Mastercard: payment processors win most from return of credit card spending

Mastercard is sometimes mistaken as a credit card company. Like larger rival Visa, it makes money from processing credit card and cross-border payments, not lending. In a downturn, this means it has little exposure to the credit risks from cardholders who miss payments. But it also wins big when consumers spend more.

If the return of credit card spending has raised smiles from US lenders and credit card issuers, payment processors like Mastercard are laughing. Every payment earns it a switch transaction fee as well as a percentage of the transaction value.

Full-year results show healthy trends. Both purchase volume and value soared in the final three months of 2021, raising revenue at Mastercard 27 per cent to $5.2bn. Net income climbed over a third to $8.7bn. The share price is down a tenth from its April peak, but it still trades on a heady multiple of 35 times forward earnings. That is a premium to Visa and twice the multiple for Amex. A paltry dividend yield of 0.6 per cent will dissuade value investors.

Concerns about rising expenses and management comments on slowing overseas spending, due to the spread of Omicron, initially dragged shares lower. Yet among financial services companies, Mastercard faces some of the lowest cost pressures. Unlike credit card issuers like American Express, it does not need to ramp up marketing or card perks to sign up customers. Despite a 16 per cent rise in operating costs during the quarter, Mastercard still managed to increase operating margin by 60 basis points.

Its virtual duopoly with Visa in the global payment processing market means that its position has strengthened, not weakened, with the proliferation of payment options from the likes of Apple, PayPal and buy now, pay later firms such as Affirm and Klarna. But Mastercard’s strengths can attract unwanted attention. A UK class-action legal case has accused it of anti-competitive behaviour.

Given its win-win position, Mastercard understandably receives a premium valuation. That shows no sign of deteriorating.