Mastercard's Debt Strategy: A Threat to Visa's Cash Supremacy?

While Visa leads with greater market share and sales revenue, Mastercard is hot on its heels, investing in tech and new acquisitions. Can Visa keep its crown, or will we see a payment industry power shift?

Try remembering the last time you made a payment. Did you use Visa or Mastercard? You might not have given it a second thought and that’s totally fine. Both Visa and Mastercard offer similar services and are often interchangeable in the minds of many consumers.

However, a closer examination of their market standing and financial statements reveal differences!

Visa can be likened to a marathon runner—consistency and endurance are its winning traits. This has allowed it to secure a substantial market share of 61.1% in 2023, overshadowing Mastercard's 25.4%.

On the other hand, Mastercard should not be underestimated. Think of it as a daring adventurer, unafraid of taking risks. Mastercard has borrowed and invested more, fueling its sales revenue to grow at a five-year CAGR of 8.28%, surpassing Visa's 7.28%.

These narratives, tucked away in the puzzle of statistics, are shaped by elements like cash flow, debt, liquidity and solvency management. All are important Treasury metrics.

Visa and Mastercard are competing in the same race—who will emerge victorious in the long-run? We provide an answer to this question today!

How do Visa and Mastercard Translate Swipes into $$$?

Visa and Mastercard generate revenue through payment processing fees, often referred to as assessment fees. These fees represent a small percentage of each credit card transaction, approximately 0.14% for Visa and 0.1375% for Mastercard. Visa levies charges on card issuers either per transaction or based on card volume, whereas Mastercard’s charges are based on the percentage of global dollar volume.

Now that we understand how both Visa and Mastercard generate revenue, let’s begin our analysis by examining their Free Cash Flow (FCF).

Visa had 1.74x the FCF of Mastercard in 2023

The data on Free Cash Flow (FCF) from 2019 to 2023 shows that Visa consistently had a higher FCF than Mastercard in each of those years. 

Visa’s FCF grew from $12.03 billion in 2019 to $19.70 billion in 2023, while Mastercard’s FCF increased from $7.47 billion to $11.33 billion in the same period. That means, Visa had a higher five-year CAGR of 10.37% compared to Mastercard’s 8.69%. 

Overall, Visa leads in FCF. But Mastercard’s growth shouldn’t be ignored. Both performed well, but not by coincidence.

Understanding the Success of Visa and Mastercard

1. Travel and cross-border spend: Both companies reported significant increases in their cross-border spend volume. This implies that consumers are spending more on travel, which includes not only airfare but also dining and entertainment in foreign countries. For instance, Visa’s cross-border volume surged 18% year over year, and Mastercard’s was up 21%.
2. Consumer spending: Increased consumer spending has positively impacted both Visa and Mastercard, leading to double-digit revenue increases. Easing of the restrictions that came with the COVID-19 pandemic led to a resurgence of in-store shopping, restaurant dining, and travel. This has resulted in increasing payment volumes for both Visa and Mastercard.
3. Co-branding and partnerships: Both companies have been capitalizing on the surge in travel spend by tying up with various brands. For example, Visa recently clinched a co-brand with Universal Studios, and more airlines are launching co-brand cards. Such partnerships allow these companies to reach more customers and increase their transaction volumes and revenue.

Now let’s take a closer look at Visa and Mastercard’s debt trends.

Mastercard's Total Debt is Increasing at a CAGR of 12.13%

Mastercard’s total debt has been on a steady rise since 2019, with a CAGR of 12.13%—suggesting a more aggressive borrowing strategy.

On the other hand, Visa’s total debt shows a smaller CAGR of 4.64%, indicating a more conservative approach. The drop in Visa’s debt from 2020 to 2023 is also noteworthy. However, despite the decline, Visa’s debt remains higher than Mastercard’s in absolute terms.

Visa presents a more effective strategy for managing debt, but there’s a catch. Mastercard has been heavily investing into its future, which could explain why its debt has been increasing at such a rapid pace.

Mastercard is Borrowing at a Greater Pace. But Where is it Spending all those Dollars?

1. Investments in New Technology: Mastercard has prioritized introducing new technologies into its business and has invested in biometric authentication, tokenization, and contextual commerce These investments, while increasing short-term debt, could provide long-term growth and profitability.
2. Focus in Acquisitions: Mastercard has made strategic acquisitions including Aiia, Baffin Bay Networks, and Dynamic Yield. These acquisitions highlight their engagement with payment technology advancements, open banking, enhancement of security with AI and cloud-based solutions, and improved personalisation capabilities.

We found out that Mastercard is investing in its future through borrowing. But can it repay what it has borrowed? In the following two sections, we’ll assess Visa and Mastercard’s capability to fulfill their short-term and long-term debt obligations.

Visa’s Average 5-year Current Ratio at 1.62 is Superior to Mastercard’s

Mastercard’s average current ratio over the past five years is 1.33, while Visa’s current ratio stands at 1.62.

Visa’s higher current ratio is due to its larger amount of Current Assets compared to its Current Liabilities. A company has more Current Assets when it has more cash, cash equivalents, accounts receivable, or other short-term assets, or fewer short-term liabilities like accounts payable and short-term debt.

Visa appears to have better short-term financial health and liquidity compared to Mastercard.

But, why is this? 

Visa is Generating more Cash and Cash Equivalents

Increase in sales directly increases cash flow by converting inventory into cash. More sales means more current assets.

Visa Current Assets are growing at a five-year CAGR of 9.84%. Whereas Mastercard’s Current Assets have been growing at a slower pace, at a five-year CAGR of 2.33%.

This can be due to several factors:

1. Visa generates more revenue: Visa is generating more revenue than Mastercard, leading to higher receivables, increasing its current assets. In 2023 alone, Visa generated 1.15x the revenue of Mastercard’s.
2. Visa manages its cash better: It is managing its inventory more efficiently, ensuring quicker conversion into sales, and retaining more cash and cash equivalents.

Mastercard's Debt-to-Equity Ratio is 3.6x higher than Visa's

From 2019 to 2023, Visa maintained a lower and more stable Debt-to-Equity Ratio compared to Mastercard. Visa’s ratio hovered around 1.25, suggesting a balanced approach to leveraging debt.

In contrast, Mastercard’s ratio was significantly higher, averaging at 4.51. This indicates a more aggressive use of debt in its capital structure.

Why is Mastercard using More Debt to Finance its Growth Compared to Visa?

1. Investment in growth: Mastercard’s is aggressively investing in new growth opportunities, such as market expansion and technological advancements, which require substantial upfront capital.
2. Visa’s conservative cash spending approach: Visa’s lower Debt-to-Equity Ratio suggests a more conservative approach, possibly relying more on its equity for financing. This is because Visa is generating more revenue, leading to less need for debt financing.
3. Having a higher ratio is NOT a bad thing: It’s important to note that a higher Debt to Equity Ratio isn’t necessarily bad—it, in fact, is an indicator of an aggressive growth strategy, which we talked about earlier in the Mastercard’s case. But it does come with higher risk, as it means the company has more obligations to meet. Conversely, a lower ratio may suggest a safer financial structure, but it could also mean missed growth opportunities.

Can Mastercard Upend Visa’s Dominance?

In conclusion, Visa maintains the dominant position for now, but Mastercard’s daring strategies could disrupt the status-quo if successful.

Mastercard, despite its robust growth and aggressive borrowing and investing strategy, is still overshadowed by Visa in terms of market share, free cash flow, and effective debt management.

Mastercard’s bold growth strategy, heavily reliant on debt financing, could potentially yield significant future results. However, this approach carries increased risk, as evidenced by its high Debt-to-Equity ratio. 

This disruption hinges on Mastercard’s ability to manage its debt effectively and transform its investments into profitable growth. Conversely, Visa must continue to innovate and explore new growth opportunities to retain its leadership
position.

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