MasterCard’s (NYSE:MA) stock derives the majority of its value from transaction fees, which we estimate form 32% of the stock. An important metric of MasterCard’s transaction fee revenues is the connectivity fee. MasterCard charges a connectivity fee for routing the transaction through its electronic financial network for processing and settlement and delivering the payment to the merchant’s online account once it has been obtained from the credit card holder’s account with the issuing bank. MasterCard’s main competitors are Visa (NYSE:V), American Express (NYSE:AXP), Discover Financial (NYSE:DFS), Diners Club and JCB.
MasterCard charged a connectivity fee of $0.005 per transaction between 2006 and 2008, but this increased to $0.0185 in 2009 as the company replaced the existing fee with a new fee called Network Access and Brand Usage (NABU) in the wake of the economic downturn. Even though the Federal Reserve is looking to pass restrictions on interchange fees, we expect the network access fee to remain at current levels for the next few years, and then decline gradually.
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While we anticipate the connectivity fee charged by MasterCard will reduce to $0.004 by the end of Trefis forecast period, Trefis members expect a smaller decline to $0.007 per transaction. We currently have a Trefis price estimate of $293 for MasterCard’s stock, about 14% above the current market price.
Expanding Data Network to Lower Connectivity Costs
In countries where MasterCard does not have its own network, it uses third-party networks. By doing so, it loses out on transaction revenues that it could have earned otherwise. MasterCard is trying to offer domestic solutions in various countries and these centers will bring the costs down and help MasterCard to lower its connectivity fee. A few acquisitions in the past have helped the company in this pursuit. MasterCard acquired DataCash Group, a European payment service provider for $520 million in August 2010.  We believe that the DataCash acquisition will widen MasterCard’s global network and presence and also drive e-commerce growth with more customers using MasterCard products in the European market.
MasterCard made another small acquisition of $100 million in 2009 of Ireland-based Orbiscom which makes payment processing networks that help financial institutions interact with credit, debit and prepaid cardholders. 
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Trefis Community Forecast
Trefis members forecast MasterCard’s connectivity fee per transaction will decrease from $0.0189 in 2011 to $0.007 by the end of the Trefis forecast period, compared to the baseline Trefis estimate of a decrease from $0.015 in 2011 to around $0.005 by the end of the Trefis forecast period. The member estimates imply an upside of 2% to the Trefis price estimate for MasterCard’s stock for a potential total upside of over 15% based on our price estimate.
- MasterCard to Acquire DataCash Group plc to Drive E-Commerce Payment Expansion, MasterCard Press Release, August 19, 2010
- MasterCard looks for acquisitions and deals, Reuters.com, Feb 13, 2009
Disclosure: No positions