Credit cards are what most people see in their heads when they hear the name Mastercard Inc. (MA). Even though the Mastercard brand is recognized as one of the leading labels for debit, credit, and prepaid cards around the globe, Mastercard does not consider itself a credit card corporation in the traditional sense. According to the business's annual report for the year 2020, Mastercard is more accurately described as a "technology corporation in the global payments sector."
As a result, Mastercard can link a wide variety of parties involved in different sorts of transactions, including customers, retailers, financial institutions, and even governments. The vast bulk of Mastercard's earnings come from the fees paid by its clients, who are often businesses rather than ordinary individuals.
Rather than consumers, financial organizations like banks are Mastercard's clients. These institutions must charge a charge to issue credit and debit cards with the Mastercard logo. As we'll see in the next section, there are several guises that these charges might assume.
Before its first public offering in the early 2000s, Mastercard, much like its long-standing rival Visa Inc. (V), had been a privately owned company and experienced success for many decades. Mastercard was first developed as a reaction to the company that would later become Visa.
In the late 1950s, Bank of America Corporation (BAC) was the first financial institution to issue a bank card. In 1966, a group of regional credit card issuers banded together to create Mastercard. At that time, it was referred to as Interbank, a reflection of the new card's connection across various banks and other financial organizations.
Mastercard's Business Model
Transactions may be made using more than 150 different currencies in more than 210 different countries and territories thanks to Mastercard. Even though the company does not hold a monopoly on the payments industry — not only because other businesses operate in a similar manner, such as Visa, but also because there is an increasing number of new companies that offer payment services — it is all the same, extremely successful in every region of the world. The Mastercard brand and the allure it carries are responsible for a significant portion of this business's success.
The following five parties are involved in a typical Mastercard transaction: A customer or account holder, with their issuer bank, as well as a merchant and their acquirer bank, are all participants in the event in addition to the payments processor itself. When purchasing from a retailer, a Mastercard-branded card is the payment method for most account holders. When the transaction is successfully approved, the issuing bank is responsible for paying the acquiring bank the whole cost of the transaction, less an interchange charge also referred to as a swipe fee.
The account owner is then billed for the whole cost of the transaction, less any discounts offered by the retailer. When it comes to offering value to retailers that accept Mastercard payment solutions, interchange fees play a crucial role. These fees do not contribute to Mastercard's overall income in any way. The acquirer bank can recover some of its expenses thanks to the merchant discount charge.
How Does Mastercard Make Money?
Where exactly does Mastercard make its money inside this framework? Mastercard levies a fee determined by the total gross dollar volume of cardholder transactions on the financial institutions authorized to issue cards. In addition, the business makes money off of costs associated with switching transactions. These fees include authorization, clearing, settlement, and certain local and international transactions.
Mastercard's domestic and international fee business
When you use your Mastercard to make a transaction, you effectively take out a loan from the financial institution whose name appears on the front of your card. There are dozens upon thousands of banks just like this. Mastercard generates revenue by charging its customers to utilize its lightning-fast, multi-noded, and instant payment network.
Mastercard's income statement distinguishes between intranational revenue (fees collected from financial institutions in the same country as the transaction for the cardholder and the merchant) and cross-border volume fees. Out of Mastercard's 2020 fiscal year gross revenue of $23.6 billion, $6.7 billion came from the first category, technically known as domestic assessments. This equates to $3.5 billion in fees from overseas traffic.
Mastercard's transaction processing fee business
The third primary revenue stream for Mastercard is transaction processing fees, which generated sales of $8.7 billion in the year 2020. These costs are assessed by the financial institutions associated with the merchants. These expenses may be broken down into connection and transaction switching fees. Connectivity fees are taken from the money users of the Mastercard network charge to access the network; these users also get a portion of each transaction.
In addition, Mastercard levies a switching charge each time the issuer is granted permission for authorization; the transaction information is reconciled between the banks of the two parties, and each time the funds are settled. Once again, these nicks are nanoscopic in size, yet they add up. Mastercard's transaction processing fees are rising at an even quicker rate from one year to the next than the rate of increase for domestic assessments.
