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No. of Recommendations: 20
Let’s begin by establishing my investing credentials. I am a seasoned Wall Street veteran, having begun my illustrious investing career all the way back in January 2015 when I purchased a basket of 3D printing stocks at the behest of a clever Motley Fool marketing video that I watched really late one night.

Now that my sterling credentials are well established and unquestioned, I would like to add that occasionally even an investing expert like me can still learn from others’ board posts. Occasionally.

In all seriousness, I feel like I know far less than others on these boards when it comes to investing. I definitely feel like I have a lot to learn. I do read a lot, however, and have learned much the past several months from contributing on various discussion boards and reading lots of articles (mostly on Motley Fool) and books. In particular, I feel like I have learned most from TMF1000 and Saul, and reading their posts on how they evaluate companies. Fortunately, while reading and studying I became horrified at the 3D printing stocks I owned and sold all of them within a month of having bought my initial positions.

I then used the money to fully fund my wife’s and my own Roth accounts for the year and bought a variety of stocks, almost all from across the Foolish universe in one way or another. One of the first stocks that struck a chord with me was...

MasterCard Inc.

The Twitter Intro

MasterCard provides a lightning fast electronic payments network that allows merchants and consumers to negotiate transactions securely, both at the point of sale, online and remotely, via a variety of different mediums but primarily credit, debit and prepaid cards.


In 1966, a group of California banks, including Wells Fargo, the United California Bank, and Crocker National Bank, formed the Interbank Card Association (ICA). Along with New York’s Midland Marine Bank, the ICA created Master Charge: The Interbank Card. Slowly, other banks began to join the ICA alliance. One of the most significant of these late comers was First National City Bank which was able to merge its Everything Card with Master Charge.

In 1968, Master Charge made a significant strategic alliance with Eurocard, the ramifications of which probably forever changed the trajectory of Master Charge. The alliance effectively gave MasterCard users access to Eurocard’s network in Europe and Eurocard users access to MasterCard’s network in the States. In 1972, UK’s Access Card joined this alliance and an international payment processing juggernaut was born.

In 1979, Master Charge: The Interbank Card officially became MasterCard, complete with the iconic two overlapping circles with MasterCard written across as its logo.

In the early 1990s MasterCard’s strategic international alliances finally began to come to full fruition when MasterCard bought the English Access Card and dropped the Access Card name. In 2002, MasterCard International merged with Europay (formerly Eurocard).

There have been, of course, other strategic acquisitions and in-house technological innovations along the way, but this former MasterCard-Access-Europay alliance forms the core around which MasterCard operates today. I believe it also explains why MasterCard is much more oriented towards international growth and expansion than its primary rival, Visa.

MasterCard’s Business Model

How does MasterCard make its money? Well, first, let’s start with how MasterCard does not make money because a lot of confusion exists on this point. As with Visa*, consumers don’t actually borrow money from MasterCard when they use their credit cards to make purchases. Hence, when consumers make their credit card payments MasterCard does not profit from the interest rates offered by the card. The money being borrowed is from the card issuer (e.g. Chase, Capital One, etc.) and thus any interest rates paid on a MasterCard-issued credit card goes to the card issuer.

There are pros and cons to this model. The obvious downside is that consumers pay a lot of credit card interest each year and none of that revenue goes to MasterCard. The positive is that MasterCard faces none of the default risk that comes with borrowing money.

So now that we’ve established how MasterCard doesn’t make money, the question still remains how they do bring in revenue. Basically, MasterCard charges “issuers” (the financial institution that issued the credit/debit card) for using its network and imprinting the MasterCard name and logo on its card and charges “acquirers” (the financial institution of the merchant) for allowing the merchant’s customers to use their payment network. The overwhelming bulk of MasterCard’s revenues can be broken down into the following three categories:

1) Domestic assessments:
This is a fee charged to merchants and issuers for transactions performed in which the card issuer and merchant are from the same country. These fees are based on gross dollar volume, commonly referred to as GDV. In other words, the higher the transaction amount the greater the domestic assessment collected by MasterCard is.

2) Cross border volume fees:
This is a fee charged to merchants and issuers when the two entities are located in different countries. This fee is also based on GDV.

3) Transaction processing fees:
There is a long, drawn-out description of this fee and an overly-simplified, dumbed-down version of it. The short and sweet version is that MasterCard charges a transaction processing fee to both merchants and issuers for facilitating each and every purchase. Bam! Fairly simple, right?

The long version is that MasterCard charges a small, almost microscopic fee for each of the following:

• Authorization: Process by which a transaction is routed to the issuer for approval.
• Clearing: The exchange of financial transaction information between issuers and acquirers after a transaction has been successfully conducted
• Settlement: Facilitation of the exchange of funds between parties
• Connectivity: Charged to issuers and acquirers for network access, equipment and the transmission of authorization and settlement messages

It should be noted MasterCard also enjoys smaller channels of revenue streams for a variety of services it provides to issuers and acquirers including fraud protection services, consulting and research fees, and management fees for handling loyalty and reward programs for issuers.

There are also some items they count as contra-revenue, namely rebates and incentives to different issuers and acquirers. These expenses have been creeping up and were one of the reasons MasterCard listed for the declining revenue and EPS growth in the last conference call.

*American Express and Discover are actually different. Credit card users actually do borrow directly from these companies and not third party card issuers.

Why Banks and Retailers Sign Up with MasterCard

Banks make money by borrowing money at lower rates and lending out the same money at higher rates. So Bank X issues credit and debit cards as a service to its customers who now don’t have to carry around unwieldy and unsafe amounts of cash for every single transaction they might make during the course of the day. The banks know that several of these card holders will get sloppy with their payments and budgeting and not be able to pay off their entire bill at the end of the month. When this happens the banks can charge high interest rates on the remaining balance and make a killing with profits. Thus it’s fairly easy to understand why banks and other financial institutions are eager to issue credit cards.

What might not be so easy to understand, especially at first glance, is why retailers would be eager to sign on to letting MasterCard take 1.5%-3% off the top line of every single transaction. This is especially true when one considers low-margin operations like grocery stores.

A few things to consider though: First, from a merchant’s perspective it’s almost always better to make 97% of the sale than 0% of the sale. Operations that take only cash and not credit cards run the risk of losing lots of customers who don’t carry around cash and who prefer shopping at retail locations where they are afforded the convenience of shopping with plastic, not cash.

Second, as a merchant, it is important to remember that it is statistically proven that consumers spend more money when using a credit card as opposed to cash. Hence customers are much more likely to splurge on unnecessary items when given the opportunity to pay with a credit card.

Corporate Culture

Glassdoor Ratings: 3.6 out of 5.0 stars, 85% approve of CEO Ajay Sanga, and 69% would recommend to a friend


Traditional Credit Card Rivals: MasterCard needs to not only worry about its traditional rivals, like Visa, American Express, and Discover, but disruptive upstarts in the payment processing arena as well. Unfortunately, as we shall see, some of these disruptive upstarts have deep, deep pockets.

Their traditional rivals will always take market share and threaten profit margins. A great example of this, though it didn’t directly involve MasterCard, was when American Express’s recent exclusive deal with Costco was nearing its conclusion. Costco wanted to negotiate better terms on the transaction processing fees, went shopping and found a taker in Visa. American Express was left standing in the cold, either unable or unwilling to budge on its previous terms with Costco.

These deals will always ebb and flow though lately American Express seems to be on the losing end more times than not. Yet there is plenty of room for more than one payment processing network in different markets. Visa, American Express nor Discover – or even UnionPay in China – will ever be an existential threat to MasterCard.

PayPal: Likewise, Paypal is another worthy competitor in the payment processing, mobile wallet and global remittance markets. It has developed a nice niche in e-commerce and, with the advent of mobile wallets, could soon become a real player in point-of-sale (POS) transactions as well. With a lower transaction fee, many merchants would prefer Paypal transactions which might mean future incentives from retailers to use this platform. More realistically, I would expect this to just further cut the margins of MasterCard. Because of this, I don’t see Paypal or other similar platforms as an existential threat to MasterCard.

MCX’s CurrentC: Merchant Exchange, better known as MCX, is a loose alliance of several big name, brick-and-mortar retail giants including: 7-11, Best Buy, CVS, Darden Restaurants, Dunkin Donuts, Exxon, Kohls, Lowe’s, Rite Aid, Shell, Target, and Walmart. MCX's first major effort was to try to form its own mobile payment processing app, CurrentC.

The system is intended to work similar to other mobile wallets with one major difference: Instead of linking the smartphone app to the consumers' own credit cards, the customer can only use store gift cards, private store cards (e.g. Target’s REDcard), or link the app directly to their own checking account.

At this time the venture has been met with nothing but delays, defections and minor controversies. Establishing a payment processing network is hard! But there is significant resources behind this venture and too much has probably been invested in it for these retailers to just abandon the project at this venture. It is conceivable that one day CurrentC is a viable competitor to MasterCard.

For further thoughts on MCX’s CurrentC, you can see my post here:

Bitcoin: Much ink has been spilled about Bitcoin and I’ve read a great deal of that ink but still am not confident in my ability to explain what Bitcoin is or how it works. But it is a whole new way of thinking about money and currency and, if it ever took hold, could radically alter the payment processing arena so that players like MasterCard would no longer be necessary.

While I am vastly underqualified to even to attempt to make this statement, I personally don’t believe Bitcoin, as we know it right now, will ever replace US currency or money like we know it. Some of Bitcoin’s features, like its block chain technology, is truly innovative and can add much needed security to monetary transactions. I do believe this technology, whether still a part of Bitcoin or not, will be integrated into a number of different type of transactions in the future.

Possible Future Upstarts: Here is where this conversation gets interesting. I have long pondered how tech companies like Facebook, Apple, and Google could disrupt the payment processing industry if they really wanted to. I do not believe we will have to wait too long to find out. Both companies have already taken the first steps necessary to do so.

Facebook: In March, Facebook announced you could now send money to your friends via Facebook Messenger by linking your Facebook account to an existing debit card.

Facebook is currently working hard to build Messenger into the most holistic customer experience that exists in e-commerce. Soon you will be able to make your order, track your package, immediately talk to a customer representative, and probably post reviews - all through FB Messenger. Oh, and of course, you’ll be able to pay for everything with Messenger as well. Right now, this will all be done through a pre-existing credit or debit card. But what if Facebook ever considers eliminating the middle man?

They definitely have the firepower, resources and expertise to pull off such a move. Last year, they even hired former PayPal President David Marcus. Facebook’s network is so ubiquitous that the hardest part – getting people to sign up to the service – is already done. In countries with developed economies it is hard to find a person or company that does not already have an account.

Even the Washington Post believes Facebook could be the “future of money”:

Apple and Google: The thought process is similar for these two companies. Both already have hardware used for making payments but, as of now, both use pre-existing cards. If either ever decided to eliminate the middle man and establish their own payment processing network, both might be able to make a serious play into the payment processing industry. Both of these companies would have even more resources to use in either acquiring a company in the industry already or building its own network.

Making all three of these threats (Apple, Facebook, and Google) even more dangerous to MasterCard, is that merchants would probably welcome these competitors as it would drive down fees and rates.

Regulation and Litigation Risks

There are always several risks and areas of concern investors need to watch while investing in a company and MasterCard is no different. The two chief areas of concerns for MasterCard shareholders though are, I believe, regulatory actions and litigation threats.

Being a major financial company, one that must interact with nearly all merchants and banks in each country it operates within, means MasterCard is subject to a number of different laws and regulations across the globe. This past summer, for instance, the European Union filed antitrust charge against MasterCard because the EU believes MasterCard is “artificially increasing the costs of credit card payments”.

MasterCard has also been the subject of a number of lawsuits over the years alleging a variety of anti-consumer behavior that can potentially cost the company billions of dollars going forward.

Revenues and Earnings

Revenue (billions)		Q1		Q2		Q3		Q4
2012 1.758 1.820 1.918 1.895
2013 1.906 2.096 2.218 2.126
2014 2.172 2.368 2.503 2.416
2015 2.230 2.390

Earnings (per share) Q1 Q2 Q3 Q4
2012 5.36 5.65 6.17 4.86
2013 6.23 6.96 7.27 0.57*
2014 0.73 0.80 0.87 0.69
2015 0.89 0.85

*10 for 1 stock split 2013 Q4

Revenue Growth (billions)
2014 Q2 TTM Revenue = 8.884
2015 Q2 TTM Revenue = 9.539
Year Over Year Revenue Growth = 7.4%

Earnings Growth (per share)
2014 Q2 TTM Earnings = 2.83
2015 Q2 TTM Earnings = 3.30
Year Over Year EPS Growth = 16.61%

P/E = (Check Current Price) 91.35/3.30 = 27.68

1YPEG = 27.68/16.61 = 1.66

A Quick Rundown of Other Numbers: I’m totally cheating this month. I tried studying MasterCard’s balance sheets from the tables listed in their 10K, but I’m just not at the place yet where I can look at these numbers make sense of them. Not yet. So, in lieu of a good balance sheet evaluation, I’ve run down these quick figures from a variety of Motley Fool articles:

• Inside ownership < 1%, CEO Ajay Banga has a $17 million stake

• ROE averages near 40%, an amazingly high number for a public company, due to MasterCard’s technology-heavy, manpower-light structure

• As of June 2014, MasterCard’s debt to equity ratio was 24%

MasterCard’s Three Big Opportunities for Growth

As I see it, MasterCard currently has three huge opportunities for growth going forward:

1) The Death of Cash –
I don’t think this point needs to be expounded upon too much, but the overall macro trend is electronic payments are increasing while cash payments are decreasing. There is nothing to suggest that this trend is about to slow or reverse anytime soon. Stunningly, cash payments still make up a solid majority of transactions being negotiated around the world, so the global market is far from saturated on this front.

2) International Growth –
When I first researched MasterCard as a possible investment, I actually became a little concerned because there were no MasterCards in my wallet. Other credit cards were present, including two Visas, one American Express and one Discover, but no MasterCards. The thought entered my mind, “How good could they be if I never found the need to apply for one or use their services?”

But as I continued my research I found there were a slew of cards available for a variety of different needs and some cards are just better suited for different people than others. For instance, some are good for people with low credit scores, others offer lower interest rates, and others just offer different types of rewards that are going to appeal differently to people. A lot of people just have cards because their favorite place to shop has partnered with a card or because it’s simply the card their bank offered.

Domestically, that stuff seems to just ebb and flow. For instance, next year AmEx is being replaced by V as Costco's sponsored card. After V's contract is up with Costco, would anyone raise an eyebrow if AmEx or MA swept in and replaced it? No. And the same goes for the different airlines, hotel chains, etc.

But the US market is already saturated. As I see it, the real growth for all the major players in electronic payment processing will happen in global markets and different technological mediums. And this is where I think MA holds an edge.

I believe this edge stems from their history. Early on they formed strategic and long-lasting alliances with Europay and Britain’s Access. After decades of existing within mutually beneficial alliances with these companies, they merged with both. These historical roots of international alliances later grew to a much more internationally-minded worldview than other credit card companies like American Express, Discover and, to a lesser extent, even Visa.

Let’s see how this global mindset has manifested itself today: In the past three years, MasterCard has doubled the number of its cards in the Middle East and Africa. They have introduced their services in 32 sub-Saharan markets alone this past year. How big is this market? Over 90% of transactions in these regions (Middle East and Africa) are still negotiated in cash.

Led by CEO Ajay Banga, they also are not afraid to think out of the box when it comes to innovative international deals. They currently have deals with both the Egyptian and Nigerian governments to link the countries’ national ID cards with a mobile wallet. Other recent deals include partnerships with the Bank of Ireland, the Bank of India, a mobile platform for the Commonwealth Bank of Australia, the First Bank of Nigeria and creating a Sharia-compliant card in Bangladesh.

And let’s not forget about their headstart over Visa in China, who just opened up the possibility of both payment processing networks to operate within its borders in the near to intermediate future!

Why does this possible advantage over Visa exist in China? Because, again, MasterCard’s global vision led them to establishing a relationship with China’s native UnionPay system years ago.

I believe these deals in global markets are the seeds for a long runway of growth for MasterCard. I also believe these seeds of modern banking and electronic payments will almost always be planted first by MasterCard over many of its rivals because of its early foreign market exposure.

3) New Technological Platforms and Measures –
MasterCard has taken a smart, any-platform-is-viable approach to how their electronic payment network is used to make transactions. By no means, do they consider themselves married to a plastic rectangle residing in your wallet. In fact, CEO Ajay Banga articulated this very idea in this year’s Q1 conference call:

“You've probably heard us talk about the fact that we are technology agnostic when it comes to mobile and digital payments, and we are determined to support implementations based on different market models."

Whether it’s mobile wallets, apps, or tying its network to a foreign country’s national ID card, MasterCard is not afraid to introduce its platform to different mediums.

MasterCard has also recently joined the global remittance and person-to-person payment fray with MasterCard Send.

MasterCard said Tuesday (May 19) it is launching its own person-to-person payment product called MasterCard Send.

The service is meant to be used by consumers, businesses, governments, or nonprofits. It can provide a way for insurance claims, rebates, tax refunds, or other payments to reach people without the need to cut a check, and it wouldn’t matter whether the recipient has a bank account for not. The payment could be sent to an account tied to a credit card, mobile money service, or traditional bank, or get picked up by the recipient at a cash-agent outlet.


An instantaneous person-to-person payment option that is accessible on any mobile device andthat can cross borders at a fraction of the cost of traditional remittance services like Western Union? Yeah, I think there’s a market for something like that.

But, more importantly, so do other companies already signing on to the service. At the link is a short marketing clip highlighting the uses for MasterCard Send. One of those mentioned, is insurance agents reimbursing customers in real time. And who has already signed up for the program? Berkshire Hathaway...which owns several insurance companies including Geico.

Another advantage I think MasterCard Send has right now is that the receiver of the funds does not also have to have MasterCard Send or even a bank account to receive funds. That is not the case with platforms like PayPal. This means if you have this platform you can pay anyone, anywhere. Not just businesses that take MasterCard or other people with MasterCard Send. For instance, I could see renters using this to pay their landlord (who would not even need to sign up for the service to receive these funds).

On a similar note, MasterCard is not afraid to introduce innovative security measure against fraud. As this type of crime is exploding, I don’t think this can be understated. If electronic payment networks ever want to supplant cash as the most preferred way to perform transactions across the globe, people need to be convinced they are safer than carrying cash transactions.

This fall MasterCard is introducing a small pilot program that allows MasterCard users to use an app to authorize payments by taking a selfie with their smartphones. Users will also have the option of scanning their fingerprint in the app, but I have a feeling many millennials will love the selfie security option.

MasterCard has also released pilot versions in Canada (through TD Bank) of the first wearable tech that can biometrically authorize payments using one's heartbeat, the Nymi Band.


MasterCard continues to use technological innovation to improve the security and expand the reach of its global payment network. I believe all three of the above factors – growing worldwide preference for electronic payments, international growth and technological innovation – will drive MasterCard’s growth in the years and decades ahead. While the valuation is a bit high for the earnings and revenue growth, I believe that MasterCard’s runway for potential growth is so long that this is not a huge concern for me at this time. MasterCard investors must, however, closely watch any disruptive competitors to the industry, litigation action taken against the company and future regulations that could harm profit margins and revenue streams.

- Matt
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