On late Thursday, credit card giant MasterCard Inc. announced its fourth quarter profits increased impressively as its revenue is up by close to 10% from what it was this time last year. It says it’s because more folks are using their credit cards. Others think there just might be something even more noble at work.
What’s interesting is that CEO Ajay Banga mentioned the continued worsening economic conditions. He just might be the only one in the sector that’s owning up to something everyone else already knows: the economic recovery is brutally slow, if it’s even happening at all. He’s hopeful, though, and hopes consumers continue spending.
It’s true, though – consumers aren’t using their cash as much now as they did a year ago. Even if they did slow their spending down during the same period as last year, they are either too afraid to use cash or they’re more confident that the economy will improve this year. Banga admitted concern that spending might slow again. Twelve hours later, news broke that unemployment has once again began its upward climb. This, coupled with a shrinking GDP, can’t possibly bode well in the financial markets.
The fiscal policy discussions and circumstances have not been completely resolved. They could affect consumer confidence further, and that would impact spending for at least the first half of the year.
Shares At Record High
Interestingly enough, when news broke, MasterCard shares rose 3.8%, which put it at an all time high of $535.35. By the time the bell rank, it had fell to $514 a share. Still, the card company’s profits increased to an impressive $605 million. Then there are those pesky litigation that saw the company lose close to $500 million last year; the revenue is still up, though.
Remember, too, that MasterCard doesn’t actually lend money or even determine who receives one of its cards. That’s left to the banks and other credit card companies to determine. They simply provide the vehicle that allows consumers to use credit versus cash. Its transactions are maintained by MasterCard and the number it processed increased by 20% to more than 9.2 billion last quarter. The surge in the third quarter is chalked up to the new debit card rules.
So what lies ahead, both for credit card companies and the consumers who use them? It could be a bumpy ride. Too many shortcomings in the financial sector, and to some degree, the politics of it all, could mean a difficult year. Retail sales are down, travel purchases are down and now that the holidays are over and the numbers have been crunched, it’s clear that retail saw a few hard knocks during the fourth quarter.
Then there’s the technology. All of the credit card networks have focused on the technological advances and new offerings in digital wallets. These work with smartphones and are designed to simplify shopping and payments. Google, Isis and others are working with the card companies for their share of the profits in the digital wallet area, which is now accounting for 15% of all transactions.
The credit card company is also known for its charitable efforts. Last year, MasterCard presented a $4 million donation to Stand Up To Cancer during the first game of the 2012 World Series. During that successful effort, MasterCard Group Executive of U.S. Market Development Craig Vosburg said,
We continue to look for ways to engage our cardholders through their everyday actions and prove that when you’re fighting for a good cause every penny counts.
He went on to say that:
Dine and Be Generous is a great example of how we’re working to build programs that help our cardholders, issuers and merchant partners come together to stand up for a cause that is personal for so many of us.
It will likely run its “Dine and Be Generous” campaign again this year.
Not only that but there are several new smartphone apps that are in the works, too. Each is designed to provide added value and services to MasterCard consumers.
Leaders and Banga
And the company’s leaders are rather impressive, as well. Fortune magazine named MasterCard CEO Ajay Banga in its annual Fortune 500 list. He was the only credit card CEO who made the cut and he came in at number 8. The honors graduate from Delhi University is said to run a tight ship with the goal of putting the credit card network on top. He is also said to be investing heavily in those newer services that will compete with the likes of Visa and Discover.
Further, much attention in the new year by Banga and the company’s developers will target emerging markets where paper money still dominates and where bank accounts are not often part of a consumer’s financial arsenal. The goal is to elevate the prepaid offerings so that MasterCard can take the reins, so to speak. The goal, of course, is to grow the company’s share of electronic transactions on a global market, which is now hovering at around 15%, according to figures by both MasterCard and Visa.
Most recently, it’s made deals in Africa with an agreement with Equity Bank in Kenya. It’s expected 5 million debit and prepaid cards will saturate the region this year. It’s one of the biggest deals in Africa.
Politics and Finances
Then there are the new rules associated with Dodd Frank. One specific mandate is that banks must include multiple processing networks on the debit cards they issue. At one time, the predominant issuer was Visa; now, though, MasterCard is part of that game plan and as a result, there’s been more volume added to the Visa competitor. Last year, MasterCard was able to sway major retailer Bass Pro Shops to convert its credit card portfolio from Visa. There have been several similar deals, which is really improving its growth. In fact, the U.S. credit card purchase volume for the third quarter 2012 increased by 4.1%
If there are any immediate problems on the horizon, it’s concerns investors have regarding rebate and incentive payments. All of the credit card companies participate in these programs and they usually require certain volume thresholds. For MasterCard, analysts believe the recent wins could result in even higher profits. That said, these types of deals are often unpredictable. It’s a risk for any financial company. That, coupled with the global economy, which historically has been a challenging dynamic for payment processors, is still responsible for about half of the credit card company’s business. It’s important to keep those opportunities open, as well.
Banga has proven to be a strong choice for MasterCard. The eccentric leader is said to love the New York Mets, Lady Gaga and Elvis. There’s no denying that his first two years with the company has resulted in impressive growth – even in a tough economy. In 2010 alone, revenues increased by 60%. Indeed, Banga is MasterCard’s golden boy with a brilliant financial mind and the numbers released yesterday only further cement those sentiments.
Are you loyal to MasterCard, Visa or another card network? Do the charitable efforts, impressive leaders and technology leaders play any role in how you decide which financial products to use? Let us know your thoughts and whether you think MasterCard is poised to take the lead in the credit card wars.