Please be aware of scammers falsely impersonating Magellan employees about potential investments opportunities. Magellan does not provide personal investment advice or recommendations regarding any investment product or securities via any social media platform.
Find out more about investment scams here

Beyond Transactions

Beyond Transactions

July 2024

Payments have been a cornerstone investment of our Global portfolios for over a decade. We’ve been invested in Visa and Mastercard as we are confident in their ability to protect and grow earnings with a high degree of certainty into the future. This is driven by the quality of their business (‘economic moat’) and the structural tailwind of digitising consumer payments.  

Economic moats rarely just exist. Management teams need to innovate to defend and strengthen their economic moat, a key criterion in our assessment of quality. Over the past decades, Visa and Mastercard have been innovators. Reinvesting in their network capabilities (reach, security and user experience) and investing in new capabilities has reduced the probability of disruption, protecting their competitive advantages of scale, network effects and high barriers to entry. As a result, Visa alone has generated 11% revenue CAGR and 16% EPS CAGR over the past decade. 
While there remains a healthy growth runway from the structural tailwind of commerce digitisation, the digitisation of new flows and the network (via value-added services) are important growth vectors for Visa and Mastercard.  

  • Digitisation of new flows: Includes, for example, Peer-to-Peer, Business-to-Business and Government-to-Consumer. Remittances are an example of success, where Visa and Mastercard have been working with fintechs like Remitly, Wise and Western Union as key infrastructure partners. B2B partners have been slower to adopt new technologies. There remains a substantial opportunity to improve the speed and user experience of these flows, just as we’ve experienced in consumer flows. Visa and Mastercard are well placed to benefit from the digitisation of new flows given their relationships with banks and the broader payments ecosystem. 
  • Digitisation of the networks – value-added services: Visa and Mastercard connect more than 4b credentials, 100m merchants and 15,000 financial institutions. This network provides Visa and Mastercard with a data advantage, which when combined with their innovation prowess leaves them uniquely placed to cross-sell services to network participants. Central to this growth opportunity is the networks’ focus on improving the payment experience for consumers and merchants. This has the effect of improving the relationship between the bank and the consumer, and the merchant and their service providers. Examples of services include buy-now-pay-later, loyalty, personalisation, subscription managers, virtual cards and fraud detection.  

This discussion should not detract from the importance of innovation and growth in consumer payments. Consumer payments make up ~70% of revenue and maintaining leadership in domestic and cross-border consumer flows is key to the investment thesis.  

  • Innovation and network security: Tokenisation and biometrics are increasingly being used in transactions, improving the security of payments and increasing authorisation rates. Tokenisation is steadily replacing the need for a card number. Tokens are more secure, reducing fraud and benefiting all members of the network.  
  • Cash to card conversion: Covid accelerated the transition from cash to card in many developed markets. However, there are many economies where cash remains prevalent in commerce (for example, Mexico, Japan, Germany, Italy and Kenya). There are also opportunities in developed markets like Australia from the shift to e-commerce and the gig economy, which lead to increased value-added services revenues or an increase in the number of transactions.

 

What could disrupt this tailwind and Visa and Mastercard’s industry position?

 

Notwithstanding Visa and Mastercard’s current dominance, we are always monitoring potential disruptive threats. What could disrupt this tailwind and Visa and Mastercard’s industry position? New networks like central bank real-time payment networks (e.g. FedNow in the United States, Pix in Brazil or NPP in Australia) are a threat to the incumbent networks. These networks, however, are not global and were established as P2P networks rather than facilitators of commerce. Enabling seamless, fast, ubiquitous and safe commerce is critical to drive consumer adoption. Central bank networks are slow to offer these features, making it challenging to compete with the Visa and Mastercard networks that offer a fast, ubiquitous, global and safe network, plus rewards. The challenge of driving switching in the face of an innovative incumbent should not be underestimated. 

Visa and Mastercard’s growth opportunities, and the disruptive threats, were central to our conversations with C-suite and management teams of the digital payments ecosystem (networks, acquirers, issuers, processors and fintechs) on our recent research trip to the United States. In our conversations, it was clear that the value-add of Visa and Mastercard’s network and technology to customers was unrivalled. Pleasingly, this is not lost on Visa and Mastercard. The networks prioritise innovation that constantly improves the payment experience, benefiting all network participants. Overall, we continue to view networks as high-quality businesses that will deliver attractive returns to shareholders. 

We currently hold positions in Visa and Mastercard across our Global Equities and Global Thematic Strategies.  

By Elisa Di Marco, Portfolio Manager, Magellan Core Global and Core ESG Funds
Sources: Company filings.

 

Important Information: This material has been delivered to you by Magellan Asset Management Limited ABN 31 120 593 946 AFS Licence No. 304 301 (‘Magellan’) and has been prepared for general information purposes only and must not be construed as investment advice or as an investment recommendation.  This material does not take into account your investment objectives, financial situation or particular needs. This material does not constitute an offer or inducement to engage in an investment activity nor does it form part of any offer documentation, offer or invitation to purchase, sell or subscribe for interests in any type of investment product or service. You should obtain and consider the relevant Product Disclosure Statement (‘PDS’) and Target Market Determination (‘TMD’) and consider obtaining professional investment advice tailored to your specific circumstances before making a decision about whether to acquire, or continue to hold, the relevant financial product. A copy of the relevant PDS and TMD relating to a Magellan financial product may be obtained by calling +61 2 9235 4888 or by visiting www.magellangroup.com.au.

Past performance is not necessarily indicative of future results and no person guarantees the future performance of any financial product or service, the amount or timing of any return from it, that asset allocations will be met, that it will be able to implement its investment strategy or that its investment objectives will be achieved. This material may contain ‘forward-looking statements’. Actual events or results or the actual performance of a Magellan financial product or service may differ materially from those reflected or contemplated in such forward-looking statements.

This material may include data, research and other information from third party sources. Magellan makes no guarantee that such information is accurate, complete or timely and does not provide any warranties regarding results obtained from its use. This information is subject to change at any time and no person has any responsibility to update any of the information provided in this material.  Statements contained in this material that are not historical facts are based on current expectations, estimates, projections, opinions and beliefs of Magellan. Such statements involve known and unknown risks, uncertainties and other factors, and undue reliance should not be placed thereon. No representation or warranty is made with respect to the accuracy or completeness of any of the information contained in this material. Magellan will not be responsible or liable for any losses arising from your use or reliance upon any part of the information contained in this material.

Any third party trademarks contained herein are the property of their respective owners and Magellan claims no ownership in, nor any affiliation with, such trademarks.   Any third party trademarks that appear in this material are used for information purposes and only to identify the company names or brands of their respective owners. No affiliation, sponsorship or endorsement should be inferred from the use of these trademarks. This material and the information contained within it may not be reproduced, or disclosed, in whole or in part, without the prior written consent of Magellan.

Insights direct to your inbox

Make sense of the global investment landscape with timely updates, articles and videos from our investment experts.

Enter your first name
Enter your last name
Provide a valid email address
Provide a valid postcode
Select type of investor