Today, 85% of all retail transactions are made with cash or check, but is that about to change? It’s beginning to look that way, as consumers start to leave their cash in the bank and take it out using their credit and debit cards.
In 2010, 48% of all retail transactions were done with cards in the U.S., and by 2013, that number was up to 50%. The Nilson Report (a credit/debit card statistics site) estimates that number could increase to 59% by 2015. A Cornell study points out that as the economy gets worse, like it did several years ago, consumers tend to retreat back to cash, but as the economy gets better, consumers start using their cards more often.
Not the master
Mastercard Inc (NYSE:MA) controlled 33.5% of the global credit card business in 2011 (according to Nilson) and 18.9% of the global debit card business. This pales in comparison to Visa Inc (NYSE:V)’s 50.1% share of the credit card market and a whooping 76.9% of the global debit card market.
This could be a good sign for Mastercard Inc (NYSE:MA) because it means they have room to grow. In 2006, MasterCard issued out 810 million payment cards; that number increased to 1.06 billion in 2011 and is expected to reach 1.42 billion in 2016. The more cards out in the world means the more transactions Mastercard Inc (NYSE:MA) will have to process, which will boost the bottom line.
The purchase volume in the U.S. is up big over the past five years. Credit card volume is up 17%, debit cards are up 61%, and prepaid cards are up a whooping 211%. The majority of the growth is coming from the debit card market as it catches up to the credit card market.
In 2002, volume in the U.S. credit card market was $1.2 trillion, versus $472 billion for the debit card market. By 2012, that gap was rapidly closing as the credit card market reached $2.2 trillion and the debit market was $1.8 trillion.
This explosive growth is why Visa Inc (NYSE:V) stock has shot upwards 170% since its 2008 IPO while the S&P 500 is up 28%. MasterCard is up over 1,270% since its 2006 IPO, while the S&P 500 is up 31%.
Visa Inc (NYSE:V) issued out 1.71 billion payment cards in 2006, which went up to 2.35 billion in 2011 and is expected to reach 3.05 billion in 2016. Both Visa Inc (NYSE:V) and Mastercard Inc (NYSE:MA) see higher levels of growth if the volume of transactions increases and the companies are issuing more cards.
One of the big future growth runways for Mastercard Inc (NYSE:MA) and Visa will be countries like India as they modernize. As of right now, 99% of India’s retail purchases are done with cash, so the growth potential is huge. As mentioned earlier, 85% of all retail purchases are done with cash or check — a number that will decrease over time as more parts of the world modernize.
From 2011 to 2016, Nilson expects purchase transaction growth of 105% in Asia, 99% in the Middle East/Africa, and 97% in Latin America. For the developed markets of the U.S., Canada, and Europe, they see five-year growth of 44%, 33%, and 51%, respectively.
As MasterCard and Visa Inc (NYSE:V) push into new markets, and developed markets see their economies improve (fueling increased card usage), their growth rates will keep going up. This is why MasterCard and Visa are both expected to grow their EPS by 18%-19% over the next few years.
Higher volume transactions coupled with more cards in circulation could allow these two companies to easily beat those estimates. With emerging markets like Mexico and Brazil modernizing and consumers showing strong growth in both these countries, volume transactions will rise. More transactions means more fees that these companies rake in, and happier shareholders.