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MasterCard Inc (MA), Visa Inc (V): Three Reasons to Buy This Global Payments Powerhouse

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It´s no secret that plastic is rapidly replacing cash and checks all over the world — a strong secular tailwind that can benefit companies in the debit and credit card business. But the really big opportunity lies in emerging markets, where this still-young trend could generate years of growing demand for this industry. When looking for the best alternatives to capitalize this opportunity, MasterCard Inc (NYSE:MA) seems to enjoy a particularly strong position.

When comparing MasterCard and Visa Inc (NYSE:V) against other players more focused on credit cards, like American Express Company (NYSE:AXP) and Discover Financial Services (NYSE:DFS), investors need to consider that these companies’ business models are quite different.

MasterCard Inc (NYSE:MA) and Visa Inc (NYSE:V) simply charge a fee for every transaction done via their payment networks. All financial risks for their actual credit cards lie with the issuing bank. American and Discover Financial Services (NYSE:DFS), on the other hand, are exposed to the problems that may arise from rising defaults if the economy turns for the worse.

During the 2008-2009 credit crisis, for example, both American and Discover Financial Services (NYSE:DFS) had to take big losses due to this problem, while MasterCard Inc (NYSE:MA) and Visa Inc (NYSE:V) simply faced slowing growth from the decline in economic activity. This has some important risk implications, and it also means that international expansion is much easier for MasterCard and Visa, since they don´t need to be concerned about their customers’ credit quality.

Mastercard Inc (MA)Taking a small percentage of every transaction can add up to a lot of money once you reach a certain scale. And since revenues grow faster than expenses, profit margins tend to increase alongside growing sales. MasterCard Inc (NYSE:MA) produced almost $7.4 billion in revenue for 2012, and boasted big fat operating margins in the area of 54%.

Companies in this business benefit from the network effect: Merchants need to accept cards that bring in customers, and customers prefer to use cards that almost every merchant accepts. The service becomes more valuable as it gains more users, and more users increase the value of the service, creating a self-sustaining cycle of growth and increased competitive strength which can be a powerful growth driver in the long term.

Brand recognition is a key asset in the payments industry, in which trust and reliability are very important attributes. The MasterCard Inc (NYSE:MA) brand is globally recognized thanks to marketing initiatives like the memorable “Priceless” campaign. Consumers around the world know they can purchase almost anything, anywhere, with a MasterCard card.

The company has built a gigantic network connecting merchants and clients all over the world. That enormously valuable asset would be very hard for new entrants with less recognizable brands to replicate. Profitable business opportunities usually attract new competitors, but players like Visa Inc (NYSE:V) and MasterCard Inc (NYSE:MA) have already consolidated themselves in a position of unquestionable competitive strength.

MasterCard has a global market share of around 31%, second only to Visa, which commands 63% of the market. Visa Inc (NYSE:V)´s dominance, however, owes mostly to its higher market share in the US. In international markets, where the best opportunities for growth can be found, MasterCard is outgrowing Visa.

MasterCard Inc (NYSE:MA) reported gross dollar volume of $653 billion in international markets during the last quarter, a 16% increase versus the same quarter in 2012. Visa Inc (NYSE:V) trailed MasterCard with $529 billion in transactions, representing an annual increase of 14% for the same quarter.

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