Financial Services

Mastercard’s revenue increased 23%, thanks to increased proccessing fees

Mastercard’s CEO reported their quarterly revenue had increased 23%. “Michael Miebach — Chief Executive Officer: Thank you, Warren. Good morning, everyone. Let’s get right into it. So the headline is that consumer spending remained resilient, and cross-border travel continues to recover. With this backdrop, we delivered strong revenue and earnings growth through the focused execution of our strategy. Third quarter net revenues were up 23% and adjusted operating income up 27%, both versus a year ago on a non-GAAP currency-neutral basis, excluding special items. Now the macroeconomic and geopolitical environment remains uncertain. Inflationary pressures have remained elevated and central banks are continuing to take aggressive steps to bring inflation in line.” (Mastercard Q3 Earnings Call, 10/27/2022)

Mastercard told analysts transaction processing fees were up 22% while transactions only grew 9%, and attributed the difference in part to “pricing.”“Sachin Mehra — Chief Financial Officer: Transaction processing fees were up 22%, while switched transactions grew 9%. The 13-ppt difference is primarily due to favorable mix, FX-related revenues, and pricing. Other revenues were up 22%, including a 2-ppt contribution from acquisitions. The remaining growth was driven primarily by our cyber and intelligence and data and services solutions.” (Mastercard Q3 Earnings Call, 10/27/2022)

Mastercard’s CFO admitted “ our transaction processing fees are growing faster than the underlying driver, one of which is the mix change.” “Jamie Friedman — Susquehanna International Group — Analyst: Hi. Sachin, transaction processing fees increased 15%, but switched transactions increased 9%. I know you called out in your prepared remarks mix changes. I was just wondering if you could elaborate on that. Sachin Mehra — Chief Financial Officer: Sure. So there are a few things going on right there where our transaction processing fees are growing faster than the underlying driver, one of which is the mix change. And really, remember, when we make cross-border revenues, we make cross-border revenues on a basis-point basis, as well as on a sales per transaction. And the component, which is on basis points since and cross-border volume fees and there’s some component of cross-border related sales per transaction that sits in terms of the number of transactions which we process with the same transaction processing fees, which is where the mix effect comes through.” (Mastercard Q3 Earnings Call, 10/27/2022)

Mastercard use its profit to spend over $2 billion on stock buybacks in the past quarter

Mastercard spent over $2 billion on stock buybacks in the past quarter.“Sachin Mehra — Chief Financial Officer: Operating expenses increased 17%, including a 3-ppt increase from acquisitions. Operating income was up 27%, which includes 1-ppt decrease related to acquisitions. EPS was up 22% year over year to $2.68, which includes a $0.06 contribution from share repurchases. During the quarter, we repurchased $1.6 billion worth of stock and an additional $505 million through October 24, 2022.” (Mastercard Q3 Earnings Call, 10/27/2022)

Mastercard’s CFO admitted the company benefitted from inflation increasing prices

Mastercard’s CFO admitted that the company benefits from inflation: “the reality is you’re very correct about the fact that we charge our basis points in cents per transaction. Our basis points are of nominal value of spend and that reflects the impact of inflation in there.” “Sachin Mehra — Chief Financial Officer: Yeah, Darrin, I’ll take that question. I guess to your point around inflation. Look, I mean, persistent in place for long periods of time, which causes for a shift in share of wallet away from carded categories into non-product categories would be the one area I would actually flag as a potential headwind as it relates to our business model. But putting that issue aside, the reality is you’re very correct about the fact that we charge our basis points in cents per transaction. Our basis points are of nominal value of spend and that reflects the impact of inflation in there. So the reality is, as we’ve said in the past, modest inflation and inflation in carded categories, we’re generally — we kind of — our business model accounts for that because depending on if it’s carded, it doesn’t matter, like Michael said, whether it’s happening in travel or it’s happening in food and building, those are carded categories, and you kind of get the benefit of that come through. Look, I mean, as it relates to your question on expenses, we’ve always remained disciplined on expenses. The thing which we always keep in mind is a few things.” (Mastercard Q3 Earnings Call, 10/27/2022)

A study found that Visa and Mastercard had raised fees by over $1 billion since 2021. “The changes coming in April 2022 are quite complicated, but only affect consumer credit card transactions within the programs outlined below. While these are the largest changes coming, it is not an exhaustive list, and there are other smaller changes coming as well. CMSPI estimates that the total impact of these changes are $475 million in annual increases. Bringing the whole picture together, $475 million from Visa and Mastercard is added to the changes that went into effect last year from Visa, which CMSPI estimated to be worth $698 million dollars, and a grand total of $1.17 billion in increased fees for merchants annually.” (CSMPI, 2/23/2022)

Mastercard announced it was doubling its “Digital Enablement Fee” and adding a minimum charge, increasing costs for every online transaction. “Along with the interchange changes, Mastercard has also announced its intention to increase the Digital Enablement fee, which applies to all online spend through the network. Currently charged at 0.01% on all sale transactions, Mastercard is firstly changing the fee to occur on all authorizations instead, meaning this fee will occasionally be charged on a transaction where no final sale is made. For example, this fee will still apply even if a transaction is declined, or if a consumer cancels a purchase before the good is shipped. They are also doubling the fee from 0.01% to 0.02% and implementing a minimum charge of $0.02 per transaction. While the fee doubling is already a substantial change, the minimum charge will apply for all transactions under $100 made online, meaning that the smaller the transaction, the larger the charge. For example, a $20 t-shirt ordered online will see a 10x increase in this fee, and a $5 hamburger ordered through an app will see a 40x increase, making smaller ticket merchants extremely vulnerable to the change.” (CSMPI, 2/23/2022)

Mastercard told analysts that it was seeing higher ticket prices and no spending slowdown

Mastercard’s CEO said the company had not seen any changing consumer behavior due to inflation, but “there has been a 1% increase in our switched volume that’s related to gas price increases.” “Michael Miebach — Chief Executive Officer: Sanjay, thanks for your question. So on the inflation side, as Sachin mentioned earlier, we have not seen anything yet in terms of changing consumer spending behaviors. But what we are seeing is in terms of the impact on the vertical mix and so forth, there has been a 1% increase in our switched volume that’s related to gas price increases. We’re seeing some shifts in the airline. That is again under inflationary pressure from a ticket prices perspective. So we have to see where it goes going forward. I mean fundamentally, where I stand on this is the push by consumers into the digital space. They learn these habits, they’re online. All that will continue. And we’ll see where the underlying prices go. (Mastercard Q1 2022 Earnings Call, 4/28/2022)

Mastercard’s CEO stressed the company had not seen reduced spending from inflation: ‘Could there be a crowding-out effect of rents or gas prices… that’s not something we can tell yet.” “Michael Miebach — Chief Executive Officer: All that will continue. And we’ll see where the underlying prices go. In the end, it comes back to what we’ve been saying all along. There are macro considerations in each country.That has to be considered here. One’s monetary fiscal policy and then there are the micro aspects of the different verticals, which ones of those are carded, which ones we would see, which ones we wouldn’t see. Could there be a crowding-out effect on rents or gas prices, particularly in Europe? Yes, there might be, but that’s not something we can tell yet.” (Mastercard Q1 2022 Earnings Call, 4/28/2022)

Mastercard’s CFO: “At this stage, we have not seen any significant impact of these in consumer spending.” “Sachin Mehra — Chief Financial Officer: As Michael mentioned, consumer spending remains robust, particularly as economies open further and pandemic-related restrictions are lifted. Having said this, we are monitoring a number of factors, including inflationary pressures, supply chain constraints, geopolitical uncertainties, and COVID infection rates. At this stage, we have not seen any significant impact of these on consumer spending. Cross-border travel is recovering rapidly as border restrictions ease. (Mastercard Q1 2022 Earnings Call, 4/28/2022)

Mastercard’s CFO told analysts the company was seeing increased ticket sizes, with volumes and transactions well over 2019. “Sachin Mehra — Chief Financial Officer: Yes, Dave, again, I want to make sure I got the question, but what we’ve observed — if you look at our trends for how switched volume and switched transactions are trending, you’ll see effectively that the improvement quarter over quarter in switched volumes from 131% of 2019 to 136% of 2019 is a 5-point improvement, compared to switched transactions, which have improved from 131 to 132. That should signal to you that there is a higher ticket size, which is happening, which you would expect because as people get out and travel more, they do so, that’s higher ticket in general. They do it on credit products, which are higher ticket size. As also there is — as e-commerce happens, that happens to be higher. So you’ve seen that come through in the Delta on a sequential basis.” (Mastercard Q4 2021 Earnings Call, 2/7/2022)

Mastercard also reported higher revenue as inflationary trends increased transaction size and volume

Mastercard reported that its revenue had increased nearly 30% in Q1 2022, thanks to “stronger than expected…domestic volumes.” “Net revenue was up 27%, reflecting the continued execution of our strategy and the ongoing recovery in spending. Acquisitions contributed 2 ppt to this group. These revenues were above expectation, primarily due to stronger-than-expected cross-border and domestic volumes, favorable cross-border mix, and FX-related revenues. Operating expenses increased 13%, including a 6 ppt increase from acquisitions. Operating income was up 40%, which includes a 1 ppt decrease related to acquisitions. Net income was up 61%, which includes a 20 ppt benefit due to the recognition of a one-time discrete tax benefit related to a U.S. (Mastercard Q1 2022 Earnings Call, 4/28/2022)

Visa and Mastercard used their market control to increase fees on merchants who pass them on to consumers

March 2022: Visa and Mastercard planned to increase previously delayed fees on merchants that accept credit cards. “Visa Inc. and Mastercard Inc. are preparing to increase the fees that many large merchants pay when they accept consumers’ credit cards. The fee increases—delayed during the past two years because of the pandemic—are scheduled to kick in next month, according to people familiar with the matter and a document viewed by The Wall Street Journal.” (Wall Street Journal, 3/8/2022)

The Visa and Mastercard fee increases targeted online purchases, in-store retail, and supermarkets.“The Visa and Mastercard fee increases will apply to many online consumer credit-card purchases, according to the document and people familiar with the matter. A Visa spokesman said merchants can avoid the higher fees if they provide certain transaction data and use its token service that masks card numbers. Mastercard will also increase fees on more than a dozen in-store purchase categories, according to the document and people familiar with the matter. Small and midsize supermarkets will pay higher interchange fees on most rewards cards. In-store general retail fees will also rise.” (Wall Street Journal, 3/8/2022)

The bulk of retailers will see increased costs from the fee increases. Only an extremely narrow segment of merchants with a small overall transaction volume might benefit from the new fee structure, critics say. The bulk of retailers will see increased costs, which will trickle down to consumers already struggling to make ends meet amid the highest inflation in 40 years. (USA Today, 4/25/2022)

Visa and Mastercard control more than 70% of the credit card payment market, collecting a percentage of the total spent in transactions. “Processing fees, or ‘swipe’ fees, on credit cards are likely rising for millions of businesses, but whether this is a classic case of corporate greed at the expense of consumers depends on who you ask. Visa and Mastercard, the top two payment networks in the U.S. with more than 70% of the market, recently changed their fee structures for merchants who accept their credit cards for payments. The fees, charged every time a customer swipes a credit card, are typically a percentage of the total spent in the transaction.” (USA Today, 4/25/2022)

In 2021, Visa and Mastercard collected $55.4 billion in merchant fees, over double the number from 2012.“U.S. merchants paid card issuers an estimated $55.4 billion in Visa and Mastercard credit-card interchange fees in 2021, more than double the amount in 2012, according to the Nilson Report. They pass along at least some of these costs to the consumer in the form of higher prices. More merchants have started charging consumers extra when they pay with credit cards.” (Wall Street Journal, 3/8/2022)

Total processing fees collected by Visa and Mastercard rose from $27.7 billion in 2011 to $77.48 billion in 2021. ”As more commerce moved online during the pandemic, so did fraud,” it said. To see how much is at stake, total processing fees for all types and brands of cards were $137.8 billion in 2021, according to the Nilson Report, which provides news and analysis of the global card and mobile payment industry. That compares with $110.3 billion in 2020 and $65.1 billion in 2011. For Visa and Mastercard credit cards alone, 2021 was $77.48 billion, 2020 was $61.63 billion and 2011 was $27.7 billion.” (USA Today, 4/25/2022)

Democrats in Congress, led by Senator Durbin, have attacked Visa and Mastercard for fee hikes

Senator Richard Durbin accused Visa and Mastercard of profiting off inflation and held a hearing critical of interchange fee hikes. “In response to soaring inflation, Democrats have accused companies of raising prices disproportionately to increase profits amid demand and supply-chain bottlenecks. Visa Inc. and Mastercard Inc. came under fire at a Senate Judiciary Committee hearing for raising the transaction fees charged to merchants accepting their credit cards. Senate Judiciary Chairman and Majority Whip Richard J. Durbin, D-Ill., said the ‘interchange fees’ face too little competitive pressure and that increases are hitting consumers and businesses when they can least afford it. ‘We’re facing inflation. And the last thing the American people need is a higher swipe fee. I wish both companies had resisted the urge to make some money when they can,’ he told representatives from Visa and Mastercard.” (Roll Call, 5/4/2022)

Senator Durbin cited comments by Visa’s CFO that inflation was a net positive for the company. “Interchange fees are typically a percentage of the transaction cost, usually 1 to 3 percent. As prices go up with inflation, swipe fees do too, Durbin said, pointing to reports that Visa Chief Financial Officer Vasant Prabhu said on an earnings call that inflation had been a net positive for the company. ‘So let’s put to rest the theory that this has nothing to do with inflation,’ Durbin said.” (Roll Call, 5/4/2022)

Credit Card interest rates are reaching record highs at the same time that credit balances are surging

Credit card balances rose by $52 billion in the fourth quarter of 2021, the largest quarterly increase in 22 years of recorded data. “Overall, credit card balances rose by $52 billion in the fourth quarter of 2021, notching the largest quarterly increase in the 22-year history of the data, according to the most recent report from the Federal Reserve Bank of New York. Now, total card debt is on track to surpass pre-pandemic levels and hit an all-time record as soon as this summer, according to Ted Rossman, a senior industry analyst at “ (CNBC, 4/27/2022)

Most credit cards have variable rates with a direct connection to the Fed’s benchmark, so APRs will rise as the Fed raises interest rates. “At the same time, the Federal Reserve has committed to raising interest rates to tame inflation, which is now running at its fastest pace in more than 40 years. Since most credit cards have a variable rate, there’s a direct connection to the Fed’s benchmark. As the federal funds rate rises, the prime rate does, as well, and credit card rates follow suit. Cardholders see the impact within a billing cycle or two.” (CNBC, 4/27/2022)

A 50 point hike by the Fed will cost consumers an additional $3.3 billion on interest alone. “If the Fed announces a 50 basis point hike in May, as expected, consumers with credit card debt will spend an additional $3.3 billion on interest this year alone, according to a new analysis by WalletHub. The average consumer has a credit card balance of $5,525, according to Experian, and pays an annual percentage rate of roughly 16.38%, which is cheap by historic standards but significantly higher than nearly every other consumer loan. (CNBC, 4/27/2022)

Analysts predicted APRs as high as 18.5% by the end of 2022.“With several rate hikes on the horizon, credit card rates could be as high as 18.5% by the end of the year, another all-time record, Rossman said. If the APR on your credit card rises to 18.5% from 16.38% in 2022, it will cost you another $885 in interest charges over the lifetime of the loan, assuming you made minimum payments on a $5,525 balance, he calculated.” (CNBC, 4/27/2022)

Most credit cards have fixed rates until the 1980s

Until the mid-1980s, most credit cards had fixed rates that were “immune” to prime lending rates controlled by the Federal Reserve.“Debt outstanding from all cards was $82 billion in 1980, compared to $287 billion last year. The variable-rate card eclipsed the fixed-rate card. ‘The vast majority of credit cards through the mid-1980s were fixed rates, which were immune to fluctuations in the prime lending rates or cost of funds,’ explained Robert McKinley, president of RAM Research in Frederick, which tracks the credit card industry. ‘We didn’t see variable rates until the mid-1980s, but today about two-thirds of cards are variable.” (Baltimore Sun, 9/2/1994)

The average credit card rate was 17.3% in 1980. “Credit cards have always held the highest loan rates, but they are particularly high right now when compared with other rates. In 1980, the average credit card rate was 17.3 percent, the discount rate charged on loans by the Federal Reserve was 11.5 percent and the prime lending rate was 15 percent. This year, with card rates averaging 17.34 percent, the discount rate is 3.50 percent and the prime rate is 7.75 percent.” (Baltimore Sun, 9/2/1994)