Chit Chat Stocks - Mastercard (Ticker: MA) with Matt Cochrane

Episode Date: June 15, 2023

Mastercard Incorporated (MA) is a global payment technology company that provides transaction processing services, enabling secure and convenient electronic payments for consumers, businesses, and financial institutions worldwide. Listen as Brett and Ryan ask questions about the company, its business model, and valuation. Enjoy the show! ***************************** Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney  Subscribe to our Substack to receive free show notes and charts that go along with every episode: https://chitchatmoney.substack.com/ Interested to see more of Matt's work? Check out their Twitter here: https://twitter.com/Matt_Cochrane7?s=20 Contact us: [e-mail] Timestamps Mastercard | (2:40) Europe | (15:27) Disruptive Threats | (25:44) Valuation | (43:04) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. Today is our Thursday deep dive episode where we interview an analyst or an investor to discuss a single stock or industry. And today we have on the show, Matt Cochran, longtime friend of the show, and we're talking about MasterCard. This is what I was really eager to dig into because I think people throw around how good of a business it is. And sometimes I guess the nitty gritty and the details of how the business actually functions has kind of always, I've never had a great grasp on that. So having Matt explain it in such layman's terms was really helpful. So look forward to that. And then also we should mention this was recorded probably it'll be three weeks prior to this episode airing. So just kind of keep that in

mind. Some things can change in between now and then, but this is a fun interview. Hope you guys enjoy it. If you like the show, please go ahead, leave a review, give a rating, something like that. It really does help and we always appreciate it. But without further ado, here's our interview with Matt Cochran. Welcome to Chit Chat Money. On this show, hosts Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, to chat money is a CCM media group podcast. Ryan and Brett are also general partners at Arch Capital and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests

is not formal advice or recommendation. Now, please enjoy this episode. All right. Welcome in. We are joined today by recurring guest. I think we're maybe getting to the double digits at this point in terms of joining the show, but it's Matt Cochran. He's a lead advisor at 7investing. And today we are talking about MasterCard, the payments giant. And I guess we usually start by asking, how did you come across this? But I think there's probably a lot of instances where you've come across MasterCard. It's kind of a name that most people know. So maybe let's start with the basics of the business.

Because I hear a lot of the, whenever someone explains MasterCard, they always tell me, oh, it's the rails. And I kind of get that. But at the same time, I guess that's not a very great way to explain it. It's not completely clear. So could you explain how MasterCard actually works and what it does, how it makes money? Yeah, of course. And guys, thanks so much for having me on.

I'll take the title of recurring guest. There was a time though, guys, when I was introduced as the podcast BFF. so it's a little sad that we've like progressed beyond the be the podcast bff or best friend to like just recurring guests but it's all right it's all right i think you still hold the title it's always a pleasure to talk to you guys um yeah yeah sorry it's all right guys so what is uh mastercard do like like um there's some good there's some good like uh like analogies you can use to describe it, such as rails, such as like a highway or the tollbooth model. But it's just a payment network that stretches across 210 countries and territories that

enables payments in more than 150 different currencies. And much of what I'm going to say today about MasterCard can also be applied to Visa. But MasterCard, it facilitates secure and convenient transactions, allowing consumers consumers to use like one of MasterCard's 3.2 billion branded cards. That's like anything from credit, debit, prepaid, and virtual cards that we have now, like at millions of physical and digital points of sale across the world. So MasterCard, like its big brother Visa, but importantly, unlike American Express and Discover, it never acts as the card issuer or lender, right? Those roles are performed by financial institutions like your bank.

And that comes with both like positive, there's pros and cons to that. So for instance, it means MasterCard does not make money from the interest of its users' credit card debt, right? American Express and Discover, when you use your American Express or Discover card, they are the card issuer. They are the one actually loaning the consumer money when they make a credit card purchase, and they will earn money from the interest of that debt. MasterCard and Visa don't. That is collected by the bank, the bank that issued the card. But it also means, however, that MasterCard is not liable for that credit default risk. And that is a very good thing.

It means that even on certain economic times when you might have less money, so you're using your MasterCard or Visa less, they're not on the hook ever for consumers not paying their credit card bill. which means also like if you ever see anyone comparing the valuation of MasterCard and Visa to American Express and Discover, it's comparing apples to oranges. It's a completely different business model because American Express and Discover, they're great lenders, but they will always have that default risk that if the crap hits the fan in the economy, they might start experiencing a lot of default risk. American Express and Discover, they're on the hook for

that. MasterCard and Visa never. So just as an aside, never compare those two, those pairs like valuations. So instead like MasterCard just ensures that money moves quickly and securely after the purchases are made. They direct funds to and from the proper accounts. So for each transaction made across its network, the company just collects it like a small, like almost microscopic fee. And yet when spread across the billions of transactions made with MasterCard products, those fees just really quickly add up. So in the first quarter alone of this year, that amounted to 32.5 billion transactions, which was a 12% increase year over year. And so for every transaction, the MasterCard collects flat fees for the following services.

The authorization, which is the process by which the transactions are routed to the financial institutions that issued the cards for approval. The clearing, that's the exchange of financial transaction information between the issuer and acquirer's banks. Now, all that means is when I go to Walmart and I give them my credit card to buy merchandise, my bank is the issuer bank because they issued the card to me and the acquirer bank, that's Walmart's bank. So my money is essentially, it's not, we say that it's going from me to Walmart, but it's really going from my bank to Walmart's bank. And then the settlement, that's the facilitation of the exchange of funds between parties. All right. So in addition to those flat fees, MasterCard also collects fees for

cross-border and domestic transactions based on the gross dollar volume of the purchase. So let's break that down. Domestic transactions, those are just simply transactions where the purchase takes place within the country where the card was issued. So that means as a Florida resident, when I go down the street to Starbucks and I buy a coffee, that's a domestic transaction. cross-border transaction that occurs when the purchases take place in a different country from where the card was issued and those are usually more so like if i fly to france and i go to eiffel tower and i buy a little souvenir eiffel tower thing uh like you know that's a cross-border transaction um uh so and those that's not that is not a flat fee those are based on the

dollar volume of that purchase. So notably, MasterCard collects all those fees that goes up and down based on the dollar amount of the purchase. That's like, I believe, I think of it as a built-in hedge against inflation. So, you know, you go to the grocery store and a loaf of bread costs $3, right? MasterCard collects as a percentage, a certain percentage of that transaction. If the loaf of bread goes up to $4 next week or $5 or $6 in the weeks ahead, MasterCard, because it's a percentage based on that transaction, MasterCard collects a little more. So I think MasterCard and Visa also make like a neat little hedge against inflation. That's why I always think that if you're a Bitcoin or gold hyperinflation kind of,

I'll call them a doomer, but I don't say that disrespectfully. I feel like you should also own Visa and MasterCard as well. Because if you believe that's going to happen, those stock prices are going to absolutely soar. Yes. And I agree with that. And I treat it like that. The only thing to remember is that if the economy is really bad, people might be spending less overall, right? Because their unemployment could go up and discretionary purchases go down. But still, if the economy is that bad off and we're spending like $500 on groceries every week instead of whatever you're spending now, or if that doubles or triples, I still think MasterCard as a nice hedge against inflation, I think that's better than most. And that's

basically what MasterCard does. So if you think of it as the toll booth model, that's probably the best one that works. If you go down the highway and you're paying a toll to get on the turnpike and you think of it like as a two axle cars or a dollar, but if you're a big truck, they have to pay more because more axles. So the bigger your purchases are, that's like kind of more axles on the truck and so they have to pay more to go through uh so that's maybe the best and just think of mastercard and visa as the highways that your money travels on from your bank to the merchant's bank okay i think i'm following along i'm kind of i hope so i hope i'm kind of a payments layman this is if we're doing the payments 101 i'm going to try to like repeat what you just

said and hopefully i'm not further behind than listeners are so it's not just everyone waiting for me but it so i go to walmart i've got a mastercard branded card that's not issued by them but they are powering the payments behind i pay or when i give them my card insert at the point of sales i guess mastercard routes that payment to walmart's bank and there's securely basically a couple layers in there at a lightning speed securely um you know if there's ever any fraud they you know like you know like the issuing bank and mastercard take care of that and they make sure like the the amounts match up and everything like that okay all right we got to send right over we got to send right over the flow chart that that that's where i got sometimes for like these

things to like have that like kind of uh like a to see an illustration yeah because then when you add addy and stripe in the mix you're like why are they there but then it makes sense over time but that's a whole another that's where it mixes me up is that it feels like everyone says they're facilitating payments and i'm not i'm not sure what what the facilitation process looks like i guess so let's let's so let's talk about that i go to walmart and i spend a hundred dollars on a purchase right um uh all cool clothes because that's you know obviously i have a very fancy wardrobe and I go to Walmart for all my fancy clothes. So I spend a hundred dollars at Walmart. Walmart actually takes away about Walmart being such a big merchant. They probably take a bigger

cut of this. So Walmart might get $98. A smaller merchant might actually get $97 of that a hundred dollars. And that money is broken up into several, the missing two to $3 is broken up into several different players. Most of it will go to the issuing bank. So I have a MasterCard. It's issued by JPMorgan Chase. I go to Walmart. I buy my nice clothes at Walmart and Walmart gets $98 of that. Let's call it a buck 50 to a buck 60 will go to JPMorgan Chase. They get the money. They get that money because one, they're saying if there's any fraud, we're going to cover it. And two, if i don't pay my credit card bill they're not going to come back to walmart to collect um to say hey matt actually never paid for those clothes he bought so you have to give us that

our money back because like uh no chase is saying we're fronting matt the money so he can buy your merchandise but because we're doing that we're going to collect again a dollar fifty to a dollar 60 right uh so walmart uses like let's say they use first data or one of these like uh global payments one of these payment companies that like the machines that you use to to do your credit card think of those as almost like the on-ramp to the highway that is mastercard and visa so they collect 10 cents or you know something like that and mastercard visa also collect 10 to 20 cents and that makes up the rest of that money so uh so they all so for that two to three dollars uh that's missing from a transaction of 100 for about every hundred dollars uh master

card visa gets 10 to 20 basis points let's call it um the the payments uh gateway gets we'll get like another about about the same amount and then most of that though the lion's share is paid to bank, that's called interchange fees. Real quick about interchange fees. So one, there's always talk about legislation to get rid of interchange fees and the retailers hate it, right? So think about a company like Walmart, how much they pay in interchange fees, right? Even though that's such a small amount of the $100, take a retailer like Walmart or Target or a gas station like ExxonMobil or whoever, they're paying huge, huge amounts in these interchange fees. So they just hate them so much. And so you always hear talk about legislation to limit them and retailers

talking about how unfair they are. The thing to remember that is that's basically where credit card rewards come from. So if you like your credit card rewards, you don't want to get rid of the interchange fees. Now, there is talk, like if legislation did pass, what would that mean, though, for MasterCard Visa? So I think Europe makes a good example. Like in 2015, the European Union capped interchange fees to 0.2% for debit cards and 0.3% for credit cards. So the result was like credit card rewards in Europe are all but extinct. And debit cards are used a lot more now. Yet MasterCard and Visa, they've grown their market share in Europe since then and growing their gross dollar volume. So I think that demonstrates that even if the current payments

landscape were to change in the US, it doesn't mean that MasterCard's fees or market share would be surrendered. Now, this comes to one of our Twitter follow-ups that I think can apply here. Did the take rate in Europe change at all for MasterCard and Visa, or were they still taking the same slice um and what do you like is there any risk for master and mastercard and visa or i guess specifically mastercard for this episode they're not the same company uh their take rate to either go down or up over time i i don't think they're going to go too much down or too much up to be honest with you like i said a lot of that does go down to the specific retailer the smaller the merchant you are, the less bargaining power you have. And generally, you will be paying out

of every $100, you might be getting down to $96, $50, or $97 that you keep, whereas the Walmarts of the world could keep $98 or even a little more than that of every $100 just because of the volume that goes through there. That is why things like Shopify for online merchants, that provides a real valued simply because as a negotiator for a small merchant or small online store to the credit cards and the issuing banks. But as far as MasterCard and Visa's take rates, I don't expect, technically, they collect the interchange fees. So technically, they raise their prices to uh like the retailer or or not but like that it all goes right back to the issuing bank um so like like master cards and visas real take rates they don't they don't change much you'll

see a lot of headlines about interchange fees and about like master card visa like those are mostly reporters who don't know what they're talking about okay we've mentioned master card and Visa kind of, and we've mentioned interchanges, but interchangeably, what are the differences? Like why, what differentiates MasterCard from Visa? And is, I mean, it seems like most people just kind of take a basket approach when investing in the payments rails, but is there anything that's like a better quality for either business? so i've always invested in mastercard over visa and we'll get into that i'll explain why however i think visa is a terrific business i think mastercard is maybe marginally better but i'm not

i'm not sure of that um like they're they're they're almost interchangeable like it's very very difficult actually for a merchant to accept one without the other i think the only example there is really is costco which uh like made visa like an exclusive like offer and that's just because costco is kind of different right but like almost everywhere else when you turn it on like you're saying like uh you're you're almost you turn both on at the same time and as a merchant why wouldn't you i mean like you know if if if 60 of consumers have visa and 30 have mastercard visa is bigger uh why are you you know why would you want to discriminate against one or the other If I'm a merchant, I like my MasterCard, but Brett likes Visa, and Ryan, you open a store, you're going to want both of our business, at least everybody except Costco.

They're almost interchangeable. They have almost the exact same business model. One of the reasons I like MasterCard better, even though Visa's doing this now, so again, it's getting harder and harder to differentiate, is MasterCard's always been better about the services, its layers on top of its network. So this made up about a third of its revenue in the first quarter, their services and solutions segment, which was about like, yeah, that was $2.1 billion in revenue in the first quarter. And their services is everything from data and analytics, consulting services, loyalty solutions, fraud solutions, cyber intelligence solutions. um like uh and all these services they will add to either the to the financial side so i'm a local credit union and uh you know i issue mastercard to my uh to to my uh to to my customers to my account holders and so like i'm being a small credit union i might not have good loyalty

services i don't know how to offer rewards and i might not have the best most up-to-date like fraud solutions, but I can go to MasterCard and say, okay, MasterCard, I'm going to give you our consumer credit card portfolio. And we're also, we'll pay extra for your fraud solutions and your loyalty solutions, maybe your security solutions, things like this. And so MasterCard, that was like a third of its revenue in the first quarter. And that grew, that was like almost 20% year over year that it grew. This is like a really fast growing segment for MasterCard. And MasterCard, it has seemed like uh that they've always been a step or two ahead of visa with their services now i will say some people have said or some people believe like visa does the same things

it's just that we're not always as open or transparent about it like they just kind of hit that data more just kind of baked it into their their like uh processing business and they just never really showed it i i can't really say i would just say from what they have shared to investors, MasterCard has always been better about that. Now Visa is very upfront because MasterCard started outperforming Visa. So now Visa is very, they've broken all that out and they always talk about the services they offer to, again, two terrific businesses. I just think MasterCard kind of always has had the lead there. So that is the differentiator for the issuing bank side? Because I get it from the merchant's point. It makes sense. Why would you eliminate

half or whatever, three-tenths of your customers. But from the issuing bank side, why would you choose a certain card, like choose to issue Visa-backed cards as opposed to MasterCard backed cards? Is it that services segment you're talking about? Yes. Okay. So important point, like the real customers for MasterCard and Visa are the banks. I'll never go out and say like, oh, I don't want a Visa card. I want a MasterCard. You never say that. You're going to go to your bank that you want to go to because they offer better rewards because they're more convenient to you or because they give you like the loan you want or whatever like you're with your bank and if they switch from visa to mastercard or mastercard to visa i don't think anyone in history

has ever left their bank because of that like they're basically interchangeable products and as the end consumer i don't care and i don't think anyone does like right it does the exact same thing so the banks are the real customer and like you want to win the bank's portfolios so you want to go to chase like that's obviously a huge one but every credit union you know with their 10 000 uh account holders like okay hey when your visas are expiring now for this next three or four year cycle as we issue new cards they're going to be visas or master cards instead of the other one or you know they can obviously keep the same one but like the banks are the real customers The MasterCard and Visa always want to keep the banks happy. So almost everything they do is designed for the banks because consumers, vast majority, just do not care.

Right. And those are huge volume drivers. And maybe we're going to talk about the next section, how maybe some of these, quote unquote, disruptive threats are really diversifying the business. So there's lots of like, there's just so many opportunities for Visa and MasterCard to capture new card issuers. But I want to talk about, you know, we've kind of solidified how MasterCard's business works, at least the core part of it. And you mentioned the services that go on top of it. But I think what people maybe under appreciate is like the changing of the volume or the makeup of the volume. When I say volume, I mean payment volume. So maybe over the last five to 10 years, what has changed about the MasterCard business? And are there any other ways they're expanding, like in recent years, are there any important services they added on top of the network? Okay, so what's crazy to me anyways, is that MasterCard, like so as ubiquitous as MasterCard network is, its acceptance has doubled in the last five years with almost 100 million acceptance points uh that growth is is mostly due to emerging markets adopting electronic and

digital payments more uh and new technologies gaining wider use such as contactless phone payments um so i think that's like uh uh like very important like their network is still growing and even though in north america uh we just take that for granted because that's just the way um you know i'm older than you guys but still for as long as i've been alive you know i've i've always had a credit card you know or you know as long as i've been an adult i've always had a credit card use that to pay for things um uh so we're just used to it and we're used to anywhere we go like we can we can pay for it with a with a card uh but in the emerging markets that's a very different story so their network has actually doubled uh in the last five years they're also

building like new networks um so uh like for instance uh like mastercard has an open banking platform. And that allows customers to pay bills from their bank accounts frictionlessly and securely. And JP Morgan Chase is actually using MasterCard. They're introducing a pay-by-bank solution that uses MasterCard's open banking platform. That solution is supposed to come to market by the end of this year. And MasterCard does not believe these new networks will cannibalize its existing card business too much, but instead just expand like it's addressable market to new use cases, such as bill payments, where a lot of times like we might not pay with our credit card, but we just pay straight from our bank account. All right, that's beautiful. And before we move

on to disruptive threats, is there anything else you want to hit on their actual business products before we hit the competitive landscape? No, I mean, I think that, I mean, I'm open to any questions, but I think that basically covers how they make their money and what they do. Perfect. All right. Now, the biggest thing that I think comes up every so often, there's kind of a cycle of disruptive threats to the payment networks. There's the private ones that we'll mention, and then there's the government ones. So I think maybe first we'll hit private. You wrote in one of your write-ups for 7investing that all the quote-unquote disruptive threats which could be um you know someone like people talk about square and paypal

people talk about google pay apple pay people talk about buy now pay later people talk about crypto which i guess is kind of just a that's more of a wild card that we maybe don't even need to address at this point you say that actually these disruptive threats that people talk about benefit MasterCard. Why is that the case? Why are people, you know, maybe why do people have so much of a misunderstanding of these quote unquote competitive threats? Yeah. So I hope I might've worded that poorly. I shouldn't have said all potential like disruptive threats like this benefit MasterCard abuse. However, I will say a lot of them do. So let's take uh let's take you know let's take apple pay great example like people more and more use apple

pay to pay for like their apps that they're you know they need to pay for or they buy you know they're on their phone they're buying something on their phone and they use apple pay or even you know in more limited use cases but even going to the store now you know you can use things like apple pay um well not you know nine times out of ten those are attached to a master card or visa debit card or credit card um so that has expanded use of people using their master card or visa you know where and again like so the up until just a few years ago like the big number one enemy for master card and visa was still cash right and so like they just had have had the secular tailwind like behind their back of payments moving from cash money from when people go to the store

to like electronic and digital payments and more and more uh like and again like their network just doubled in the last five years so even around the world that's still that's still a till end for these guys uh but like so apple pay but it has habituated it has made a habit of people like using their apple apple pay to pay for things and that's like i said nine times out of ten that's that's attached to master carter visa think about square and cash app right like so square um like you know people want to pay with their cash app again that's mostly attached to mastercard or visa and square like when they made their little dongles that people can plug into phones and now they can accept credit card payments well can't go go back 10 even 10 years but uh you know

and and and farther back from that you went to a farmer's market you went to a food truck you went to a lot of places still and you had to pay cash because a to accept credit cards required uh like a landline and like expensive hardware and so when square introduced the dongle and you could you know pay on somebody's phone or or pay or an ipad a tablet like now you can use your credit card at that many more use cases you use that the flea market when you go to the flea market you know you can just use it almost like a farmer's market you can use it almost everywhere now like um i have a picture of it somewhere but like my wife and i for our 20th anniversary like a year ago we went up to like new hampshire and vermont in the fall and you know we we were like just

looking at the leaves and all these things and there's a pumpkin patch and there was like a stand outside someone's house like selling pumpkins or fall foliage and that kind of stuff and it was just like on it there was a placard with a qr code on it like say like pay here for what you need right and like that used to would have been like several years ago that would have been a jar for cash but now you just use the qr code and whether that goes to apple pay or paypal or google pay or however you pay it on your phone nine times out of ten that's attached to master carter visa i on the back you even see it with like um street performers the uh someone playing a guitar they used to have you know their their guitar case would be open asking for cash now

it's just a qr code yeah or my vent here's my venmo or something right yeah yeah yep yep okay see it everywhere so okay now the next question that people have with this is will a paypal will an apple pay will i guess buy now pay later kind of went boom and bust but will any of these networks have they ever said or have they ever succeeded in bypassing mastercard or visa because i know a lot of people talk about quote-unquote closing the loop and making everything internal has it ever happened do you see that as a threat or is it realistic and very limited use cases they have and even in those more and more you're seeing them open up to an open loop so like some subway systems use like uh you know like a specific like your subway card for uh you know or whatever your

subway app to pay for like your your your tickets or things you know where you just tap your phone going through but even more and more those are going to more open loops just because it's so ubiquitous so let me tell you so let me tell you about like maybe so you guys know but if you're listening and you don't like i love economic moats and i love companies with economic moats and um which just means any competitive advantage and what i love about mastercard and visa is like it would be the classically just called the network effect which just means the more that merchants stepped it the more that like um uh the more that consumers like us will want to have it because we can just use it in so many places the more consumers have it the more

merchants want it so it would be very hard uh like to come in when you think about that network and like to disrupt it however it was attempted once and what i think is neat about knowing or evaluating economic modes is like has there ever been a moat attack so a moat attack is when somebody especially a very well capitalized attempt uh by like some big competitor or somebody who had a lot of money and wanted to disrupt mastercard and visa um like like when they come in and they completely failed. And we have an example of that with MasterCard and Visa. So let me just give you a little history lesson, but I think this example is beautiful for showing the strength of MasterCard and Visa. So let me take you back. In 2011, a consortium of retailers got together and they

wanted to start a company called the Merchant Customer Exchange. And they were going to make an app called Current and the letter C, so it'd sound like currency. They were going to make an app called Currency, and they were all going to band together because they were tired of paying the interchange fees that we were talking about. They wanted to come together and collect that for themselves, and they were going to make a network. These retailers included Walmart, Target, Best Buy, CVS, Shell, Olive Garden, Lowe's, Michaels, Sears, Circle K, 7-Eleven, Bed Bath & Beyond, And Dunkin' Donuts, QT, Wawa, Racetac, Sheetz, Phillips 66, you can go on and on. Dick's, Sporting Goods, Gap, Kohl's, overall, 110,000 retail locations that processed more

than a trillion dollars of payments annually. And this is back in 2011. And they were going to go live in 2014. And they also had banks to help them out, like JP Morgan Chase. So this was like a huge attempt to try to take the networks out of it. and um and and again just to get rid of the interchange fee it lasted for till june 2016 when it just shut down it utterly failed um and it did and it failed for a few reasons one they're solving a they're trying to solve a problem for retail but not consumers consumers

love their credit card they love credit card points they love all these things um and it didn't tap into any existing networks or user behavior and if that kind of network uh fail with like that many retailers like again just utterly fail like i mean people don't even remember it because it was such a failure like it's like just lost to history but like uh like just private attempts to disrupt mastercard or visa have just completely gone nowhere now there's been other like look uh it doesn't mean one that it can't it can't happen one day or two it doesn't mean that like uh you know uh like there haven't been like things like zelle that have been introduced which have very interesting use cases but most of those like you're not going to a store

and paying with zelle um and uh like so i just think like looking at that mode attack and just how utterly it failed like it just shows you how entrenched uh these networks mastercard and visa are into our, uh, commerce ecosystem. Whoops. I was on mute there. Um, what about, and this might be a bit speculative, Apple pay going a bit and maybe they wouldn't be exactly like American express, but trying like, do you, do you worry about them? Cause Apple has really gone into, you know,

they can offer rewards and stuff they could offer. They already have the, the Apple card. Do you, do you worry about them kind of trying to be a closing the loop and being a bit of like american express for their consumers i feel like that from the private you know perspective at least in the united states and maybe some other richer nations the apple threat feels like the biggest one but i'm curious if you think that is misguided so like one who who knows i i can't say it's impossible what i would say is like if i was an apple and i well i am an apple shareholder it's a smaller position for me but like uh like i wouldn't want them to do that like

for a few reasons one as soon as you're like directing money yourself and you're not going to an issuing bank uh you're going to demand like a smaller multiple as that number grows now for apple like it's different they have so many other you know like revenue streams and things so like you know they probably could get away with it a little more but if that number ballooned and that became like a really like big number that they're lending out and they're liable for all those defaults even for a company like apple that's going to eventually start demanding a lower like valuation multiple um and two remember like right now they use mastercard and visa to be accepted everywhere like if if they unplug from that like then they have to go get accepted

everywhere now they have so many consumers um you know like they they could probably do that but that would still be a giant step back uh for apple pay like um you know as far as like being accepted everywhere now like on your phone like i guess that's like you know digitally but like in store especially like that's a giant step back um like what i would say is like any apple pay like or anytime forget about apple pay too but like anytime like a fintech comes up and that could be buy now pay later um you know that could be uh like any other fintech that wants to come up with any kind of payments app the quickest way possible to get uh to like get some kind of like uh uh like ubiquity going so where your app is accepted everywhere is to just plug into the

networks and so if you're you're saying no i want to disrupt the networks like man that is a hard hard road now could someone like apple do it i mean like if you're looking like probably like apple or google are the only ones who would even try but again i see that more on the digital side not really the insured person side um but like uh but yeah maybe but like i don't think apple wants to be a bank. They're heavily regulated. So they come with a whole bunch of new regulations on how they can spend their capital. They have to hold a whole bunch of capital on their balance sheet then to counterweight the money they're loaning out. That becomes a whole thing. I really don't think Apple wants to be a bank and the government telling them,

this is how you can spend your money and this is how you can't. And also, at the same time, demanding a much, much lower valuation as the money they're loaning out gets bigger and bigger. and two like again it would also be a giant step back in acceptance now could they build that back out eventually maybe but like why i guess why do all that to disrupt mastercard and visa it just doesn't seem like something they would want to do okay let's move on to governments i as someone who wants to own mastercard or visa and is painstakingly waiting for a valuation that may never show up. I look at stuff like this article that I've linked to about India's central bank setting up its own sort of payments network. And that kind of becomes one of the

biggest fears for me. I think it's a bigger fear than the private ones because these governments can institute a lot of the stuff. They could kind of shove it down consumers' throats, shove it down the merchants' throats. Do you see that as a risk? Has any of that worked before? um and is like the india part an example that you followed with these companies or specifically mastercard yeah i missed a i missed a part of that question so basically like can the government like say you're going to use this payment rail instead of mastercard or visa yeah they made they made their own payment rails i think india is an example here but i'm not sure how successful that's been or whether you know if they're too entrenched at this point that the

governments can't even disrupt them so i mean a government can if they try hard enough a government can probably always disrupt like a company like within the borders of their own country right so i think india that that is probably a good example of like where it's obviously it's taking off um you know uh i don't see like you know more developed nations like that happening but like could you get that in an India? Sure. Uh, and that does take away some of its TAM, right? Like it's total addressable market like that. Uh, I think that's certainly something to consider. Um, and the things to consider is like, um, one, you know, like Massacar and Visa, like they're growing in, in places like India, but they're not like, that's not like taking away existing revenue

really. Um, and, and two is like people in India, like they'll still want to travel and they go outside their borders of their country and they won't be able to use that domestic system anymore. And what will they use? They'll use MasterCard and Visa. So like even you see that a lot in China where like a MasterCard and Visa have had like, man, I remember buying MasterCard in 2015 and like acceptance in China was allegedly just around the corner, you know?

It's coming baby. The China growth. And China has just like, you know, I mean, China can just do what they want. Right. And, But even then, like a lot of Chinese banks have partnerships with MasterCard or Visa so that when their account holders travel outside the country and when they travel, like they, you know, when they go outside the country, they have to use something they can't use, like whatever they're using inside the country. So they use MasterCard and Visa. So like just overall, like MasterCard and Visa will still have some market within those countries because they're global network. And that's really, really powerful, you know, in a world where like, you know, where the borders or in a world without borders. And obviously we still have borders, but like, you know, like people as they travel and as these emerging economies like grow up, more and more of those consumers will travel.

They need to use something and it will be MasterCard or Visa. That's interesting. I hadn't thought about the international travel mode and how that could definitely be one that just steadily expands over the next few decades. Let's move to management. They had a management transition lately. The old executive, the CEO, forget his name.

You probably know it, Matt, did extremely well. But how has this transition gone? Do you think it's been successful? And yeah, any other thoughts on management? Yeah, Michael Biebach took over. I'm trying to remember when he took over because it was right around COVID. So, you know, like anything with COVID, I just think that makes it really difficult to measure, I guess, like how he would have done in quote unquote normal times, especially

for, you know, a company like MasterCard and COVID were just travel shut down, but e-commerce exploded and you're trying to normalize both of those. But I think Michael Biebach has been fine. He's been with the company since 2010. A.J. Banga was the CEO before A.J. Banga was like in my mind because I got a MasterCard a long long time ago

A.J. Banga will always have a soft spot in my heart for A.J. Banga he was fantastic so I don't know Michael Meebok has not proven himself to that extent but I think he's been very competent as CEO so

I don't think he's made any big mistakes or anything like that um so i don't see any red flags here i guess it's the best way to say it okay can you can you guys hear me okay sorry i've had some technical difficulties okay um i guess we've i mean we've hit on the competitive advantages we've discussed really the business model and new management maybe more on the investment specifically something that i have and as brett mentioned uh have always clung to for a reason not to own it is the valuation i guess 15 times fingers crossed 15 times earnings it's coming it's coming trough

earnings 15 times trough earnings just wait how do you think about the valuation um is this one where you kind of just i don't want to say ignore it but it matters less you know i had a i had some wide charts up and then before the show we're talking about home depot and those and i was proud of all those charts um but look i think the pe ratio is like uh like a little under 40 right now um yeah so one of the things i think that makes like mastercard and visa amazing right you're kind of operating margins, like over 50%, operating margin. And in Visa's case, sometimes they clear 60%. MasterCard has said they're almost purposely not trying to get 60% because they want to invest more for growth, or 60%. But they want to clear 50%. They've said

that's kind of their goal for margins, clear 50%. But once it gets too much higher than that, they start trying to look for areas to invest for in growth um so like i don't think you're going to get a company like that uh cheap right like you're just not and and also this is like a company um i was talking to someone at a money manager once and they said like mastercard and visa are like companies they can basically roll out of bed in the morning and grow revenue by 10 uh basically like right you have a pce which is personal consumer expenditures which is kind of a combination of GDP and inflation every year, and let's just call that between three and 5% a year, right?

Like some inflation plus GDP growth, three to 5%, easy, but let's just be conservative. I think three to 5% is pretty conservative that you'll get that every year, get it like a, you know, maybe a 1% dividend, 1% buyback, and you still have the secular tailwinds for like growth of digital and electronic payments. And so like you can just, like I said, like they put it like, you know, just rolling out of bed, you almost get to 10% revenue growth and you have margins of 50 to 60% and you have this moat that has been attacked and completely stood up to it. And that people like, you know, retailers hate it, you know, banks wish they could do

it, but they can't, they can't. And so with a mode that wide, with margins that high, and revenue growth that automatic, I don't think you're going to get it cheap, is all I can say. When I bought it, I thought it was expensive too. I think the PE ratio was closer to 30, maybe, at that time. There was a golden age to buy MasterCard and Visa when they first IPO'd, because the reason why they used to be owned by a network of banks, and the history of how MasterCard and Visa came into existence is crazy.

by the way but like uh without without going into that like too long like just saying like they they were owned by the banks for for forever and then like the banks spun them out and their ipos and i think mastercard was like i don't know like you know before 2010 and visa was like a year or two after that but like they you know they were they were spun out and um and they were being because they were being hit with like all these threats of lawsuits and like um by the retailers And like there's new regulation coming through and people were freaking out about the regulation and the lawsuits and the lawsuits. I mean, they paid a lot of money, like billions and billions of dollars in these lawsuits. But like they were passing things and they have grown tremendously since their IPO.

So that was the time to get it at a cheap valuation when all those things were coming for it. You know, you're only going to get it at a good valuation again. It's like there's a real credible threat to its moat. So it's almost like I would be like, unless you're very certain about whatever that was causing the disruption risk, you're probably not going to get it that low. And you take something like Moody's or S&P for their credit ratings business, I think those are like other businesses with really just incredible moats, but they don't have the growth factor there.

And their PE ratios are almost, in some cases, higher maybe. So I think with the automatic revenue growth, the high margins, and the wide economic modes MasterCard and Visa have, I just don't think you're going to get them too cheap. Sorry. Yeah. I think you're probably right. When was the first time you bought shares? I have owned this. In one of our episodes you guys probably had me on, I probably talked about my investing journey and how I finally just got smart and MasterCard and Disney were the two stocks I bought immediately after that. So that would have been late 2014, second half of 2014, maybe okay yeah congrats all right hey yeah congrats so the mastercard more than made up for the the the disney uh we'll call it the stagnation i think the great stagnation at

disney okay let's go to our last question that we ask every time i'm sure you remember it getting asked the last three or four times we've done a company and it is the pre-mortem and it's what could go wrong here now we address the government stuff which is kind of like all right well you you can't predict that. My take on the biggest premortem or why this investment will be due poorly is deflation. Do you see that as the biggest risk? And do you worry about that? Because I feel like if there's a deflationary bust, obviously you can't predict the Great Depression, but some sort of deflationary bust, it could hurt this business. So any thoughts on that or any other risks that you're watching so any kind of macro economic thing like deflation

right uh i consider to be more cyclical like anyways like it could happen but then eventually it too shall pass um so anything like that like um i it would survive and i think be okay on the other side it wouldn't be fun going through something like that obviously um with MasterCard or with a lot of stocks, right? But yeah, it probably wouldn't be too fun, but I think it would survive and then be fine on the other side. I think the biggest risk is

like the central bank digital currencies. So if they make the dollar a digital currency or maybe even crypto, if somehow like crypto became... Oh man, crypto. Come on. I own MasterCard. I own MasterCard, but you're telling me to do

a pre-mortem. It's our fault. We asked the question. like i don't think it will i don't think it will i don't think it will i don't own any crypto um but if you're telling me that mastercard didn't make it it's probably something like that uh like either like like i said central bank digital currency or like some kind of crypto use that could actually be used for currency and not as an asset like i think you know but then the price thing would have to figure itself out because right now crypto's price volatility i I don't think it will ever be used as a currency until that's figured out, which I don't know

that can be figured out. But if that was figured out, maybe that, maybe like a central bank digital currency. But again, I think something like that might disrupt these networks more than like Apple deciding, you know what, let's be a bank and let's make Apple pay its own issuer and its own network. I worry more about the government side than a private disruptor trying to build a better network or something.

Our government competition is a huge moat test. And I kind of think MasterCard would pass it, but that would definitely hurt the stock probably in the short run. And it would definitely be a threat to its business over the long run. Ryan, I have no other questions unless you have any.

Do you want to wrap up? No, I think we've covered pretty much everything here. People that listen to the show on a regular basis and have heard Matt before, you know where to find him. He has tons of work and tons of research and write-ups at 7investing.com.

You can also follow him on Twitter. What's the handle there, Matt? At Matt underscore Cochran number seven. And if you search Matt Cochran, I'm sure it'll pop up. We'll have the link to the Twitter in the show notes. All right. Well, before we sign off,

we should throw a disclosure on this. Brett and I are not financial advisors. Anything we say or discuss here on Chit Chat Money is not formal advice or recommendation. We are, however, general partners at Arch Capital, so clients may have positions in the securities discussed in this podcast. Thank you all for listening. Thank you, Matt, for coming on yet again, and we'll see you all next time. Bye.