Invest in Mastercard and cash in on credit cards
Payment-processing giant Mastercard is one half of a duopoly, and keeps investing in future growth.

The bandwagon for fast-growing payment-processing stocks has come to a screeching halt this year. Mastercard, Visa, PayPal and Square have all slipped, while US stocks overall are up by 22%. But the jitters appear overdone. Investors are losing sight of what made – and still makes – some of the top payment companies attractive in the first place.
Short-term headwinds
There is certainly plenty of short-term uncertainty facing the sector. Established card networks are under pricing pressure, with Visa credit cards (and their fees) no longer welcomed by Amazon in the UK, for example. And people aren’t travelling nearly as much as they used to: new Covid-19 variants keep delaying the return of big international transaction fees and fat foreign-exchange profits.
In the meantime, analysts have detected a shift to debit cards, away from higher-margin credit cards (although this could just reflect spending of stimulus payments and saved lockdown cash; demand for credit may return when this has run out). And there are shoppers turning to the often interest-free option of “buy now pay later” (BNPL), a digital, smartphone-friendly reboot of the decades-old model of paying by instalments that has opened the door to fast-growing new players such as Klarna, Afterpay and Affirm.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
These doubts are coming as some investors are starting to wonder if they overdid the rally in technology businesses expected to gain from the accelerating digital transformation kicked off last year by lockdowns. Highly valued growth stocks can be especially vulnerable to central banks hiking interest rates to reduce inflation.
An MSCI index of 300 financial-technology stocks underperformed the S&P 500’s traditional big-finance firms, such as banks, brokers and asset managers, by 31% in the first ten months of this year. Nevertheless, card-processing giant Mastercard recently delivered impressive results for the third quarter. I single out Mastercard not just for its recent financial performance, but also for its enduring quality, which makes it a standout investment throughout the economic cycle.
It operates a global payment system that any newcomer would struggle to build from scratch. It dominates its market, alongside Visa. The two giants are effectively a duopoly with no serious competitive threat to their businesses. Mastercard has 2.9 billion cards in issue, meaning nearly one in every two people in the world has one (if you exclude China, where it can’t operate freely).
Insulated from inflation
Mastercard has a strong balance sheet with profit margins consistently over 50%. It doesn’t lend any money, it just issues cards and settles payments, so it doesn’t carry bad-debt risk in a downturn. Its income is largely a cut every time one of its cards is swiped. So it is well insulated from inflation because its fees generally climb over the years in line with the prices charged by merchants.
And Mastercard is no slouch when it comes to innovation either. E-commerce keeps developing in new directions. It couldn’t without the Mastercard and Visa networks. PayPal and Square might seem to be alternatives, but they too rely on these payment networks to move money, so Mastercard gets a cut from PayPal’s business.
Some say BNPL could displace the card processors. But these newcomers collect instalments from cards, so again Mastercard gets its cut. It has even set up its own BNPL offering. And as for bitcoin, should the cryptocurrency take off as an everyday payment token, Mastercard’s bitcoin cards and reward programmes will benefit.
A finger in every financial pie
Recent results from the $330bn card-processing giant were initially well received. Earnings eclipsed expectations and comments from the company revealed an encouraging pick-up in income from recovering cross-border travel.
The very recent emergence of the Omicron variant has inevitably dented travel as restrictions are reimposed. Still, the rebound in this key source of sales has been delayed, not cancelled. The company upped its dividend by 11% and announced an $8bn distribution to shareholders via a share-buyback programme.
Its recent partnership with cryptocurrency specialist Bakkt means Mastercard can offer its clients the ability to issue bitcoin payment cards and promote crypto-reward programmes. This is likely to be a bigger draw than old-style reward points and, crucially, engages younger consumers. Similarly, the launch of “Mastercard Installments” as a platform for building BNPL offerings keeps the group at the forefront of financial trends while it simultaneously receives transaction fees from the efforts of newcomers in this field.
Mastercard is also moving into other new areas. Working with alternative-finance group Demica, for example, it is providing supply-chain financing to businesses.
The recent demise of Greensill Capital has unfairly cast a shadow over this activity. It has in fact been an established practice for years and, if managed correctly, is a good opportunity given that $125trn of payments flow between businesses each year.
Wall Street analysts have forecast annual sales and earnings growth of around 14% and 22% respectively on average over the next three years.
This is well ahead of the market as a whole. While the pandemic could reduce these numbers in the short term, Mastercard undoubtedly offers superior long-term growth prospects due to its dominant industry positioning, financial strength and technological innovation.
Stephen Connolly writes on markets and finance and has worked in investment banking and asset management for nearly 30 years (sc@plainmoney.co.uk)
Sign up for MoneyWeek's newsletters
Get the latest financial news, insights and expert analysis from our award-winning MoneyWeek team, to help you understand what really matters when it comes to your finances.
Stephen Connolly is the managing director of consultancy Plain Money. He has worked in investment banking and asset management for over 30 years and writes on business and finance topics.
-
IMF suggests “refinements” to Rachel Reeves’s fiscal rules
The IMF has upgraded the UK’s growth forecast but wants Reeves to refine her fiscal rules to avoid unnecessary spending cuts or tax rises
-
Invest like a tortoise, not a hare to avoid market volatility
Opinion Hassan Raza, Portfolio Manager at CG Asset Management, highlights three favourite investment companies
-
Investment opportunities in the world of Coca-Cola
There is far more to Coca-Cola than just one giant firm. The companies that bottle and distribute the ubiquitous soft drink are promising investments in their own right.
-
Streaming services are the new magic money tree for investors – but for how long?
Opinion Streaming services are in full bloom and laden with profits, but beware – winter is coming, warns Matthew Lynn
-
Trainline: a cheap cash machine for investors
Opinion Trainline’s shares have slumped owing to concerns about growth, but the sell-off seems overdone
-
Look to British stocks to lead the charge as the Magnificent Seven falter
Opinion Gervais Williams, fund manager, The Diverse Income Trust, picks three British stocks where he'd put his money
-
'Pension funds shouldn't be pushed into private equity sector'
Opinion The private-equity party is over, so don't push pension funds into the sector, says Merryn Somerset Webb.
-
Greg Abel: Warren Buffett’s heir takes the throne
Greg Abel is considered a safe pair of hands as he takes centre stage at Berkshire Hathaway. But he arrives after one of the hardest acts to follow in investment history, Warren Buffett. Can he thrive?
-
Who will be the next Warren Buffett?
Opinion There won’t be another Warren Buffett. Times have changed, and the opportunities are no longer there, says Matthew Lynn.
-
Will Comstock crash – or soar?
Opinion The upside for Comstock, a solar panel-recycling and biomass-refining group, dwarfs the downside, says Dominic Frisby.