MasterCard’s (MA) stock has rallied on strong first quarter earnings and signs of improvement in the U.S. economy. The stock has gained 5% since the company reported a 9% year-on-year increase in gross revenues for the first three months of 2013. Nearly 40% of MasterCard’s revenue comes from the U.S. and given the nature of the company’s business, MasterCard’s performance is closely linked to the country’s economic condition.
MasterCard charges data processing fees from its banking clients on the basis of the total number of transactions processed for the client and assessment fees as a percentage of the gross dollar value (GDV) of transactions processed for the client. Assessment fees account for 30% of the company’s revenue and data processing or transaction fees account for 30%. The company also charges cross-border fees for transactions where the issuer or cardholder’s bank and the acquirer or merchant’s bank are based in different countries. These fees account for 25% of the revenues earned by MasterCard.
Our price estimate for MasterCard is $550, in line with the current market price.
MasterCard has around 1.2 million cards in circulation worldwide, of which around 436 million are debit cards, 686 million are consumer credit cards used by individuals, and 36 million are commercial credit cards offered to corporations. Consumer credit cards account for nearly half of the GDV processed by the company while debit cards account for 40% and commercial credit cards account for the remaining 10%. The company processes around 30 transactions per card in a year with a total of 34 billion transactions processed annually. MasterCard charges an authorization, settlement and switch fee of around $0.08 per transaction and connectivity fee of $0.008 per transaction.
In the U.S., MasterCard reported a 15% increase in debit and prepaid GDV in 2012, resulting from the implementation of the Durbin amendment to the Dodd-Frank bill. The bill requires banks with more than $10 billion in assets to use separate payment processing networks for signature authorized and PIN authorized debit card transaction.  This bill has hurt MasterCard’s main competitor, Visa (V), whose logo is displayed on three out of four debit cards in the country.  The company’s near-monopoly in the market meant that it lost market share to MasterCard. Visa’s payment volume increased by only 6% in the U.S. last year, with debit volume remaining unchanged. Debit cards now account for half of MasterCard’s GDV in the U.S.
Electronic payment adaption in the U.S. is very high. Electronic payment solutions account for more than 60% of the personal consumption expenditures (PCE) in the U.S.  According to our analysis, MasterCard has maintained a market share of 10% of the PCE in the country. 
PCE as a percentage of actual disposable income in the U.S. (the income available to an individual for spending after paying taxes) dipped from 96% in 2007 to 91% in 2008 and 2009, as a direct consequence of the economic downturn observed worldwide during this period. However, the percentage has revived to 94% in the last three years, as the economy has improved.  To forecast the disposable income, we must use the growth rate observed in the real disposable income, calculated using chained 2005 U.S. dollars. 
The per capita real disposable income fell by 3% from 2008 to 2009 as the U.S. economy was affected by the global financial crisis, but has since been growing at an annual rate of 0.7% in the last few years. The U.S. population annual growth rate is around 0.7% to 1%. Extrapolating this rate to the end of the decade, we get a population of 330 million.
The unemployment rate in the U.S. has recovered remarkably from the peak of 10.1% observed during the financial crisis in 2009 and reached a four-year low of 7.5% in April, indicating a general recovery in the job market, leading to higher disposable income.  Assuming the per capita disposable income continues to grow at a rate of 0.7% for the next three years, followed by higher growth ~1%-1.5% in the next four years, we get actual disposable income of $13.3 trillion by 2019.
With improving economic conditions, the PCE can be expected to reach the pre-recession level of 95% of the actual disposable income. If MasterCard is able to retain its market share of 10% then it can generate $1.27 trillion in GDV from the U.S.
MasterCard charges an assessment fee of 0.098% of the GDV processed for a client. Assuming it maintains this fee structure, it can generate $1.2 billion in assessment fee revenues from the U.S. by the end of the decade. You can modify the interactive charts in this article to gauge the effect a change in forecast would in our price estimate for MasterCard.
- The Durbin Amendment Explained
- Visa investor meeting for 2013
- Ref: 1
- Personal Consumption Expenditures, U.S. Department of Commerce: Bureau of Economic Analysis
- Disposable personal income, U.S. Department of Commerce: Bureau of Economic Analysis
- Real disposable personal income: Per capita, U.S. Department of Commerce: Bureau of Economic Analysis
- U.S. Department of Labor, Labor Force Statistics from the Current Population Survey
Disclosure: No positions