By Shweta Dubey
MasterCard (MA) has been focusing on growth opportunities from under-penetrated regions. This is quite justified after two recent research reports. One of the reports, named "Global Journey from Cash to Cashless", discusses 33 emerging countries that include India and China, which are moving towards cashless transactions. The other report "Road to Inclusion" provides insight on the un-served and underserved population in Western Europe, including how the respondents feel about the financial services. What opportunities lie ahead for MasterCard with the findings of these reports?
Expecting to tap the unbanked European market
In the "Road to Inclusion" report, MasterCard has taken into consideration the financially excluded and financially underserved residents from six European countries. The countries included in the report were Poland, Spain, Russia, Italy, France, and UK. The report highlighted that 25% of both un-served and underserved respondents stated not having a bank account since they didn't had enough money to use this facility.
Moreover, 95% of both un-served and underserved respondents used cash to pay for their utilities. There is significant potential for this population to adopt a cashless payment facility. It was surprising that a considerable portion of six major countries in Europe still aren't financially included. The company expects a considerable portion of the population will be financially included by facilitating prepaid card services.
Prepaid card facility will drive financial inclusion
MasterCard found that utilization of general financial services such as prepaid cards could make major portion of the population financially included. People's general interest in prepaid cards was also estimated:
Source: Company data
According to the above chart, 22% of the overall respondents said they were interested in using prepaid card services. Moreover, 39% of the respondents said that they would be very/somewhat interested in MasterCard branded prepaid cards. The company could generate considerable returns by facilitating prepaid cards in Western Europe. We estimate, out of 93 million underserved and un-served people in Western Europe, 36.27 million can be converted into MasterCard prepaid card users.
What potential lies ahead for Europe as a whole?
We have our estimates for Western Europe's underserved and un-served population. The impact of this opportunity will benefit overall European operations, since it takes into consideration six important economies in the region. We believe that European operations are important to understand whether the company will be able to harness the opportunity lying ahead with the un-served and underserved population in the Western Europe.
Let's look at how MasterCard performed in the last few quarters in Europe, year over year in terms of gross dollar value, or GDV. The GDV includes both purchase volumes and cash volume.
GDV ($ billions)
Year on Year growth
Quarter ended June 2013
Quarter ended March 2013
Quarter ended December 2012
In the last three quarters, the GDV from Europe increased at a consistent rate of more than 14%. Moreover, in past quarter results, the GDV from Europe was MasterCard's highest compared to other regions outside the U.S. We believe that this growth will continue in the coming quarters, if MasterCard is able to harness the potential growth from the region.
It is also important to have an analysis of purchase volume since it has a significant portion in the GDV. The Nilson report for the purchase volume estimation from Europe for MasterCard, along with its peers Visa (V), American Express (AXP) and Diners, is given below.
Source: Nilson report
From the above chart, we infer that MasterCard has much better growth potential in purchase volume in Europe as compared to Visa, American Express, and Diners. MasterCard can expect an average year-over-year increase of 14.6% in purchase transactions by 2017 in Europe. This is because the overall growth estimation from 2007 to 2017 is 146%.
With MasterCard achieving an average growth rate of more than 14% in the last few quarters, we can comfortably say that the region's purchase volume growth projection is meeting the year-over-year GDV growth. Meanwhile, Visa is giving close competition to MasterCard with an average growth rate of 12.6% in purchase volume by 2017, since its overall growth for the period has been 126%.
Despite having better growth potential, MasterCard will not be able to overtake Visa as market leader in Europe purchase transactions. The market for purchase transactions for MasterCard will be $1.16 trillion, much lower than Visa's $2.65 trillion.
On the other hand, American Express will not be able to capture significant purchase volume market share, since its average volume growth until 2017 will be 7.6%. This will be comparatively low to that of MasterCard's 14.6%.
High expectations ahead in China and India
According to MasterCard's Global Journey from Cash to Cashless report, cashless payment in India accounts for 32% of overall consumer payments. With such low cashless payments, we can say that India has huge opportunities in term of its financially un-served population. Moreover, MasterCard describes India as being at an inception stage, moving towards cashless economies. MasterCard believes that by educating Indian residents, it can shift them to electronic payment mechanisms.
The BCG estimated that India's consumption spending will grow from $990 million in 2010 to $3.6 trillion in 2020. This will lead to consumption spending growth at a compounded annual growth rate, or CAGR, of 13.7% by 2020. India's consumer spending will be $1.28 trillion for 2013. Even if 32% of consumers make cashless payments, then a $409 billion paperless transaction business opportunity is available in India.
To harness the growth potential from India, MasterCard entered into an agreement with Central Bank of India and Suvidha Infoserve, which is India's leading retail services company, in September 2013. It will launch Central Bank of India-Suvidhaa Channel Card, which will be accepted at 65,000 Suvidha retailers across 2,800 towns in India. This will offer services like bill payments, payment of municipal taxes, travel ticketing, and shopping. The services are targeted towards reaching the 15 million digitally underserved people in the country.
The company also has considerable expectations from China. The cashless payments in the country account for 40% to 60% of the overall consumer payments. MasterCard categorized China under transitioning countries, which means that they are moving towards cashless transactions at a much faster pace.
The overall consumer spending for China in 2013 will be $2.34 trillion and $6.2 trillion by 2020; this is a CAGR of 10% until 2020 from 2010, as per BCG's estimates. MasterCard can expect around $936 billion of paperless transactions in 2013 from China, based on at least 40% cashless transactions.
Despite opportunities lying ahead for MasterCard, the company is facing increasing competition from government backed payment networks in China. These services are expected to lower the transaction costs, and in turn, it will affect MasterCard's market share in China. MasterCard was not successful in harnessing opportunities in micropayments and the rural population, which may hamper its pace of growth from the region.
Despite the threat from the government backed payment networks, ample opportunities lay ahead for MasterCard from China since consumer spending in China is expected to grow at an average growth of 10%, and the majority of this spending is expected to convert into paperless transactions.
We expect huge opportunities exist for MasterCard in emerging economies.
PEG Ratio (5years)
Source: Yahoo Finance
In the above table, MasterCard appears to have better revenue prospects than Visa. Moreover, its PEG ratio seems highest among its peers, but not with considerable margins, so its long-term growth prospects look promising. Although its trailing twelve month, or TTM, P/E is the highest, we believe the company has huge earning potential from China and India. According to our analysis, the GDV from European countries also looks promising. We expect the company will provide considerable capital returns in the coming future and recommend buying.
Additional disclosure: Fusion Research is a team of equity analysts. This article was written by Shweta Dubey, one of our research analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.