What is the Venmo Credit Card Scheme
MasterCard Share - The undisruptable
In our first article in the payment series, we presented the breathtaking growth of the payment market and explained why, despite massive competition and increasing regulation, two companies are steadily growing and becoming more and more profitable: Visa and MasterCard.
Today I want our portfolio value MasterCard and the MasterCard share introduce in more detail.
MasterCard - the history
MasterCard's origins go back to the Interbank Card Association, which was founded by California banks in 1966 in response to Bank of Americas Visa (then BankAmericard).
The network was quickly expanded internationally and was already taking care of overarching tasks such as authorization, processing, security, the definition of standards and the marketing of credit cards.
The credit card scheme with the parties involved has survived to this day, only the underlying technology has always been expanded.
It was already clear to the bankers at the time that they had to win over as many banks as possible (for issuing, i.e. the issuing of credit cards or for the acquisition of end customers) and as many dealers as possible (for acceptance) in order to build up a permanently lucrative business.
So if the world is talking more and more about platforms and network effects these days, then MasterCard and Visa were long ahead of their time.
Because both companies have been “platforms” for over 60 years.
Few companies were as well prepared for the Internet, mobile devices and Metcalfe's Law as these two.
MasterCard share: the success story after the IPO
With the IPO in 2006, MasterCard was given independence from collective ownership by banks.
The initial price of the MasterCard share was then 3.90 USD (actually 39 USD, but in 2014 there was a 10 for 1 stock split) and thus a market value of around 5 billion USD.
Today the company is worth $ 230 billion.
A subscription for MasterCard shares was even more profitable than having invested in Google two years earlier (46-fold price explosion for Mastercard compared to 31-fold for Google since the respective IPO).
At the same time, the company has increased sales by a factor of 4 and profits by a factor of 17.
The enormous increase since the IPO is also reflected in the chart of MasterCard share since 2006:
MasterCard and Visa always earn money when payments are made via credit cards (it would be more precise to speak of payment cards, since debit and prepaid cards are also included).
Interest rate risks and credit risks do not play a role for the company (in contrast to banks and American Express).
The company has one maximally scalable business model and as a global player only needs around 17,000 employees.
For comparison: the IT service provider and digitization winner Accenture has 460,000 employees.
And since the costs are manageable, the company generates one operating margin of over 55 percent.
40 percent of sales can thus be invested as free cash flow or returned to the shareholders.
In the past few years more and more in the form of the repurchase of MasterCard shares.
With a P / E ratio of around 40 (based on 2018 profits), the company is of course anything but cheap.
But the biggest competitor, according to the company, is still cash. Can you wish for a better environment?
Why aren't MasterCard and Visa disrupted?
Inevitably the question arises: How can it be that financial service providers and the “old” technology companies (IBM, Oracle etc.) have been massively displaced in recent years, but not the two companies that are a mixture of the two.
The answer is: Moat and Wall.
Warren Buffet coined the term economic moat (“economic moat”).
MasterCard's moat is the sheer unbelievable number of over 47 million companies worldwide that accept the card as a payment medium (Nilson Report).
MasterCard is accepted in 210 countries, which is greater regional penetration than Coca Cola can boast.
MasterCard's defensive wall is issuing.
An armada of financial institutions worldwide takes care of the acquisition of end customers and all of them earn a lot.
In addition, there is a complex network of rules and standards that are controlled by the card company.
To disrupt MasterCard, a challenger must be able to take both lines of defense; an almost impossible endeavor.
Amazon, Google, Apple, all use the existing infrastructure of the credit card companies.
Some may recognize Trojan horses in the IT giants' willingness to cooperate, but an Amazon would have to win a similar number of retailers and end customers in order to take on MasterCard and Visa.
Regionally, Alibaba has shown the way in China. However, we currently consider this to be utopian globally.
In addition, MasterCard manages very cleverly to clasp the new challengers with generous incentives.
Whether Square, Stripe, PayPal or the subsidiary Venmo, all of them cooperate with MasterCard. Others may wage wars, but MasterCard prefers to ensnare.
It was also possible to copy some things from the Paytech company. That technology is not everything, but sometimes the user experience decides, this lesson was taught by PayPal (our article on the PayPal share) to MasterCard.
With Masterpass, the digital payment solution from Mastercard, the customer can now simply pay with an email address and password instead of a series of numbers that no one can remember.
Conclusion on the MasterCard share
The credit card market is one of the big winners in online trading and the trend towards cashless payments.
Banks, acquirers, digital giants and fintechs are doing a relentless battle for market share.
Only the duopoly MasterCard and Visa always earns with them.
The biggest competitors are cash and regulation. The former suffers from consumption, the latter lacks global power of intervention.
This unique starting position still justifies the high valuation of the MasterCard share.
It is no coincidence that Valuepe Warren Buffet of all people is a fan of the MasterCard share is.
MasterCard has been in the Digital Leaders Fund's portfolio since it was launched and we believe the valuation remains attractive.
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