Mastercard Inc. MA, the leading payment processing company with network across the globe, is one of the beneficiaries of the announcement made by Pfizer Inc.’s PFE management about a near-successful vaccine (with effectiveness rating of 90%) against COVID-19.
The positive news about the vaccine buoyed widespread optimism that COVID-19 can somewhat be tackled. As a result, shares of the company rallied 12.2% following the update on Monday. Stocks of other companies in the same space, namely American Express Co. AXP, Visa Inc. V and Discover Financial Services also gained from this development.
Mastercard’s earnings remained stressed this year as demand for hotels and airfares took a beating from COVID-19 lockdown orders, which restricted eager travelers to their homes.
Consumers to date avoided travel and spending overseas, thereby limiting transactions that are most lucrative on the firms’ networks. Mastercard earns a fee from every transaction that is carried out on their network. Lack of cross-border payments is especially hurting as those card swipes yielding higher margins are more rewarding.
Cross-border volume dropped 48% in the quarter ended Sep 30, 2020 at Mastercard. The company, however, saw an uptick in domestic (U.S.) business, partly owing to the stimulus and additional unemployment insurance offered to its customers.
The company also benefited from a surge in online shopping as shoppers resorted to contactless interactions.
Though people are taking road trips and spending on holidays, Mastercard is waiting anxiously for the resumption of international travel. A sharp drop in international travel was the key reason for the double-digit (20%) declines in operating profits during the quarter ended Sep 30, 2020. For Mastercard, cross-border businesses usually tend to be more lucrative than its domestic payments. However, this time, due to the continued economic turbulence, border restrictions and delayed payments, cross-border volume was badly hit. In the first nine months of 2020, cross-border volume fees plunged 36% year over year.
Apart from the recovery in cross-border transactions, which is expected to be seen gradually as people gain more confidence in travelling, the company is seeing improving switched transactions (defined as the number of transactions initiated and switched through the company’s network during the period) trends, driven by the global relaxation of restrictions in business operations and social-distancing measures. Notably, in the first nine months, switched transactions were up 2%
Mastercard is likely to see solid growth owing to a rapid swing from cash to digital modes of payment, which is mostly favored by the next-gen consumers. Also, the coronavirus episode prompted the senior citizens to adopt the digital method, given that this is highly hassle free and safe.
Thus, the transition to digital is here to stay. Even after the vaccine becomes part and parcel of our daily lives, some of the changes brought in by the pandemic are expected to be everlasting. T payment system via the digital route is a case in point.
However, till the vaccine achieves success and people gain enough confidence to fly internationally, the company’s cross-border payments will remain weighed on, thereby denting revenues as well as margins.
Year to date, the stock has gained 10.2% compared with the industry’’s growth of 7.3%.
Currently, Mastercard carries a Zacks Rank #4 (Sell).
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