MasterCard-PayPal Partnership Brings Solidarity to Legacy Players
- By Sangara Narayanan
Visa (NYSE:V), Mastercard (MA), American Express (AXP) and Paypal (PYPL) are the four companies that control our payments world.
In fact, they have so much control that without them - especially the first two - the bulk of payments processed around the world will come to a standstill. Although Visa has established a clear and significant lead over MasterCard in the last 10 years, the latter has refused to bow down to the "No. 2 syndrome" and has kept moving up.
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The intrinsic value of V
MasterCard's revenue has growth at 12% CAGR in the last five years while earnings per share grew by 19%. Though MasterCard's 2015 operating margin was a full 12% less than Visa's, the company has steadily improved the number in the last five years, moving from 50% in 2010 to 54% in 2015.
There could have been a major threat coming from PayPal in recent times, but both card companies signed deals with it to not push customers to directly link their bank accounts to their PayPal IDs. PayPal is possibly the only company to grow to such a size in the payments world without Visa or MasterCard being able to disrupt its model in some way. Even though rumors flew hard and fast about PayPal being acquired by one of the legacy payment solution providers and even Google at one point, PayPal CEO Dan Schulman made it amply clear earlier this year that the company was "not up for sale despite rumors that it is."
Ironically, PayPal itself faced a threat from tech companies jumping into digital wallets so it had to be willing either to fight at two ends or make a deal at one end and strengthen itself. That's where the partnerships came in, but now it also extends to their combined competition with banks doing real-time payments using their own apps.
PayPal's partnership announcement with MasterCard last week, and a new feature for Visa's customers, both seek to leverage the power of real-time payments.
"MasterCard will further enable PayPal's Braintree to offer Masterpass, a one-click online checkout tool, and enable Venmo users to make instant transfers via MasterCard Send, rather than waiting up to three days to get money into their bank accounts. That in particular is key to competing with banks' real-time payments apps.
"PayPal also announced Tuesday that Visa Checkout, Visa's version of one-click, will be available to stores that use Braintree to create online shopping carts." - Wall Street Journal
But the partnership seems to extend even further. MasterCard will now be offered within PayPal Wallet to allow customers to make contactless payments in more than 5 million merchant establishments. Moreover, individuals and small businesses will be able to instantly withdraw their PayPal funds directly into their MasterCard accounts. In turn, the card companies will not levy the digital wallet operator fee on PayPal while also giving it some incentives based on the volume of transactions.
By mirroring Visa's deal with PayPal, MasterCard has assured itself of a relatively threat-free future where any new entrant to the digital wallets space will need to support both Visa and MasterCard payments if they want to offer broad support to their users.
At this point, it is becoming increasingly difficult to pick one company in which to invest over the other. What it now boils down to is who is more efficient at managing operations, increasing cash flows and holding on to margins. Either way this is a duopoly that cannot be neatly separated, but even with Visa in the lead MasterCard looks to be a little more attractive from a valuation standpoint.
Disclosure: I have no positions in any of the stocks mentioned above and no intention to initiate a position in the next 72 hours.
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This article first appeared on GuruFocus.
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The intrinsic value of V