In the 1960s, an alliance of US banks formed the Interbank Card Association (ICA) following Bank of America’s success with the first type of payment card ‘BankofAmericard’, which would later go on to be spun out as Visa in 2008.

The ICA introduced ‘Master Charge’ in 1969, an interbank payment card that could be used by the cardholder at any bank within the alliance. In the years following, the ICA formed alliances with banks in Mexico, Europe, Australia and Africa, prompting a rebrand that saw the birth of ‘Mastercard International’ in 1979 – which went public as a standalone company in 2006.

Similarly to Visa, Mastercard provides the network infrastructure that allows the flow of payments made using credit or debit cards to pass from the customer to the seller (merchant) in a transaction. The process begins with a customer presenting their card to the merchant’s card reader, which in turn presents the transaction data to the merchant’s chosen processing firm or ‘merchant acquirer.' The data then moves through the Mastercard payment network to the customer’s issuing bank (e.g. Santander or Lloyds) which checks the account balance and responds with an authorise or decline signal, this is sent back through the network to the merchant’s card machine. If the transaction is authorised, the issuing bank debits the amount from the customer’s account and sends the funds to the merchant’s bank via the merchant acquirer. 

Its operating margin is the fifth highest of any company in the S&P500.

The system is complex, with several stages and stakeholders. The success of card networks relies on numerous cardholders, issuers, merchants and merchant acquirers singing from the same hymn sheet to ensure that a customer can always pay using their card and a seller can always accept that card. It is these characteristics that make the barriers to entry associated with card networks so high, and the near global duopoly that exists between Mastercard and Visa one of the fiercest. 

As should be expected with almost all duopoly market structures, Mastercard has regularly found itself in the crosshairs of antitrust competition authorities. This year in the US, a lawsuit filed nearly 20 years ago has sought to cap the credit interchange rate that Mastercard and Visa charge merchants on credit transactions in a similar way to the 2010 Durbin Amendment, which capped regulated US debit interchange rates. Interchange fees, also known as ‘swipe fees’ are set by the network provider and charged to the cardholder. The total fee is typically comprised of a fixed amount as well as a percentage of the spend amount and varies depending on the card type. They are used by the networks to cover transaction costs, but also to fund incentives and rebates which the networks use to lure banks (and indirectly their customers) into issuing (and using) cards on their network. Whilst Mastercard (and Visa) have historically navigated evolving regulation well, it is an ongoing threat that requires monitoring. 

Unsurprisingly, Mastercard boasts stellar financials. Its operating margin of c.55% is the fifth highest of any company in the S&P500 and it has grown net revenues at 10.2% p.a. over the last decade. Within the wider consumer payments space, growth has historically been driven by increases in personal consumption and the trend of payments moving from cash to card. The US and UK have been the fastest to make this transition, but these markets have historically been dominated by Visa. With Visa’s attention somewhat focussed on these cash cow markets, Mastercard set its sights on other regions of the world and bolstering its value-added systems and services (VASS) offering.

VASS covers a range of services that complement the traditional card network service for facilitating payments. These services include fraud protection and mitigation, cyber security and intelligence within the payments network and the provision of consultancy to the various stakeholders within the network. VASS is a no brainer for the card networks: it can be bolted on to existing services to add significant value along the entire stakeholder chain, giving Mastercard a large established customer base to sell to. Whilst there is more external competition in VASS, Mastercard already has well-established relationships with the target market and, similarly to the provision of the network, it is a business that carries significant scale benefits. VASS has grown at a high teens rate annually, and now makes up c.44% of total Mastercard revenues. While we expect this rate to moderate somewhat, VASS is likely to remain a key contributor to growth in the coming years. 

Managing your wealth

Managing your wealth

Understanding Finance

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