🧑🏫 Business Model
Analyzing Mastercard's business model
This is the fifth article in the series How to Analyze a Stock.
In this course you’ll learn:
How to find attractive stocks
Where to find information about these companies
How to determine whether a company is an attractive investment
In case you missed the first articles of this series:
Today you’ll learn how to analyze a business model using Mastercard as an example.
Business Model
How does the company make money?
Do I understand the products/services the company sells?
If the business profile doesn’t look attractive to you or you don’t understand it properly, you can stop looking into the company right away.
The more simple and attractive the business model, the better.
"Know your circle of competence, and stick with it. The size of that circle is not very important; knowing its boundaries, however, is vital." - Warren Buffett
"Invest in a boring, mundane and non-glamorous businesses. Those companies tend to do the best in the long term." - Peter Lynch
In every investment case, we’ll analyze the following elements to determine whether the company has an interesting business model:
What does the company do?
How does the company make money?
In which segments is the company active?
How does the geographical split look like?
We’ll give the company a score on 10 for its business model
We’ll use the following resources to answer these questions for Mastercard:
The company’s annual report
The document with interesting snippets we collected (see article 3 in this series)
1. What does the company do?
First of all, we need to understand the company’s business model.
We will only invest in companies that lays within our circle of competence.
A company falls within our circle of competence when 2 criteria are met:
We understand the products/services the company sells
We think we know what the industry and company will look like 10 years from now
Mastercard falls within our circle of competence because we use their products daily.
Together with Visa, they dominate the entire market for payment networks and we think this will continue to be the case 10 years from now.
What does Mastercard do?
Mastercard operates as a global financial services company with a straightforward business model that revolves around transaction fees and providing payment services. Together with Visa, they dominate the entire credit card and digital payments sector. Last year, Mastercard processed 125 billion transactions, representing $8.6 trillion (!) in payments. The company is active in 200 countries and approximately 150 different currencies.
It’s important to understand that Mastercard isn’t a financial institution. They don’t issue credit or debit cards themselves but instead, partner with banks and financial institutions that issue these cards to consumers. They connect consumers, financial institutions, merchants, governments, digital partners, businesses, and other organizations worldwide by enabling electronic payments instead of cash and checks and making those payment transactions safe, simple, smart, and accessible.
In general, you can state that Mastercard makes payments easier and more efficient by providing payment solutions and services. The company’s family of trusted brands includes Mastercard, Maestro and Cirrus.
Mastercard operates a multi-rail payments network that provides choice and flexibility for consumers, merchants and their customers. Through their network, they authorize, clear, and settle payment transactions. Furthermore, Mastercard also has additional payment capabilities that include an automated clearing house (“ACH”) and transactions (both batch and real-time account-based payments). Furthermore, the company offers value-added services including, among others, cyber and intelligence solutions to allow all parties to transact easily and with confidence, as well as other services that provide proprietary insights, drawing on our principled use of secure consumer and merchant data.