A Wide Moat Surrounds Mastercard

Senior Equity Analyst

Brett Horn

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Mastercard has multiple characteristics that should draw investors’ attention. First, despite the evolution in the payment space, we think a wide moat surrounds the business and view Mastercard’s position in the current global electronic payment infrastructure as essentially unassailable. Second, Mastercard benefits from the ongoing shift toward electronic payments, which provides plenty of opportunities to utilize its wide moat to create value over the long term. Digital payments, on a global basis, surpassed cash payments just a few years ago, suggesting that this trend still has a lot of room to run, and we think emerging markets could offer a further leg of growth even if growth in developed markets starts to slow. Finally, Mastercard is something of a tollbooth business, and the company is relatively agnostic to smaller shifts in the electronic payment space, as it earns fees regardless of whether payment is credit, debit, or mobile.

Mastercard has not been without issues recently. Cross-border transactions, which are particularly lucrative for the networks, came under heavy pressure due to the fallout from the pandemic and a reduction in global travel. We expect a full recovery, and this should drive relatively strong underlying growth in the near term. However, a stronger dollar will be n offsetting headwind in the near term. From a longer-term point of view, we think it is likely that smaller and more regional networks are building out capacity for cross-border transactions, which could eat into growth a bit in the coming years, but we haven't seen a material effect yet. 

In the near term, we see the state of the economy as Mastercard’s biggest risk. A downturn in the economy would slow overall growth, as Mastercard’s revenue is sensitive to the volume and dollar amount of consumer transactions. The company saw growth decline significantly during the early stages of the pandemic. But we don’t see any industry trends that will impede Mastercard’s ability to maintain double-digit growth in the coming years, and the company looks poised to continue to modestly outperform its larger peer, Visa.

Business Strategy & Outlook

Payment networks such as Mastercard benefit, unsurprisingly, from a network effect. The more consumers that are plugged into a payment network, the more attractive that payment network becomes for merchants, which, in turn, makes the network more convenient for consumers and so on. In our view, this dynamic explains why a handful of networks have come to dominate electronic payments over time, and at this point, Mastercard has reached essentially universal acceptance in most developed markets. While the network effect is the initial and primary driver of economic moats in the space, the highly scalable nature of payment processing leads to sizable cost advantages for large payment networks, which further cements their competitive positions. For the dominant payment networks with global footprints, such as Mastercard, the network effect and resulting cost advantage is strong enough to lead to a wide moat, in our view.

Mastercard’s origin lies in the formation of the Interbank Card Association by a group of banks that acquired Master Charge in 1969 and adopted the company’s current logo. In the decades since, Mastercard has been one of the largest beneficiaries of the ongoing shift toward using electronic payments. During 2021, the company processed over $6 trillion in purchase transactions. Visa, meanwhile, processes roughly twice as many transactions as Mastercard and leads it in terms of market share in every major global region. However, Mastercard has a similarly commanding lead over any other network and is the only other company with a truly global presence. Mastercard’s global market share for credit and debit cards has been estimated at 29% and 24%, respectively, a level that dwarfs competitors outside of Visa. We don’t believe that building a new network with a comparable size and reach is realistic over any foreseeable time line and view Mastercard’s position within the current global electronic payment infrastructure as essentially unassailable.

Mastercard has translated its dominant competitive position into an enviable level of profitability. Operating margins (using net revenue) in 2022 were 57%, and margins have generally trended upward over time due to the scalability of the business. Further, given the relatively asset-light nature of the business, returns on invested capital are very high, averaging 114% over the past five years.

Wide

Economic Moat

Mastercard

Mastercard, Inc. operates as a technology company. The firm engages in the payments industry that connects consumers, financial institutions, merchants, governments and business. It offers payment solutions for the development and implementation of credit, debit, prepaid, commercial and payment programs. The company was founded in November 1966 and is headquartered in Purchase, NY.

Earnings data Q2 2023

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