Visa Inc (V) And Mastercard Inc (MA) Seem Destined For Greatness

One of the key reasons behind the gold crash was the recovery of investors’ confidence. According to recent reports, investor sentiment in the U.S is reaching two-year highs, and the prolonged economic recovery should only strengthen the investors’ confidence. Furthermore, with the dipping unemployment rate and $85 billion worth of monthly liquidity injections in a low-interest-rate environment, personal disposable income in the U.S economy has increased by $1 trillion over the last year. This type of macroeconomic environment is beneficial for liquidity-driven companies, which presents a bullish case for credit-servicing companies.

Better Business Model

Visa Inc (NYSE:V) and Mastercard Inc (NYSE:MA) jointly dominate the credit-servicing industry with their extensive global presence and relatively lower merchant fees. Visa Inc (NYSE:V) operates in 170 countries with merchant fees of 1.9%, while Mastercard Inc (NYSE:MA) is present in 210 countries with merchant fees of 1.8%. Their premium peer, American Express Company (NYSE:AXP) has a geographical footprint in around 140 countries with merchant fees as high as 2.9%.

American Express Company (NYSE:AXP) loads its customers with privileges and offers, which altogether bundle more value than its $450 annual fee. But its high merchant fee greatly limits its acceptance rate at retail outlets across the world. Thanks to the relatively lower merchant fees, Visa and Mastercard Inc (NYSE:MA) are accepted at 30 million and 22 million shops respectively across the world.

But that’s not all. Visa Inc (NYSE:V) and MasterCard have a high-quality business model with minimal operational risks involved. As soon as a card payment is made,

Banks deduct the merchant fees,

Banks pay the amount to the merchant, and

Banks pay the merchant fees to Visa and MasterCard.

However, banks including American Express Company (NYSE:AXP) bear the risks of credit defaults. To filter out problematic customers, American Express generally provides services to customers with high credit ratings. But in the process, American Express limits its potential customer base, since people belonging to the upper class exist in relatively smaller numbers.

However, Visa Inc (NYSE:V) and Mastercard Inc (NYSE:MA) can be used by customers with even bare-minimum credit ratings. It is due to these reasons that Visa and MasterCard have been able to report risk-free financial growth.

A New Growth Avenue

To facilitate transactions even further, Visa Inc (NYSE:V) has launched PayWave, while Mastercard Inc (NYSE:MA) has launched MasterPass. The common thread between the two is that both are mobile payment systems that use Near Field Communication (NFC) equipped in the latest smartphones. The management of Visa Inc (NYSE:V) stated that by 2020, half of its transactions would be carried out by mobile payment solutions. Considering the fact that smartphones equipped with NFC technology have already begun rolling out, it appears to be a realistic goal.

Besides that, PayWave and MasterPass would also challenge eBay Inc (NASDAQ:EBAY)’s PayPal. Consumers would no longer have to re-fill their PayPal wallets to make online transactions, as a PayWave and MasterPass would be directly linked to millions of bank accounts. Furthermore, PayPal’s dominance in domestic and international funds transfer could also be challenged as both PayWave and MasterPass can transfer funds throughout the world.

As of now, PayPal holds 26 international currencies and has a consumer base of over 100 million users. However Visa and MasterCard don’t hold any currencies (no risks of market volatility) and have a larger consumer base of 2.1 billion users and 697.9 million users respectively.

Wrappng up

I firmly believe that Visa Inc (NYSE:V) and MasterCard would continue to grow. Their business models are nearly risk free, and their venture into online mobile payments solutions would play a vital role in accelerating their growth momentum for the years to come. Both Visa and Mastercard Inc (NYSE:MA) may appear to be fairly valued on a forward-earnings basis, but in my opinion, paying 19-20 times forward earnings is nothing for a fast-growing company (or industry).

The article Visa And MasterCard Seem Destined For Greatness originally appeared on Fool.com and is written by Piyush Arora.

Piyush Arora has no position in any stocks mentioned. The Motley Fool recommends American Express, eBay, MasterCard, and Visa. The Motley Fool owns shares of eBay and MasterCard. Piyush is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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