Customers of financial institutions pay volume fees


When most people think of Mastercard, Inc. (MA), they think of credit cards. While it is true that the Mastercard brand is one of the world’s best labels for debit, credit and prepaid cards, Mastercard does not see itself as a credit card company per se. On the contrary, Mastercard is a “technology company in the global payments industry,” according to its 2020 annual report.

As such, Mastercard connects the many different participants in various types of transactions: consumers, merchants, financial institutions, governments, etc. The vast majority of Mastercard’s income comes from fees paid by its customers, who are not ordinary consumers. Rather, Mastercard customers are financial institutions, such as banks, that pay fees to issue credit and debit cards with the Mastercard brand. These fees can take many forms, as we will see below.

Key points to remember

  • Mastercard generates revenue by charging financial institutions that issue Mastercard-branded payment products a fee based on gross dollar business volume.
  • Consumers do not pay the fees they accumulate directly to Mastercard; rather, they are paid to the issuing financial institution.
  • A typical Mastercard transaction involves four other parties: the account holder or consumer, the issuing bank, the merchant, and the merchant’s acquiring bank.

Much like Mastercard’s perennial competitor, Visa Inc. (V), Mastercard enjoyed decades of private success before an initial public offering (IPO) in the early 2000s. Indeed, Mastercard actually started out as a response to what would become Visa. After Bank of America Corp. (BAC) launched a bank card in the late 1950s, a coalition of regional credit card providers came together to launch Mastercard in 1966. card connectivity between different financial institutions. Since then, the company has seen many expansions and rebranding, but has enjoyed consistent popularity with an increasingly global base.

Investors love MasterCard. The credit card operator reported net revenues of $ 15.3 billion in 2020, down 9% from the previous year, largely due to the global pandemic. As of August 28, 2021, Mastercard had a market cap of $ 351.03 billion. Yet despite all the hype from investors, end users also seem happy. The fluidity with which you complete a Mastercard transaction belies an entire network of merchants, financial institutions, and settlement banks, each of whom receives part of a process that only takes a few milliseconds.

Mastercard’s business model

Mastercard facilitates transactions in over 150 currencies in over 210 countries and territories. Although the company does not have a monopoly on the payments industry, not only due to similar operations such as Visa, but also increasingly due to new payment service providers, it is nevertheless enjoying enormous success in the whole world. Much of this success is down to the Mastercard brand and the cachet it holds.

A typical Mastercard transaction involves five parties: In addition to the payment processor itself, the event includes a consumer or account holder and their issuing bank, as well as a merchant and their acquiring bank.

Typically, an account holder uses a Mastercard branded card to make a purchase from a merchant. Once the transaction is authorized, the issuing bank pays the cost of the transaction (less an interchange fee, also known as a “swipe fee”) to the acquiring bank. The account holder is then billed for the cost of the transaction, less a merchant discount. Interchange fees are key to delivering value to merchants who accept Mastercard payment products. Mastercard does not generate income from these fees. The merchant discount fees cover the costs of the acquiring bank.

Although known for its branded credit and debit cards, Mastercard sees itself as a “technology company in the global payments industry”.

How does Mastercard make money?

Where does Mastercard earn money in this system? Mastercard charges financial institutions that issue cards a fee based on the gross dollar volume of account holder activity. The company also earns revenue from switched transaction fees covering authorization, clearing, settlement and some cross-border and domestic transactions.

Mastercard’s national and international fee activities

When you make a purchase with a Mastercard, you borrow the funds from the issuing bank whose name is printed on your card. There are thousands of such banks. Mastercard makes money by charging them to use its multi-node, low-speed payment network.

The biggest distinction in Mastercard’s income statement is between intranational income – fees charged to financial institutions from cardholders and merchants, which are processed in the same country in which a transaction takes place – and volume fees. cross-border. The first category, officially known as “national valuations,” accounted for $ 6.7 billion of Mastercard’s $ 23.6 billion gross revenue for fiscal year 2020. As for cross-border volume fees, they totaled $ 3.5 billion.

Mastercard transaction processing fees

Mastercard’s third major revenue category, called “transaction processing fees,” generated net revenues of $ 8.7 billion in 2020. These fees are charged to merchant financial institutions and fall into two sub-categories: “connectivity” and “transaction switching”. Connectivity fees are charged to users participating in the Mastercard network to use the network and get a discount every step of the way.

Mastercard also collects a transaction transfer fee whenever the issuer receives approval for an authorization, whenever transaction information clears between banks on both parties, and whenever funds are actually settled. Again, these cuts are nanoscopic, but they accumulate. In fact, Mastercard’s transaction processing fees are rising even faster year over year than national ratings.

The four currencies in which Mastercard does the most business are the US dollar, the euro, the Brazilian real and the pound sterling.

Future plans

Mastercard believes that one of its main advantages over emerging payment systems is its ability to be a multi-rail network, covering domestic, cross-border, card and account-to-account transactions. Going forward, the company will continue to develop and strengthen each of these channels. For traditional credit, debit, prepaid and commercial products, the company will continue to offer consumers and financial institutions a greater variety of options, both in terms of the products themselves and of payment plans and systems. .

International Mastercard

The key to Mastercard’s growth is diversification into new markets. In 2020, UK service providers promoting Mastercard’s Pay by Bank service, launched in 2016, included Barclays, HSBC, Yoyo Wallet, Global Payments, Wirecard, Worldpay and Barclaycard, which processes half of all card transactions. UK. Pay by Bank allows UK consumers to purchase goods and services using funds from bank accounts and using mobile banking apps. Ultimately the intention is to make the app universal, rather than just for the UK

Main challenges

Although Mastercard is a dominant player in the global payment services industry, it still faces significant challenges. One of the most important is government regulation: the company has faced numerous antitrust lawsuits throughout its history, and regulations are continually changing in many of the regions in which Mastercard operates. She must remain flexible and vigilant to ensure the prosperity of her business. Particularly considering the company’s international and cross-border activities, this is a crucial part of its continued success.

Mastercard call hold

Mastercard must continue to deliver an attractive and engaging product set to every segment of its transaction ecosystem. Financial institutions should continue to believe that it is in their best interests to issue cards with the Mastercard logo, while merchants should be prevented from charging surcharges on products in order to offset fees. Cardholders should find the whole process simple, efficient and competitive with other payment systems.

Finally, given the intense competition from both established competitors and new technologies and companies, Mastercard must ensure that its offerings are at least on par with the competition, if not superior.


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