caused it to lose customers. For example, in May 2009, MA lost half of its largest customer's business to debit-leading Visa due to J P Morgan Chase (JPM) acquiring Washington Mutual, one of its clients.
MA's debit card services has a strong growth opportunity because of the trend away from cash and checks for debit cards. Consumers are even shifting away from credit cards as Interest Rates and U.S. Unemployment continue to increase. It is important for MA's long term viability to develop a strong debit card platform as another outlet for revenue from the increased use of debit cards since consumers are shifting away from credit card use. In addition, President Obama recently signed a bill regarding stricter credit card controls, which could affect the amount of credit extended and the volume of transaction fees for MA.
Contents
1 Business Overview
1.1 Domestic Assessments 46.7%
1.2 Cross-Border Volume Fees 29.6%
1.3 Transaction Processing Fees 40%
2 Trends and Forces
2.1 Susceptibility to adverse economic environments due to revenue concentration
2.1.1 Client Concentration
2.1.2 Country Concentration
2.2 Consumer spending and the shift from paper based payments
2.3 Impact of Financial Reform on Credit Card Companies
2.3.1 credit card reform bill limits fees
2.3.2 Durbin Amendment limits interchange fees
3 Competition
4 Notes
Business Overview
MasterCard collects revenue from both transaction-processing and brand-licensing fees and from a percent assessment fee on the money flow, or gross dollar volume (GDV), on individual cards.[2]
Domestic Assessments 46.7%
Domestic assessments are fees charged to issuers and acquiers based on the volume of activity on MasterCard and Maestro-branded cards where the merchant country and cardholder country are the same. They also include card assessments, which are fees charged on the number of cards issued or assessments for specific purposes such as acceptance development or market development programs. Acceptance development fees are mainly charged to U.S. issuers based on components of volume. Domestic assessment fees decreased by .2% in 2009 due to changes in exchange rates. GDV increased 1.4% during 2009, when measured in local currency terms, and declined 3.3% when measured on a U.S. dollar-converted basis, versus 2008.[2]
Cross-Border Volume Fees 29.6%
Cross-border volume fees are fees charged to issuers and acquierers based on the volume of activity on MasterCard and Maestro-branded cards where the merchant country and cardholder country are different. They also include fees charged to issuers for performing currency conversion services. Cross-border volume fees decreased by 2.5 in 2009 to $1.5 billion due to changes in exchange rates. The impact of foreign currency relating to the translation of domestic assessments from our functional currencies to U.S. dollars contributed approximately 2 percentage points to the decrease in 2009. [2]
Transaction Processing Fees 40%
Transaction processing fees are fees charged for both domestic and cross-border transactions and are primarily based on the number of transactions. They include authorization fees, clearing and settlement fees, switch fees and connectivity fees.[2]
[3]
During the past five years, revenue has steadily grown in part due to organizations around the world switching from paper-based to card-based payment methods. In 2009, the GDV of all transactions made using MasterCard branded programs was approximately 2.5 trillion USD, and MasterCard collected over 5 billion USD in revenue. [2] MasterCard’s transaction processing fees has gradually grown to become a more signifcant portion of the company's total net revenue. From 2008 to 2009, transaction processing fees increased by 14.9% to $2 billion and contributing to 40% of total net revenue.[2]
In 2009 and 2008, gross revenues grew 4.0% Revenue growth in 2009 was primarily due to changes in pricing, increased transactions and increases in the volume of activity on cards carrying the MasterCard brand, partially offset by unfavorable foreign currency exchange impacts. Price changes related to transaction processing fees increased 2009 revenues by 6% alone. The revenue growth in 2008 was the result of increased transactions and GDV, as well as price increases and currency fluctuation.[2]
MasterCard uses a four-party payment system to process transactions. A card-holder makes a purchase from a merchant using a card, and the merchant is paid the amount of the purchase after the interchange fee deduction by the merchant’s bank, or acquiring bank. The card-holder’s bank, the issuing bank, then pays the acquiring bank and charges the amount of the purchase to the card-holder. MA processed transactions increased 6.9% in 2009. [2]
By increasing the number of cardholders and the dollar value of total transactions, MasterCard plans to flood the market with payment cards. Within the United States, the continued increase in use of payment cards provides MasterCard with a fertile field for growth in sales. Internationally, MasterCard will expand into regions experiencing rapid growth by promoting strong relationships with financial services firms and working to increase the number of merchants that accept MasterCard. To appeal to a wide range of customers, MasterCard offers a number of credit and debit payment plans. These may have different spending limits, third party services such as emergency travel assistance, and loyalty reward programs.
[4]
Trends and Forces
Susceptibility to adverse economic environments due to revenue concentration
Client Concentration
In 2009, 28% of MA total net revenue or $1.4 billion was from its five largest consumers[5]. Loss of business from any of the five largest customers could present a significant setback for MasterCard. Since MasterCard depends on business agreements with its largest customers, consolidations may harm MasterCard’s business if a customer is acquired by another institution that does business with MasterCard’s competitors. In general, mergers reduce MasterCard's profitability since large banks are better able to negotiate prices than small banks.
In particular, J P Morgan Chase (JPM), which acted as MasterCard’s settlement bank, generated $59 billion, or 11% of total revenue in 2006 [6]. In May 2009, J P Morgan Chase (JPM) shifted more than half of its portfolio of debt-card users away from Mastercard to Visa. Most of the customers were part of Washington Mutual (WM), which was acquired by JP Morgan in September of 2008. The shift was motivated by Visa's superior debit platform.[7]
Country Concentration
Although MA operates globally to shield itself from revenue concentration susceptibility, almost half of its total revenue is generated in the U.S., it’s largest geographic market.[8] It’s five highest revenue generating countries besides the U.S. are the UK, Canada, Brazil, and Australia.[8] Of the additional 200 countries and 160 currencies that it operates in, no country accounts for more than 10% of its revenues. [8] The volatility of the global markets have had both adverse and beneficial effects on foreign currency exchange rates , such as the weakened U.S. Dollar (USD) against the Euro (EUR) and the Brazilian Real. Overall, the Credit Crunch and global economic turndown have not significantly altered MA’s bottom line since it does not extend credit, but only develops payment solutions and processes transactions. However, the recession has had an effect on the number and size of credit transactions.
Consumer spending and the shift from paper based payments
Consumer spending has remained stagnant since its collapse in the Fall of 2008.[9] The downturn in the economy, especially in the United States, puts increased pressure on MasterCard’s business since it's revenues depend on the level of overall consumer and business spending. For example, it's year-over-year cross-border volume fees were down 11.3% from $436M to $407M due to the decreased amount of activity, such as cross-border travel and currency conversion.
However, MA stands to benefit as consumers have increasingly shifted away from paper based payments, such as cash and checks, to credit cards and debit cards during the economic downturn. According to a Nilson Report, the global market for card purchase transactions grew at a compound annual growth rate (CAGR) of 14% from 2000 to 2006, and forecasts the market to grow an additional 11% from 2006 to 2012. Further, the latest trend has consumers shifting from credit cards to debit cards due to rising interest rates and uncertainty of future income due to rising unemployment rates. MasterCard's transaction possessing fees increased 7.1% year-over-year due to the increased amount of card transactions.[8] In addition, to lower banks' vulnerability to defaults, they have lowered credit card limits for many of its consumers, which has further promoted debit card use.
Impact of Financial Reform on Credit Card Companies
credit card reform bill limits fees
On May 22, 2009, President Obama signed into law a wide the Credit Card Accountability, Responsibility and Disclosure (CARD) Act, a wide ranging credit card reform bill set to fully take effect in February 2010.[10] However, the first stages of the reform take effect as early as August 20, 2009.[11] Included in this bill are restrictions on interest rate increases, a 45 day notice before changing interest rates, restrictions on fees that can be charged, requirements for more disclosure, and limits on ability of those under the age of 21 to obtain cards, among others.[12] Banks have warned that the new legislation will increase rates, decrease credit extended, and increase the use of annual fees for cards.[13] Less credit likely means less transactions, transaction amounts, and thus a negative impact on earnings.
Durbin Amendment limits interchange fees
The Durbin Amendment, which was enacted as part of the Financial Reform bill which passed in July 2010, gives the federal government control over credit card interchange fees charged to merchants. Interchange fees are charged to merchants by banks for every transaction made through the credit card company. Prior to the passing of the bill, banks were allowed to set their own fees; however, with the amendment in place, the government can effectively set a cap on such fees, thereby reducing potential revenues for banks.
The cost imposed by the government would inevitably force such companies try to force credit card companies to change fee structures such as cut network fees in order to make up for the lost revenues. Credit card companies may also be enacting policies such as raising annual card rates and reducing membership rewards to make up for losses in card revenue. News has speculated that the Federal reserve may cut interchange fees by as much as 40-60%.[14]
A new clause inserted into the Durbin Amendment was designed to protect credit card companies by prohibiting the use of a network fee to directly or indirectly compensate an issuer or from being used to circumvent or evade the Fed's rules. This means that that issuers cannot force networks to cut their network fee and reap the economics of that reduction.[15]
Competition
[16]
MasterCard’s primary competitive advantages are brand name and pricing. The MasterCard brand is recognized worldwide, in part due to its global “Priceless®” marketing campaign. Although consolidation of banks may increase the bargaining power of MasterCard’s largest customers, MasterCard will rely on brand loyalty to impose higher prices on customers with less bargaining power.
In addition to electronic payments, MasterCard competes across all payment methods, including paper-based transactions (cash and checks). In the US, its largest competitors are Visa, American Express Company (AXP), and Discover Financial Services (DFS). Visa maintains a much larger GDV than MasterCard and its competitors. American Express and Discover have a competitive advantage because they have direct relationships with both cardholders and card issuers, and are not affected by regulation of interchange fees. Globally, foreign competitors have significant market share in their respective countries, such as JCB in Japan and China Union Pay in the People’s Republic of China.
MasterCard also faces growing competition from electronic funds transfer (EFT), or PIN-based networks, which allow the cardholder to authorize transactions from his or her bank account to the merchant by entering a PIN. This system may be perceived as more secure, since each transaction must be authorized at the time of sale, and are sometimes less expensive since a flat fee is charged for each transaction. Visa currently holds a dominant market share in this sector.