COVID-19 Accelerated Growth of Mastercard’s Digital Payments Business
MasterCard (NYSE: MA) is a key player in the payment processing industry — one of two companies that control the merchant acceptance “rails” for credit cards (the other, of course, is Visa).
Concretely, it benefits directly from global economic growth and increased consumer spending. The more people spend — and use credit cards in those transactions — the more money Mastercard earns in transaction fees. It is therefore not surprising that the credit card giants have been significantly affected by the recession triggered by the COVID-19 pandemic. With people mass canceling travel plans, avoiding errands and becoming increasingly concerned about their finances, there has been a natural decline in the number of credit card transactions.
However, the silver lining for credit card companies was that much of this lost in-person spending was replaced by transactions using e-commerce and other forms of contactless payment, which still provided them with lucrative fees. . While Mastercard may lose some transaction activity due to lack of in-person travel and spending, it may be able to compensate for that and then some with digital and contactless payments. In other words, Mastercard’s business is proving quite resilient despite the significant headwinds created by COVID-19.
Mastercard’s approximate results for the second quarter of 2020
There is no doubt that the pandemic hurt Mastercard’s financial performance in the second quarter. During the first quarter, it began to feel the impact of COVID-19 as governments around the world began implementing travel restrictions and lockdown orders. However, these headwinds blew with full force throughout the second quarter, which will likely make it the weakest segment of the year in terms of transactions processed and revenue generated.
|Financial measures||Q2 2020||Q2 2019||Change|
|Net revenue||$3.3 billion||$4.1 billion||(19%)|
|Operating result||$1.7 billion||$2.4 billion||(29%)|
|Net revenue||$1.4 billion||$2.0 billion||(31%)|
2020 was a sharp reversal for Mastercard, which had previously seen many years of double-digit revenue and profit growth. The cross-border transactions category was the hardest hit – these fell by more than 50%. Overall, the second quarter was tough, but the company’s business actually improved from the low point it hit in April.
Clearly, these steady improvements since the peak of the pandemic shutdowns are good signs.
To the future of payments
While overall trends for Mastercard were negative, the pandemic accelerated the growth of the company’s value-added services such as cybersecurity and data analytics. Revenue from its “other” category – which comes primarily from these value-added services – increased by 12%.
|Income source||Q2 2020||Q2 2019||Change|
|National assessments||$1.474 billion||$1.680 billion||(12%)|
|Cross-border volume fees||$637 million||$1.374 billion||(54%)|
|Transaction in progress||$1.901 billion||$2.053 billion||(seven%)|
|Other income||$1.081 billion||$962 million||12%|
As the chart shows, the company saw a 54% drop in cross-border transaction fees due to international travel restrictions. Cross-border revenue primarily occurs when a customer pays for something in person while in a country other than where their card was issued.
Furthermore, the company revealed that the volume of transactions carried out on its network where the card was present fell by more than 10% compared to the previous year. In contrast, transaction volume from cardless payments increased by around 20%.
In addition to processing more transactions virtually, Mastercard has seen the number of contactless payments increase. These include payments made through a digital wallet (like Apple Pay) or payments made through card antenna chips. One obvious reason the use of these payment methods has increased is that merchants and consumers are more reluctant to handle cash while transmission of COVID-19 via surface contact remains a risk.
Mastercard is happy to see its customers also using contactless payment tools, as it charges higher fees than traditional cards. The question is whether people will continue to use contactless payments and e-commerce tools at the same rate once the pandemic is over.
A sustained recovery
This year was the ultimate test for Mastercard. Its business model has been disrupted in some ways. Historically, it has relied on international travel and in-person spending. It is now building on its ability to facilitate e-commerce transactions and contactless payments. In other words, investors should increasingly view Mastercard as a fintech company rather than just an old-fashioned payment network.
The good news is that despite the shock to the system, Mastercard remained profitable. Even better is its steady recovery from the economic lows seen in March and April. As economic activity picks up, Mastercard will be looking for consumers to continue spending with their cards. The company will emerge from this difficult year in better shape if the habits that people have developed during this one persist in the future.
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