MasterCard In China: Lucrative Market, Big Challenges

| About: MasterCard Incorporated (MA)


MasterCard can now expand into China.

China's card market is a huge opportunity.

It will be difficult to grow share against China UnionPay, but MA doesn't need much in order to realize a big windfall.

China recently overhauled regulations to give foreign card companies access to its $8.25 trillion card payment market. So long as they meet new rules, the likes of Visa (NYSE:V), MasterCard (NYSE:MA), and American Express (NYSE:AXP) are free to compete in China's lucrative electronic payments industry. Foreign companies have lobbied regulators for years to get access to this market, and MasterCard plans to apply this year to become a licensed payment service provider. However the company is still working on a strategy, and MA is yet to decide whether it will partner with another firm or go it alone. China's credit card market is a massive opportunity, but MA will have trouble establishing a footprint. However, due to the sheer size of the market, MA may not have to in order to materially benefit from its expansion into China.

China is a massive opportunity for credit card companies. It is the world's most populous country and its credit card market is projected to become the world's biggest by 2020. The value of consumer credit card transactions totaled 55 trillion yuan in 2015 (equal to 48% of consumer spending), and credit card transactions as a percentage of total spending should increase thanks to increased mobile use and deeper e-commerce penetration, which drives demand for electronic payment processing services. It really is a secular growth industry. China is rebalancing its economy away from an investment and manufacturing driven model to one based on consumption, and regulators are implementing policies to accelerate this shift, for instance by cutting interest rates and binging on debt to prop up growth. Consumption accounted for 38% of China's GDP in 2014, but this fraction is expected to reach 50% by 2030, driven by the rising middle class and urbanization.

It is no wonder that companies have been so desperate to get into China, but things will not be easy for MasterCard and its peers. MA must meet China's national security and cyber security standards, which are different from those in America, and must also hold 1 billion yuan in a local company. MA is still working on understanding the rules, which is part of the reason why it has taken so long to devise a business plan. But the biggest challenge will be taking market share from state-owned China UnionPay, who essentially has a monopoly over the credit card market. Its processing network is used by 80% of debit cards, and the company accounted for 72% of total transaction value in 2014. Thanks to network effects, China UnionPay has a wide moat that will make it difficult for new entrants to compete. The company's payment system is used by the most merchants and the most cardholders, which attracts more merchants and cardholders. This makes it hard for companies operating on smaller scales to catch up. Chinese banks do issue Visa, MasterCard, and American Express cards but very few Chinese merchants accept them and they are mostly used for foreign travel. MA is essentially starting from scratch, and it will take a lot of time and resources to build up an infrastructure that has a chance of competing.

But MA would not have to take much share in order to see a big financial benefit. China's card market is on pace to reach $9 trillion next year, and if MA can get just 0.1% share it would lead to 9 billion in incremental revenue, which alone amounts to more than 75% of MA's forecasted revenues for 2017 ($11.63 billion).


China is a huge opportunity for MasterCard, but it will be very difficult to grow share. That being said, MasterCard does not have to take much share in order to make its expansion into China worthwhile. China will drive global credit card industry growth over the next decade, and by investing in infrastructure now, MA can position itself for long-term growth.

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