[V – Visa; MA – Mastercard] Beyond the card
Related posts:
[V – Visa; MA – Mastercard] Expanding the rails, Part 1
[V – Visa; MA – Mastercard] Expanding the rails, Part 2
How many companies are still posting consistent double-digit organic revenue growth doing essentially the same thing that they’ve done for the last 60 years? I can only think of two. Visa and Mastercard, as I explained in a prior post, intermediate payment flows between three mutually reinforcing constituents: consumers, issuers, and merchants:
“If you wanted to build your own payments network to compete with Visa, you’d need to win over the issuing banks. Of course, you won’t get the issuers if you don’t have merchants to accept your card and you won’t get the merchants unless you have the issuers’ card customers, who want to know that the card is accepted nearly everywhere…and, critically, you won’t get anyone unless you can ensure security, which itself depends on the insights garnered from the 100bn+ of transactions these two networks process every year”.
The durability of V’s and MA’s network effects and the size of their addressable market have not gone unnoticed. Over the last 5 years, on top of high-teens per share earnings growth, Mastercard’s multiple has expanded from 27x to 37x; Visa’s from 28x to 34x. For their stocks to earn at least low-teens returns from here, I’m thinking these companies will probably need to the sustain double digit volume growth for the foreseeable future. Given the ubiquity of their card rails, does that assumption even make sense?
After stripping out Russia and China, I estimate global Personal Consumption Expenditures (PCE) addressable by Visa and Mastercard to be around $33tn. The combined payments volume (ex. commercial) of both companies is ~$13tn, comparable in size to cash, which mediates $14tn (44%) of ex. China/Russia PCE. Let’s say global PCE grows by ~4%/year, and that V and MA’s rails capture half the incremental PCE dollars while cash and other payment mechanisms evenly split the remaining half. Let’s also assume 10% volume growth for V/MA and more like 6% for alternative rails. Part of that growth will be supported by share of incremental PCE and whatever isn’t will be plugged by taking share from today’s $14tn of cash volumes. Running this process out 10 years still leaves $5tn of cash volumes. This is a simplistic exercise, but my point is that as widely adopted as Visa and Mastercard are and without even considering the opportunity in B2B payments (more on this later), there still seems to be enough cash floating around to sustain 10% annual volume growth from PCE for at least the next decade.
Even in the US, the largest market for both companies and where credit cards have been in circulation since the ‘60s, ~40% of payment volumes are still consummated with cash. Whittling that down to ~10%-20% will mean intermediating more small ticket transactions and capturing more of the long thin tail of merchants, leveraging technologies like tokenization1 and contactless payments2. Contactless capability may sound trivial, but innovations that alleviate checkout friction by even small degrees can have a surprisingly meaningful impact on transaction frequency: for instance, PayPal’s checkout conversion rate of ~90% is more than 2x better than standard checkout and over half of PayPal shoppers with OneTouch3 make more transactions than those without. Mastercard claims that in the US, it has seen lower card attrition from consumers who start using their cards contactlessly.
Contactless accounts for ~1/3 of face-to-face transactions in 45 countries – Visa has seen a 10-point spike in contactless penetration over the last year – and nearly half of non-US face-to-face transactions on Visa’s network are tap-to-pay. In some countries like Australia, Poland, Hungary, and Georgia, contactless is nearing 90% of face-to-face transactions. The US is a surprising outlier. In 2015/2016, there were high hopes that as US merchants migrated to EMV chip-enabled terminals, nearly all of which came embedded with NFC capability, contactless payments would take off. But no, contactless accounts for just a low-single digit percent of US transactions today.
The good news is that the biggest obstacle to adoption has already been solved with mass EMV reterminalization complete (over 60% of Mastercard’s and 2/3 of Visa’s US transaction volume comes from contactless-enabled merchants). Issuers are now committing themselves to the cause: Bank of America, Chase, and Wells Fargo are issuing tap-to-pay debit and credit cards this year. Issuers representing 3/4 of Mastercard’s cards will be doing likewise over the next 1-2 years. Visa expects to have 100mn contactless cards outstanding in the US by the end of 2019; 300mn by 2020. To habituate consumers, contactless is being rolled out in subways, where hurried consumers want to make their way past the turnstiles without having to periodically reload a stored value card (notably, New York’s MTA launched contactless turnstiles this past May). From the Wall Street Journal:
“New York’s Metropolitan Transportation Authority prints 80 million MetroCards a year. By July 2023, it hopes to print zero… Eventually, subway and bus riders will need to tap either a new OMNY card (which they can pay for in cash), a contactless credit or debit card, or a phone or watch with a mobile wallet such as Apple Pay or Google Pay. The system is currently active in 16 subway stations along the 4, 5 and 6 lines, as well as in Staten Island buses. The MTA expects the entire subway and bus network to have the tech installed by October 2020. It’s the biggest overhaul since MetroCards replaced tokens back in the 1990s.”
From there, one might see contactless adoption eventually spread to vending machines, parking spots, and other sundry sub-$10 purchases that are still mostly mediated with cash.