Up until this point, both MasterCard and Visa were driven by a worldwide surge in payments, and benefited tremendously from their duopoly in the payment processing arena.
As a result, analysts continue to maintain bullish outlooks for both stocks, and many investors continue to buy MasterCard and Visa stock without foreseeing any potential threats that could derail either company’s tremendous run.
You know where this is leading to — there is one looming, almost inevitable threat that could be catastrophic to both Visa and MasterCard stock.
Understanding the Payment Processing Business
When it comes to payment processing, MasterCard and Visa have built a network of card issuing banks, payment acceptors (merchants) and card holders (consumers) that is unprecedented and unchallenged. While American Express (AXP) also has a large network, it is more of a members only company, and lacks card issuer (bank) support. In other words, MasterCard and Visa have had no legitimate threats because of their respective dominance … until now.
With that said, the three areas where V and MA thrive are also three areas that a competitor would have to penetrate in order to compete against either company.
First, banks are needed to issue the cards. Second, merchants are needed to accept the cards. Third, consumers must use the cards so that merchants will carry and banks will issue. It’s a difficult process for companies that want to enter the space, and while no other company has been able over the last 10 years, MA and V now face at least half-a-dozen potential competitors who could become legitimate threats.
New Threats Emerge
The payments landscape has changed greatly over the last year, with smartphones acting as the new credit/debit card. Apple (AAPL) Pay, Alphabet’s (GOOG, GOOGL) Android Pay, Samsung (SSNLF) Pay, Square (SQ) and PayPal (PYPL) are just a few of the companies that allow consumers to make payments in-store or over the Web using their smartphones.
This is a space that is getting crowded fast, which is one of many reasons that MasterCard and Visa’s processing business will be targeted.
All of these companies already have the necessary consumer and merchant support in place, so the next step is getting banks on board rather than allowing users to store and use their Visa and MasterCard. If just one of these companies elect to go this route and compete in the payment processing space, it could be problematic for MasterCard and Visa, but if several do, then MasterCard and Visa stock could be in for a very long 2016.
Currently, PayPal is the largest in the group, having 173 million active users with nearly $70 billion in payment transactions across its platform during its last quarter. Pay with Amazon (AMZN) is much smaller, but transactions are growing at a 180% clip this year. With nearly 300 million active customers, Amazon’s payment business could get very large.
Beyond PayPal and Amazon, Android Pay already has over one million retail locations that accept payments from Android smartphone phones, and Apple Pay is accepted at 1.5 million U.S. retail locations. Further, the Wall Street Journal reported in November that Apple had already been in talks with mega-banks JPMorgan (JPM) and Wells Fargo (WFC) regarding new services with Apple Pay.
Thus, Apple is already familiarizing itself with banks, and my guess is that many banks would be willing to give their customers a choice between one or multiple card issuers if those options were available.
Currently, banks have to choose between MasterCard and Visa, but if Apple, PayPal, Amazon, Square and Android were to give bank customers a choice, that would seem like good business for the bank.
MasterCard and Visa Stock to Fall
Nevertheless, we are getting close to the day when one, or several, of these large point-of-sale service providers make the call to banks, facilitating direct competition with MasterCard and Visa. The incentive to do so couldn’t be more obvious — Visa generated net income over $6.3 billion during the last 12 months with an operating margin of 65%!
Those are profits that sure beat the 15 cents per $100 that Apple currently receives for transactions on Apple Pay, or the fees that PayPal has to charge its users, or the no money that Android Pay receives from processors.
All things considered, MA and V are sitting on a highly profitable business model with little competition, while all of these technology juggernauts are scrambling to find ways for monetizing their POS services.
Up until this point, MasterCard and Visa stock owners have not had to worry about new competition, but with both trading over 23 times next year’s earnings, there could be significant downside if, in fact, one or several of these technology giants enter the payment processing space.
In my opinion, that scenario is far more likely than not,
As of this writing, Brian Nichols was long AAPL.