Group Project Visa vs Mastercard

Visa vs. Mastercard

Rymario Armstrong, Chidi Ekebere, Jacob Gonzalez, Laura Hanavan

Department of Business Administration, Park University

MBA615: Managerial Finance

Professor Mitchell Miller

March 6, 2022

Introduction

Executive Summary

Analysis of Visa

Visa Inc is a multinational financial company headquartered in Foster City, California. The company’s primary business includes the facilitation of digital payments via digital and merchant solutions to individuals, commercial businesses, financial institutions, and government entities. Visa’s strengths include their operational framework, partnerships, and cost efficiency. The company operates in more than 70 million businesses and merchant locations and has a large customer base with more than 3.5 billion cards in circulation (Visa Inc SWOT Analysis, 2021). Partnering with companies such as PayPal and Square, Visa has been able to remain competitive and extend their services to millions of individuals and businesses throughout the world. Even with this growth, Visa has continued to operate at an average of a 35 percent efficiency ratio over the last decade. However, a weakness of having such a large business in the financial industry is the resources required in litigation and government oversight. In November 2020, the Department of Justice intervened on the acquisition of Plaid, claiming it would give Visa a monopolistic position in the industry (Visa Inc SWOT Analysis, 2021). The time and money needed to deal with legal proceedings, no matter how large or small, can quickly drain the company of resources.

Given the vast arena of the financial payment industry, Visa has many opportunities that include growth in the consumer market, investment in FinTech, and introduction of new products. While Visa has more than 3.5 billion cards in circulation, there is greater opportunity in the United States for more customers. Visa could also venture into existing or new technology, through the acquisition of grassroots FinTech firms or introducing new payment systems to improve the customer experience. The biggest threat facing Visa is the highly competitive industry.” Visa’s key competitors are Alipay.com, American Express, Discover, JCB, Mastercard, PayPal, and UnionPay, based on factors such as “consumers, technology and innovation, distribution network, service quality and affiliated institutions” (MarketLine, 2021, p. 58). Other threats include the transition from the LIBOR benchmarking or regulatory changes by the European Union. 

Analysis of Mastercard

Mastercard Inc is a multinational financial company operating in Purchase, New York and O’Fallon, Missouri. The company’s primary business includes partnerships with financial institutions that issue Mastercard branded cards to their customer base, including airlines, hotels, and retailers. Mastercard’s strengths include a wide presence in the industry, strong product portfolio, and a safe and secure reputation. With a presence in more than 210 countries, 2.2 billion users, and 36.5 million locations across the world, Mastercard has a presence across the world (Shastri, 2021). Over the years, Mastercard has created a strong product portfolio that can be beneficial for opportunities to expand into new product lines, including consumer credit, consumer debit, prepaid cards, and a commercial product business. Additionally, the company has a reputation of being safe and secure, including the use of a new biometric identity technology. Even with the strengths, Mastercard has a few key weaknesses including operating under a four-party system and extensive legal battles. Many of Mastercard’s competitors run on a three-party system in which there is a direct line of communication between the company, merchant, and user. With Mastercard’s four-party system, they don’t have that direct communication and have less control over buyers and sellers (Shastri, 2021). As with any large corporation, especially in the finance industry, legal issues are sure to ensue. From 2005 to 2019, Mastercard dealt with a class action lawsuit from retailers who claimed they were charged more than they should have for allowing their customers to use their card, ending in a $5.5 billion cash settlement and draining company resources (Surane, 2021).

Between the emerging markets and FinTech, Mastercard has many opportunities for growth and improvement. While Mastercard has a wide reach, there is always opportunity to add more customers in more countries throughout the world. In 2021, Mastercard purchased Ekata Inc, a leading company in digital identity verification solutions, acquired a majority stake in Corporate Services Business of Nets, and a minority stake in Airtel Mobile Commerce (Mastercard, n.d.). These opportunities allowed Mastercard to expand their reach within Europe and Africa. Fin-tech terms are competitors, but Mastercard can work in partnership or acquisition to increase their share in the market. The biggest threat facing Mastercard is the highly competitive industry, including key competitors such as Visa, American Express, Union pay, and Paypal (Surane, 2021). Other threats include government regulations and cyber attacks or hacking.  

Critical Analysis of Main Ratios

This analysis compares Visa Inc. and Mastercard across eight (8) categories, which will be based on their income statements, balance sheets, and cash flow statements. The analysis will also answer which company's financial metrics are stronger. This analysis reviewed each company’s income statement. The income statement presents information on the financial results of a company's business activities over a period of time. The income statement communicates how much revenue the company generated during a period and what cost it incurred in connection with generating that revenue (Dybek, 2021).

The income statement analysis was conducted to better understand each company’s results not just for the prior year or trailing twelve months (TTM), but over an extended period of time. The income statement provided insights into the company’s revenue, expenses, and profits. With this analysis, the previous trajectory of each segment was visualized, which made the forecasting model for the future realistic for both companies (Fiorillo, 2021).

After analyzing the company’s income statement, the balance sheet was the next financials that was analyzed. The balance sheet allows the review of the financial health of a company. The review of a company’s current assets presents a picture of how much total cash and short term investments a company has on the books. This is always a good starting point because it shows how big a company’s war-chest is (Fiorillo, 2021).

The last financial review of the two companies was their cash flow. The cash flow statement provides an immense amount of critical information, as it illustrates how effective a company’s business operations are at generating cash. The following are the formulas used to calculate the ratios.

Ratios		Formulas
Gross Margin	=	Gross Profit/Sales
Operating Margin	=	Operating Income/ Sales
Net Profit Margin	=	Net Income/ Sales
Current Ratio	=	Current Assets/ Current Liabilities
Cash Ratio	=	Cash/ Current Liabilities
Debt to Equity	=	Long Term Debt/ (Total Assets - Total Liabilities)
ROE	=	Net Income/ (Total Assets - Total Liabilities)
ROA		Net Income / Total Assets

Visa vs. Mastercard

Gross Margin

Gross margin is net sales less the cost of goods sold (COGS). In other words, it's the amount of money a company retains after incurring the direct costs associated with producing the goods it sells and the services it provides. Visa Inc. gross margin ratio improved in 2017, then deteriorated in 2018 before making a little bit of gain in 2019, while Mastercard Inc. gross margin improved continuously from 2017 to 2019.

Operating Profit Margin

Operating profit margin is a profitability ratio calculated as operating income divided by revenue. Visa Inc. operating profit margin ratio improved in 2017, then deteriorated in 2018 before regaining some of its loss in 2019. Mastercard Inc. operating profit margin ratio also improved in 2017, before slightly deteriorating in 2018 and climbing back up in 2019.

Net Profit Margin

Net profit margin is an indicator of profitability, calculated as net income divided by revenue. Visa Inc. net profit margin ratio deteriorated in 2017, but then significantly improved from 2018 to 2019. Mastercard Inc. net profit margin ratio also deteriorated in 2017, but bounced back and improved from 2018 to 2019.

Current Ratio

Current ratio is a liquidity ratio calculated as current assets divided by current liabilities. Visa Inc. current ratio improved in 2017, but then deteriorated from 2018 to 2019, while Mastercard Inc. improved in 2017, but was down in 2018 before making another improvement in 2019

Cash Ratio

Cash ratio is a liquidity ratio calculated as cash and short-term marketable investments divided by current liabilities. Visa Inc. cash ratio deteriorated from 2017 to 2019, while Mastercard Inc. cash ratio improved in 2017 and deteriorated from 2018 to 2019.

Debt to Equity

Debt to equity is a leverage ratio calculated as long-term debt over current assets minus current liabilities. Visa Inc. debt to equity slowly fell from 2017 to 2019, while Mastercard Inc. debt to equity rose tremendously from 2017 to 2019.

ROE

Return on equity (ROE) is a profitability ratio calculated as net income divided by shareholders’ equity. Visa Inc. ROE improved significantly from 2017 to 2019, while Mastercard Inc. ROE improved significantly from 2017 to 2019 too.

ROA

Return on assets (ROA) is a profitability ratio calculated as net income divided by total assets. Visa Inc. ROA deteriorated from 2019 to 2020 but then slightly improved from 2020 to 2021. Mastercard Inc. ROA also improved significantly from 2017 to 2019.

Visa vs. Mastercard Chart

The chart below shows a comparison between Visa Inc. and Mastercard Inc. based on their financial ratios over the course of three consecutive years. As shown, Mastercard profitability and liquidity ratios are on par with each other, while the leverage ratios and operating returns significantly differ between the two companies.

Visa Ratio Table

The table below consists of the calculated ratios for Visa Inc. over three consecutive years as shown in the chart above.

Profitability Ratios	2017	2018	2019
	Gross Margin	82.31%	81.29%	81.87%
	Operating Margin	66.15%	62.86%	65.29%
	Net Profit Margin	36.49%	49.98%	52.57%
Liquidity Ratios
	Current Ratios	1.90	1.61	1.56
	Cash Ratio	0.99	0.72	.58
Leverage Ratio
	Debt to Equity	0.51	0.49	0.48
Operating Ratios
	ROE	20.45%	30.29%	34.84%
	ROA	9.85%	14.88%	16.65%

Mastercard Ratio Table

The table below consists of the calculated ratios for Mastercard Inc. over three consecutive years as shown in the chart above.

Profitability Ratios	2017	2018	2019
	Gross Margin	78.50%	78.50%	79.05%
	Operating Margin	55.99%	58.71%	57.24%
	Net Profit Margin	31.33%	39.19%	48.08%
Liquidity Ratios
	Current Ratios	1.57	1.39	1.42
	Cash Ratio	0.67	0.58	.59
Leverage Ratio
	Debt to Equity	0.99	1.08	1.44
Operating Ratios
	ROE	71.22%	108.14%	137.20%
	ROA	18.36%	23.57%	27.77%

Comparative Analysis

Based on the financial statements of the two companies, one can conclude that Visa Inc. is a much stronger credit card company. In fact, in 2020, it was reported that Visa generated $21.8 billion in net revenue with a payments volume of $8.8 trillion. Visa’s core products include credit, debit, and prepaid cards as well as business solutions and global ATM services (Hayes, 2021). MasterCard in the same year, generated total net revenue of $15.3 billion, with a payment volume of $6.3 trillion. MasterCard’s core products include consumer credit, consumer debit, prepaid cards, and a commercial product business (Hayes, 2021).

Conclusion

Visa

Advantages/Disadvantages

Mastercard

Advantages/Disadvantages

Ultimate Answer

References

Dybek, M. (2021, November 19). Visa Inc. (NYSE:V): Income statement. Stock Analysis on Net. Retrieved January 28, 2022, from https://www.stock-analysis-on.net/NYSE/Company/Visa-Inc/Financial-Statement/Income-Statement

Fiorillo, S. (2021, April 22). Visa vs MasterCard stock: Showdown Between Credit Card Companies. SeekingAlpha. Retrieved January 28, 2022, from https://seekingalpha.com/article/4420318-visa-and-mastercard-showdown

Hayes, A. (2021, December 30). Visa vs. Mastercard: What's the difference? Investopedia. Retrieved January 28, 2022, from https://www.investopedia.com/articles/personal-finance/020215/visa-vs-mastercard-there-difference.asp

MarketLine. (2021). In Visa Inc. MarketLine Company Profile (pp. 1–69).

Mastercard. (n.d.). Mastercard to acquire Ekata to advance digital identity efforts. Retrieved January 30, 2022, from https://www.mastercard.com/news/press/2021/april/mastercard-to-acquire-ekata-to-advance-digital-identity-efforts/

Shastri, A. (2021). Descriptive SWOT analysis of Mastercard. IIDE. Retrieved January 30, 2022, from https://iide.co/case-studies/swot-analysis-of-mastercard/

Surane, Jennifer. (2021, March 29). Visa, Mastercard face new pushback in $5.5 billion retailer suit. Retrieved January 30, 2022, from https://www.bloomberg.com/news/articles/2021-03-29/visa-mastercard-face-new-pushback-in-5-5-billion-retailer-suit 

Visa. (2021). Visa Inc. Reports Fiscal Fourth Quarter and Full-Year 2021 Results. https://s1.q4cdn.com/050606653/files/doc_financials/2021/q4/Visa-Inc.-Fourth-Quarter-and-Full-Year-2021-Financial-Results.pdf

Visa Inc SWOT Analysis. (2021). Visa Inc. SWOT Analysis, 1–7.