MasterCard (MA) and Visa (V) have been two of the best performing financial stocks over the past five years, with MasterCard stock and Visa stock up 340% and 330%, respectively. The reason is simple: MasterCard and Visa are a duopoly in the payment processing space, thereby giving each company strong pricing power and very few competitive risks aside from each other.
However, all that could change very soon.
Three things must happen for a company to legitimately compete with V or MA in the payment processing industry.
First, banks must issue the cards or support the technology of the payment processor. Notably, just about every bank issues either Visa or MasterCard, and the two processors collect fees on all transactions to earn revenue.
Second, consumers must agree to use those cards or form of payment processing. This brings up the third hurdle: Businesses must agree to accept that new form of payment. Ironically, businesses will only do so, and agree to pay those fees if there are a large number of banks issuing the form of payment and consumers using it.
Thus, new entrants need to hurdle all three obstacles pretty much simultaneously. That’s why it is so difficult for new competitors to enter the space.
That said, payment processing would be a very lucrative business if a new competitor did manage to penetrate the market. MasterCard and Visa have operating margins of 53.4% and 65%, respectively — once all marketing and infrastructure investments are complete, and cards have been issued, the maintenance costs are minimal.
Visa and MasterCard Stock Face New Competition
So, which companies could pose legitimately threats to Visa stock and MasterCard stock? The biggest contenders are Apple (AAPL) and Google (GOOG, GOOGL) with Apple Pay and Android Pay.
Currently, Apple Pay and Android Pay are nothing more than middlemen, offering a delivery for transactions but still relying on the card issuing bank for funds and Visa or MasterCard to process the transaction. However, Apple Pay and Android Pay are quickly gaining traction to make a full-blown jump to processing payments.
Apple Pay is already partnered with every large financial institution in the U.S. and is well on its way to being accepted at more than 1.5 million retail locations. Meanwhile, Android Pay recently went live at over 1 million locations.
Both Apple and Google have the support of financial institutions, retailers and consumers, and let’s not forget that Apple is sitting on 800 million iTunes accounts with financial information. Thus, Google and Apple have everything needed to cut MA and V out of the equation, and become the payment processors for mobile transactions.
With that said, it would be catastrophic for MasterCard stock and Visa stock stock if they lost ground to mobile payments processors. Visa and MasterCard only exist in mobile payments because of Apple Pay and Android Pay, relying on the technology for point of sale. Without those mobile payment options, neither Visa nor Mastercard would have much of a presence.
If Google and Apple were to abandon MasterCard and Visa, or start promoting their own respective processing businesses, it would consequently hinder both Visa and MasterCard’s ability to grow with mobile payments.
Great Growth Prospects for Apple, Google
Mobile payments are where all of the global payments growth will be for the next few years. IDC recently figured that mobile payment volume would more than triple to $1 trillion in the next two years.
So, in the event that both Google and Apple were to go in this direction, becoming a payment processor and gaining regulatory approval in an environment that Jefferies recently described as “calming,” both could gain a significant share of the mobile payments industry.
For the sake of argument, let’s say that Google and Apple gobbled up the next $500 billion of the $1 trillion market by 2017. That would equal $15 billion in revenue and upwards of $7.5 billion in operating profit. In the event that Google and Apple were to evenly split that operating income, it would represent a 22% and 6% increase to Google and Apple’s respective operating profits.
Nonetheless, it is probably unrealistic to assume that Google and Apple could gain regulatory approval, adopt a new payment processing technology, and then penetrate 50% of the mobile payments market in just two years’ time. Further, there is no guarantee that either or both of these companies will go in this direction.
However, the move makes perfect sense, and seems like a seamless transition.
Bottom Line for MasterCard and Visa Stock
Apple is certainly further along in the mobile payments arena, and based on its historical desire to own every aspect of industries in which it operates in, Apple does seem like the more clear cut choice to pursue this market.
Regardless, the point is that both technology giants have the option, and while it may be just one or the other, the mere entrance of either into the space presents an equally disruptive and risky problem for MasterCard and Visa, a problem that likely means the rapid gains of Visa stock and MasterCard stock are soon to vanish.
As of this writing, Brian Nichols was long AAPL.
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