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Global Stock Opportunity: Mastercard Inc

The company that was formed  in 1966 when some US banks created a card  network  earned US$15  billion in revenue in 2018, up 20%  from the previous year. Over the 12 months, this revenue was generated from handling  US$5.9  trillion in payments from 2.3 billion cards in more than 150 currencies conducted within 210 countries and territories.

Mastercard has  enjoyed strong share price gains  in recent times because investors assess that it’s likely to keep posting strong earnings growth  in coming  years. Mastercard shares rallied 134% in the five years to 2018 compared with a 48%  gain in the S&P 500 Index.

The beauty of Mastercard’s business model  is twofold. The first is that demand for its services is strong because e-retailing,  tap- and-go and mobile payments are taking off in a world where  more than  80% of transactions are still in cash and cheque. Another boost is that governments keen  on ‘inclusive growth’ are pushing for financial services to reach more people. The other  is that Mastercard’s competitors outside of China are likely to remain the existing payments companies namely,  American Express, PayPal and Visa, the largest payments company. This is because the payment companies enjoy the strong protections of the network effect that links consumers, merchants and banks – where  each additional user  boosts the benefits of a network  for all users. The businesses of Mastercard and its three competitors are largely impregnable from newcomers. (China has a unique payments ecosystem that is difficult for Mastercard, Visa and others to penetrate.)

Vocalink is a payments-technology company that was set up by 18 UK banks and building societies to run the UK’s network  of cash machines. In 2016, Mastercard paid 700 million pounds for the company that processes about 11 billion transactions a year, to beef  up its presence in the UK and add real-time payments to the services it offers worldwide.

Mastercard’s history of acquisitions and innovations such as ‘virtual cards’ – where  one-time card numbers are issued for specific  transactions at specific merchants – have helped the New York-based company become the second-largest global payment network  in a world that is using less  cash and fewer cheques each year.

To take market  share from the four incumbents, any newcomer to the global payments business would need consumers and merchants to simultaneously accept its card. To achieve that, the entrant would need to achieve mass awareness, offer a simple means of payment, have ubiquitous technology, be trusted (even though the issuing  bank  bears the risk of theft and fraud), meet regulatory requirements in every country it wished to operate, and fulfil arduous customer and merchant servicing needs.

Thus far it has even been too hard for the likes of Apple, Facebook, Google  and Samsung. Rather  than  pose threats to the payments status quo, Apple Pay, Samsung Pay and Android Pay are piggybacking the infrastructure set up by the payment companies. That means that the growth  of mobile payments offerings by the tech giants helps Mastercard and its three peers. Cryptocurrencies are no threat either because payments this way are, so far, too slow and insecure to take market  share and they face major regulatory  impediments. Their volatile prices  are another risk too.

Mastercard faces risks, of course. The payment companies are reliant on consumer spending for fees so their share prices can lag if investors become pessimistic about the economic outlook. American Express, PayPal  and Visa could dent  Mastercard’s market  share, even if no newcomer is likely to.

Another risk is excessive regulation as governments move to protect privacy and competition – evidence of this is that the EU this year fined Mastercard US$650 million for stopping merchants from clinching better deals from banks in other  member countries. Another risk is cybersecurity breaches that dent people’s faith in mobile payments. Then there is the limit to Mastercard’s growth due to China blocking the entry of the US payments companies.

But while the world outside China keeps expanding, societies go more cashless and mobile remains a secure way to pay, Mastercard and its competitors are likely to enjoy buoyant times.

Price: US$281.37

Mkt Cap: US$286,997m

P.E Ratio: 43.15

Gross Dividend Yield: 0.47%

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