There are some things money can't buy for everything else. There's mastercard with that slogan mastercard became one of the world's Recognizable brands. It is the second largest card network in the US accounting for more than a quarter of all purchase volume using a payment card Internationally nearly a quarter of the over $624 billion spent using a payment card in 2022 was made using a mastercard Mastercard is a huge company.
In fact, they're the most accepted card worldwide in terms of the number of countries as the world Transitions to a more cashless society mastercard's value has continued to soar as of May 2023 the company had a market cap of over $360 billion shares of the company have seen nearly 100% gain over the past five years post financial crisis Pre-pandemic mastercard grew earnings at a 10 year Kager of 20 percent that's extraordinary for context earnings growth of the S&P overall the market overall is like in the high single digits But pressure is mounting as mastercard faces growing competition and stricter regulations when you have a large enterprise Is largest mastercard perhaps the biggest risk to their business model is regulation.
So how is mastercard able to generate so much revenue and how does it set itself apart from its competitors? Mastercard was founded in 1966 by the Interbank Card Association as a direct competitor to bank America which would later become visa Mastercard's original founders tried to get a visa license and was denied until they decided to make Mastercard and it realed in a bunch of smaller banks to do so and then eventually mastercard obviously went overseas And it's been growing nicely ever since and continually diversified their business model.
Together visa and mastercard Dominate the payment network industry the two companies account for 87% of market share based on purchase volume in the United States Visa and mastercard have the benefit of being the original ones in a market where there's Tremendous first mover advantage and a tremendous in-compensy effect because once you have Merchant acceptance and once you have the card issuance like two sides of the two-sided network It's extremely difficult to gain that scale if you're a third party coming into the market Internationally visa and mastercard account for 63% of market shares based on global purchase volume using a payment card.
They essentially set the standards and then they would just go to groups of banks in other countries and say hey We've got these standards. We've got all this technical infrastructure that works for this Why don't you just adopt ours? Why would you ever create a new one a competing one? And so they very effectively expanded around the world as a result over the following decades like visa Mastercard does not issue credit itself Instead they function more like toll operators that facilitate the transfer of payments their network involves four players the consumer Merchant acquire and issue when a consumer swipes their card to make a purchase from a merchant mastercards network Communicates back and forth between the choir the merchants bank and the issuer the bank that issued the consumers cards to Authorize clear and settle the payment.
它们主要制定了标准,然后向其他国家的银行群体展示它们有这些标准,以及为此工作的技术基础设施。它们说,为什么你们要创建一个新的竞争标准呢?因此,随后的几十年中,他们非常成功地在全球范围内扩张,就像 Visa 和 Mastercard 所做的那样。Visa 和 Mastercard 并不直接发放信用,而更像是便利支付传输的收费操作员。它们的网络包含四个参与者: 消费者、商家收款方、发行方及收购方。当消费者通过刷卡从商家购物时,Mastercard 的网络会在收购方的银行和发行方的银行之间进行通信,来进行付款的授权、结算。
Mastercard and visa do not extend credit. They're not lenders. They're merely the payment processors But that's a very lucrative business even just getting a small slice of those transactions That pie continues to grow because globally there continues to be a sizable transition away from cash and towards digital payment methods Mastercard made over 64% of their revenue through fees generated from their intricate payment network in 2022.
Mastercards main revenue source is interchange fees that come from card processing and they have different types of Transactions and volumes that go over their network. They can be domestic transactions cross-border transactions The way I would think about it is that they make on average about 30 cents on every $100 transaction that's processed with one of their cards But because of the tremendous scale because of the tremendous sums of money that they're processing this can be a very lucrative Business model the rest of the revenue comes from what mastercard refers to as value added services and solutions.
The biggest categories of value added services are really in two buckets One bucket is all related to advisory analytics and data So as you can imagine mastercard has extraordinary amounts of data about consumer spending So literally consultants that will work with banks and then we'll also work with retailers and consumer package goods companies Even governments in many cases to apply that data and insight into helping build their businesses The other very large portion of value added services is all cyber security and advanced security related services It's a very important part of the business. It also is very mutually beneficial with the underlying base business It reinforces the base business of the two kind of. work hands and glove
Despite their success Mastercard has long lag behind visa in company performance They're just over three billion mastercard in circulation Compared to visas 4.1 billion Mastercard reported a net revenue of 22.2 billion in 2022 Compared to visas 29.3 billion in the same year Worldwide mastercard accounts for nearly a quarter of market share based on purchase transactions While visa alone accounts for more than a third The reason is really simply one of history the market shares Amongst the card networks barely budge they move like a point if anything globally mastercard has Modestly gained share over the last say 10 years, but they barely move because there's just a huge you know Incompensy bias to the whole ecosystem once you're using one type of card network You don't typically switch it.
Yet mastercard stock has outperformed visas over the past five years Experts say mastercard simply has more qualities that would entice an investor It has faster top-line growth It's has that a positive nature that gives it a premium And there's the perception that there's more margin expansion that's achievable boosting EPS growth overall It can grow more since it's on that smaller base people do believe one day It could get to that same margin that visa is and they're also taking some partners away One edge that mastercard has over visa is its position in the international market a lot of that has had to do with Europe visa did not use to own visa Europe it was branded visa, but it was still a separate entity back in 2016 2017 visa was able to buy visa Europe and they have gone through a huge effort to modernize visas operations in Europe, but in the meantime mastercard has taken advantage of that sort of disruption to Outgrow visa significantly in Europe That's obviously a really big cross-border hub as well So it's kind of a double whammy benefit to revenue when you have more market share in Europe in particular
Besides visa mastercard also faces competition from companies like American Express and Discover Which account for 13% of the domestic market combined But they're also combining forces to fight external threats especially in the digital payment front There's sort of frenemies with the other card networks like visa like American Express because the whole card ecosystem Compete against alternative forms of payments like account to account payments like a digital wallet style direct payment Like Venmo or something like that right there are these alternative usually their country specific or regional But these alternative forms of payment that don't use cards that's really the the bigger competition
In recent years mastercard has made big acquisitions and investments to focus its technology on business to business payments Mastercard estimates B2P payments is a 135 trillion dollar industry One would be expense reports for example Mastercard is actually a big player in Virtual cards that companies can give employees for pre-approved travel expenses There's also the issue of paying suppliers So you picture that maybe you're some kind of vendor and you have supplies delivered And then you want to pay that company and you know that can be done in real time with mastercard B2B payments are a gigantic market but difficult to crack into That has not really paid off yet to be honest, but these are Investments that can easily take five to eight years to really see them come to fruition
One of mastercard several challenges is the rising competition in the payment network landscape. I would think of it as sure visa is the big brother competitor that they're up against every day. American Express is sort of the specialty competitor that they're up against every day. But perhaps the more difficult competitors for them to compete against is the sort of Death by a thousand cuts competitors like dozens if not hundreds of small competitors in 200 countries around the world that are all just trying to chip away a little bit at their business. That's like the trickier thing is like fighting on all fronts at once.
But rising competition could also prove to be an opportunity. While there are a lot of competition among different payment providers. They still have a really strong market share really strong positioning because what we found is that the competitors, actually want a partner with mastercard versus trying to take them out. And so as mastercard is continued to expand its tentacles across the globe. They found themselves and even I would argue a better competitor positioning than before the pandemic.
The payment network industry is one of the most heavily regulated markets in the world. As a result, mastercard has faced numerous regulatory and legal challenges over the years. Most recently the US Justice Department began an antitrust investigation into mastercard's debit card program. Mastercard declined to participate in this documentary but said they're cooperating with the Department of Justice. They currently are not speculating about potential outcomes. When you have a large enterprise is largest mastercard, perhaps the biggest risk to their business model is regulation.
I think a lot of the regulatory challenges relate to the fact that mastercard like Visa is a very big important global company. These are companies that we engage with almost every day. Whether we think of it or not through our daily transactions. So I think probably rightfully so there is a lot of scrutiny there.
The Credit Card Competition Act of 2022, currently introduced to the Senate, could also have a major impact on mastercard's business. The bill aims to enhance competition amongst credit card networks, which could potentially end the dominance enjoyed by Visa and mastercard. If the credit card competition act becomes law, I think it would have a massive effect on mastercard and the whole credit card industry. I don't think it's going to pass but if it did it would be a really big deal. It would basically cause every credit card agreement to be rewritten. Because it wouldn't really be just a Visa or mastercard anymore. Every card would have to have at least two networks that merchants could choose from. And they couldn't both be Visa and mastercard.
Regardless, experts say that mastercard's future success lies in relying on what it is they do best – providing a valuable service to its customers. If we step back and think about how mastercard stays most relevant in their space. We think it's by expanding their network across merchants. It's making sure that they are where the customer wants to be when they want to pay. And that they can pay the way the customer wants. That is the critical factor for mastercard to stay relevant. They're doing a great job of it now. And we don't expect that to change in the future.