Shares of global card-processing giants like Visa Inc. V and MasterCard Inc. MA witnessed a surge as markets applauded China’s modified reform that will allow even domestic bank-cards to be directly cleared by any of the global card processors, bringing in healthy competition in a country that sustains about 20% of the global population.
While the final scope and limitations of the amended reform are awaited, it is expected to implemented beginning Jun 2015, as declared by the State Council of China. Notably, following the announcement, Visa scaled a new 52-week high of $69.98, representing a strong one-year return of 30.8%, against 12.1% clocked by the S&P 500 index.
Overall, Visa and MasterCard jumped 4.1% and 3.9%, respectively. Both stocks also saw a surge in its average volumes traded.
So far, China UnionPay Co. Ltd. had been enjoying a comfortable monopoly in the world’s second-largest economy, processing all the cards domestically as mandated by the central bank of China (China Banking Regulatory Commission). Even Visa and MasterCard had to operate in the country through trade alliances with China UnionPay.
Opportunities Galore
The amendment was backed by substantial criticism faced by Chinese government from the World Trade Organization in 2012 for discriminating against foreign card processing companies, giving them minimal exposure of about $6.8 trillion worth in debit and credit cards processing (up 33% year over year at 2014-end), as all of it was executed by UnionPay alone. In Oct 2014, the Chinese government decided to loosen its grip on the payments market.
China also leads in personal consumption and digital commerce, which is expected to grow in double digits over the next 5–10 years, offering healthy growth opportunities to global card giants. Meanwhile, more than 30% of Visa and MasterCard’s top line accounted for card-processing or transaction fees in 2014. Per the Nilson Report, both companies together processed about $10.1 billion in payments volume in 2014.
Hence, going forward, it is believed that attainment of even a 10% market share in China can add incremental revenues worth over $1 billion for MasterCard, while purchase volumes are expected to be doubled for Visa and MasterCard by 2023 from 4.9 billion bank cards in 2014, as estimated by the Chinese central bank.
Our Take
While global card giants rejoice at the lucrative opportunity that China has unveiled, the think-tankers among them and the markets are simultaneously seeking the imp in the regulatory details. Despite some skepticism looming, the companies expect firm entry in China over the next 12 months.
We believe that allowing healthy competition and growth prospects in China could help Visa and MasterCard make up for the losses in the U.S., Europe and Russia due to stringent regulations and financially damaging lawsuits.
Meanwhile, other card companies like American Express Co. AXP and Discover Financial Services DFS have yet to assess their scope of growth from the amended regulation in China.
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