Strategic Recommendations for MasterCard

Prepared strictly for educational purposes. Copyright of the team mentioned in the deck.

Transcript

1. Foresight and Adjustment: Sustainable Advantage Through Higher Network Volumes Foresight and Adjustment: Sustainable Advantage Through Higher Network Volumes Robert Friedman. Xinyi Liu. David Seibert. Ethan Protas. William Butler. Katherine Kim. Nir Levy. Robert Friedman. Xinyi Liu. David Seibert. Ethan Protas. William Butler. Katherine Kim. Nir Levy.
2. Last month, MasterCard SVP of Mobile identified these issues: - Merchant engagement and terminalization. - Consumer awareness. - Ease of consumer adoption. - Breadth of compelling services. “ ” March 2012, “Commercial Launch of Mobile Payments Using NFC Enabled Phones” James Anderson, SVP Mobile Product Development
3. Our Agenda Industry & Company Analysis Industry Opportunities and MasterCard vulnerabilities [1] Strategic Recommendations Payroll and government services Expansion of contactless payments Mitigating Concerns [2] Q&A [3]
4. Industry Threats to Profitability √ Regulatory Restrictions Interchange fees lower transaction volumes. √ Low Switching Costs - Easy account termination - High of availability of near perfect substitutes: + Debit, credit, and prepaid offerings of other financial institutions, e-commerce √ Imperfect Substitutes - Cash and check - 86% of current transactions √ Concentrated Industry - Consolidations and vertical integration by banks - 4 main competing companies hold 99% of purchase transaction market share WtP - Price - Costs - Industry profitability is directly driven by consumer spending. 86% 14% Paper Payments Electronic Payments
5. Resources & Capabilities Distinctive advantages that are difficult to replicate: √ In-house advisory group. √ Fastest processing. √ Diversified revenue and a global company. √ 2nd largest network. 0 30 60 90 120 MasterCard 2nd Closest Competitor Network Speed [Milliseconds] 150 currencies. 210 countries. Cardholder Merchant Issuer Acquirer MasterCard Open Loop Franchisor Processor Advisor Regulatory risks regarding interchange fees.
6. √ Targeted towards high income consumers. √ Closed loop system >> open loop system. √ Capital intensive operation. √ Going after MasterCard market share. √ Greater control over card distribution: - Higher point of sale discount rates - Better rewards for cardholders American Express COMPETITOR ANALYSIS Key Competitor Advantage: √ Better rewards for high volume consumers. √ Greater control of the network. The most effective closed loop competitor.
7. √ Largest payment processor - 64% of total payments and 50% of card sales by 2012 √ Competitive advantage Weakened by 2004 legislation √ Banks have high switching costs. Visa COMPETITOR ANALYSIS Key Competitor Advantage: √ More members to spread fixed costs among Source: Morningstar
8. Corporate Contracts 1 recommendation Client: - Revenue metric: Differential Pay-Rate - Diverse Operations: Tech, Accounting, Finance, etc. - Benefits from temporary staffing needs during economic uncertainty Issue: Payroll Management - Responsible for contract payrolls - Detracts resources from core operations Solution: Prepaid Payroll Solutions √ Leverage Comdata prepaid capabilities √ Value to KForce: reduce payroll costs Target: Professional Staffing
9. 1 recommendation √ New Revenue Sources + Sensitivity: Ranges from $47M to $1.4B + Revenue determinants: - % of Disbursements via Pre-Paid - Net transaction revenue -> (transaction fees generated less costs) √ Diversified Access to Consumers + Across different industries + Potential marketing synergies Next Targets: Value to Mastercard $0.00$ $20.00$ $40.00$ $60.00$ $80.00$ $100.00$ $120.00$ $140.00$ $160.00$ 0.25%$ 0.50%$ 0.75%$ 1.00%$ 1.25%$ 1.50%$ 1.75%$ MCI$Revenue$($Millions)$ Average$Compounded$Revenue$ MCI$Revenue:$Prepaid$Sensi;vity$ 20%$ 25%$ 30%$ 35%$ 40%$ 45%$ 50%$
10. d Government Contracts 1 recommendation Why? √ Government spending increases during economic downturn √ Profit found in these segments: + Unemployed + Food stamps + Worker’s comp Target: Social Transfer Payments
11. Government Contracts 1 recommendation √ Utilize synergies between in-house advisory practice and MasterCard Labs √ Specifically target state governments responsible for the payment disbursements: + Convenient (specifically tailored software) + Less costly (more expensive to use paper) + Faster (network) Target: Social Transfer Payments How?
12. Revenue Per Business Application: 2 recommendation Unemployment Food Stamps Workers’ Compensation Revenue 0.5% transaction fee $650.71m $272.87m $82.17m Revenue 0.9% transaction fee [average] $1,171.27m $491.17m $147.91m Revenue 1.4% transaction fee $1,821.97m $764.04m $230.08m Revenue 2.5% transaction fee $3,253.53m $1,364.35m $410.85m
13. Contactless Payments Why? - Huge growth in contactless payments. - Build infrastructure for merchants to boost transaction volumes. 0 100 200 300 400 Value of transactions in billions 2011 2015 2014 2013 2 recommendation Contactless Payment Growth:
14. Merchant Engagement & Consumer Awareness Subsidize & Distribute Terminals Issue new Paypass card upgrades to existing card holders. Prioritize specific merchants: √ High volume traffic √ Exhibits benefits to consumers (convenience & time) Develop long term sustainable advantages: √ Exclusive contracts with merchants until 2015. √ Network effects- catch Visa off guard 2 recommendation $200/terminal 200k terminals
15. Profit and initial costs as a function of market share: 2 recommendation Profit 1% market share $5.13m 5% market share $185.63m 10% market share $411.27m Breakeven point is just .886% additional market share.
16. summary Investing in our network via: Executive Proposal by 1. Payroll & Government Services 2. Expansion of Contactless Payments
17. Q&A
18. Samsung GALAXY S II Google Nexus S Sagem COSYPHONE Samsung S5230/S5260 Nokia C7 Samsung SHW-A170K Pantech Sky Vega Racer Motorola MC75A HF Casio Ruggedized IT-800RGC 35 BIackBerry Bold 9900/9930 Nokia Symbian Belle 600/700/701 HTC Ruby/ Amaze Sonim XP3300 Force LG T530/ Ego Casio DT-X8 HTC Incredible Samsung Galaxy Nexus Huawei Sonic Blackberry Curve 9350/60/70 Nokia Oro Acer E320 Liquid Express Nokia 603 Sky Vega LTE Fifth Media Axia A206 Current Capacities: √ Can load their card over-the-air to an embedded secure element √ For transactions less than US $50, contactless tap and go [versus tap and sign]. √ Wallet also supports loading of loyalty credentials and offers. Network volume is limited because merchant terminals must be upgraded these devices are only just coming out: What about Mobile? FAQ
19. 85% 15% Emerging Markets Mature Markets Where new consumers will come from: We could establish and develop networks in emerging markets beyond BRIC nations. Identify locations based on: √ High consumer expenditure √ High disposable income √ Unbanked population √ Large prepaid market √ High mobile penetration What about emerging markets? FAQ
20. MasterCard inControl DataCash Group MasterCard SmartDataL What business units can we leverage? Assets help us increase “share of wallet” Used by 41 governments to manage expenses. Web and device based: financial control, spending, budgets, alerts. eCommerce Gateway. Travelex Prepaid program management with global applications. PayPass Key consumer dependance in New York, Romania, Poland, Singapore, Korea, et al. First mover advantage with out-of-box NFC applications on: FAQ
21. world’s fastest & second largest retail electronic payments network transaction processing fees payment services dollar volume on branded cards transaction volumes in new markets expanded card base price discounts and rewards for customers payment capabilities [ mobile | plastic | paper ] network members willingness to pay - bank price - fixed costs { interest expense Consulting arm is the only major source of variable costs. FAQ How does MC create value?
22. How do Industry forces affect prices? √ Fixed Costs Apply To New Units thanks to Global Expansion: - Increased Rivalry decreases WtP and incentivizes consolidation and forward integration. - High economies of scale: Telecommunication advances enable processors to follow banking customers abroad. √ Imperfect Substitutes face Diminishing Attractiveness: - 86% of global consumption is still in cash. - MasterCard Advantage replaces cash and checks: more convenient and faster purchase. [Retail & Transit Industries.] - eCommerce / new tech present consumers with new applications: lower switching costs. Ease of account termination. - Users are price sensitive with added pressures from economic boom/bust cycles. - But consumers favor debit and prepaid products and use less revolving credit. √ Buyer Power Puts Downward Pressure on Price: - Lowers already low buyer switching costs and limits WtP. - Equal access to distribution. Saturated market means that merchants have high bargaining power. - However: Buyers are not concentrated and do not have a capacity to integrate backwards. WtP - Price - Costs - √ Significant Industry Growth presents opportunities to grow the pie. FAQ