Card giants Visa (NYSE:V) and MasterCard (NYSE:MA) are scheduled to announce earnings for the quarter ending September on Wednesday, 31st October, 2012. Although MasterCard announced earlier in an investor-community meeting that it expects revenue growth in the second half of the year to be lower than the 9% growth observed in the second quarter,  we expect both companies to benefit from an increase in consumer spending in the U.S.  Our price estimates of $135 for Visa and $451 for MasterCard are both in-line with the current market price.
The U.S. is the biggest market for both Visa and MasterCard, accounting for 55% of Visa’s net revenues. Revenues are earned by charging quarterly service fees on the basis of payments volume and data processing fees which include clearing, settlement and transaction processing fees on the basis of the number of transactions processed for a client. These fees are dependent on transaction volumes, and the higher the number of transactions processed, the higher the income generated.
In the first half of 2012, 31.6 billion cashless (through credit, debit and prepaid cards) transactions were executed in the U.S., an increase of 4.4% over the first half of 2011.  Consumer spending in the U.S. has since picked up as household spending, which accounts for 70% of the GDP, increased 0.5% in August and 0.8% in September, the highest increase since February this year.
In credit card transactions in the first six months of 2012, Visa maintained the highest market share of 48%, whereas MasterCard accounted for 27% of credit card transactions in the U.S. American Express (NYSE:AXP) with 17% and Discover Financial (NYSE:DFS) with 8% rounded up the top four credit card transaction processors in the U.S. We expect this trend to continue this quarter as Visa has an established reputation and a vast network of banks which issue cards carrying its logo.
The major change last quarter came in the debit cards department where for the first time is history, MasterCard debit transactions exceeded Visa credit card transactions. This was due to the effect 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 transactions.  As a result, debit card transactions processed through Visa’s network were down 3% whereas MasterCard’s debit transactions increased by 17% allowing MasterCard to increase market share to 27%. Debit card transactions account for 64% of all transactions in the U.S. and gaining market share in this domain is a big step forward for MasterCard.
There is immense potential for growth outside the U.S., and Visa estimates that over 30% of consumer spending worldwide ($10 trillion in gross dollar volume) is still carried out through cash and checks. The biggest market is China where the penetration is quite low, with only 285 million cards in circulation for a population of over a billion. MasterCard estimates that card spending in the country will grow from $1 trillion to $2.5 trillion by 2025. Strict government regulations are the main deterrent for growth. The Chinese government has greatly favored state-owned domestic supplier, China UnionPay (CUP) by demanding every merchant and ATM across the country to accept UnionPay cards and requiring all cards issued in China to work with UnionPay, allowing the company to maintain a monopoly in the industry. A WTO hearing earlier this year has ruled in favor of Visa and MasterCard stating that the Chinese government was violating its regulations by not allowing the two to expand their businesses. This might turn the tide in favor of the two giants and allow for future expansion in the country.
Mobile phone transactions hold the key to future expansion as there are about three times more mobile phones than payment cards in the China.  Visa and MasterCard are both aggressively expanding their mobile payment solutions. For more details on the payment industry in China, please read our article : MasterCard Is Ready To Break New Barriers In China, But How Successful Will It Be?
V.me is Visa’s digital wallet service, which has recently entered a partnership with PNC Financial Services Group Inc., with plans to expand to 6.3 million accounts by next year.  MasterCard’s counterpart is PayPass. Technological advancements in the mobile domain are set to revolutionize the payment industry in the next decade, Visa and MasterCard will have to move fast to evolve as the industry does.
- MasterCard Sees Slower Revenue Growth, Wall Street Journal, 20th September, 2012
- Consumer Spending in U.S. Increases 0.8% as Incomes Climb, Bloomberg, 29th October, 2012
- The Nilson report, August 2012
- The Durbin Amendment Explained
- China, MasterCard Mobile Payments Readiness Index
- Visa Adds Partners for Digital-Wallet Service, Press Relase, 26th October, 2012
Disclosure: No positions