Why we think Visa and Mastercard are extraordinary

Dass Capital Extraordinary Companies portfolio update

Dear Investors,

You might be getting antsy with the recent volatility in the US markets.

Our Extraordinary Companies portfolio was down last week and the week before. It’s up this week. This roller coaster can easily unsettle your nerves.

Let me calm your nerves by telling you about two of the extraordinary companies that we own - Visa and Mastercard.

Sincerely, Raj

Let’s imagine you’re going on a trip to the store, or across the country, or overseas. What is the one item that you cannot forget to take along?

You’re thinking – mobile phone. After all, did your vacation take place if you didn’t share it on social media?

Believe it or not, up to about 20 years ago, a mobile phone was not essential packing for a trip - because the cameras were rubbish, data was slow and call costs were high.

And today, they are still not essential packing. Yes, your trip does take place, even if you don’t capture it on social media.

The one item that you could not forget for any trip was (and still is) your credit card. Many people don’t carry cash these days. That is our segue into discussing the portfolio and why Visa and Mastercard are extraordinary companies.

Visa and Mastercard

You know that Visa and Mastercard do something with credit cards. But you might be surprised to know that they have nothing to do with providing you with credit. Your bank does that.

Visa and Mastercard are actually technology companies that enable the processing of payments. They connect the merchant (store), you and the bank when you do a transaction. I won’t bore you with the details, but a lot of steps happen really quickly - Visa and Mastercard are the ones doing those steps.

Between the two, Visa is the big brother and Mastercard is the little brother. In the USA, Visa has 53% of payment market share while Mastercard has 26%. In Europe, market varies by country, but as a whole Visa has 60% of the market and Mastercard has 39%. That means, these companies cover 80% of US payments and 99% of European payments.

The only place in the world where these companies do not dominate is in China, where they have their own dominant payment company – Union Pay.

The reason Visa and Mastercard are dominant is due to their massive payment network. Merchants across the world accept payment using these cards. And the more places that accept these cards, the more convenient it is for customers to use them. So more and more customers get these cards. And the more customers that have these cards, the more attractive it is for merchants to accept these cards. This is a virtuous cycle that has allowed these payment processors to become a duopoly (i.e. two suppliers dominating the market).

You might be thinking, these companies have been at it for 50+ years, can they keep on growing?

Yes, they can. There is a slow decline in the use of cash and an increase in the use of cards. In 2016, cash accounted for 12.6% of American GDP. By 2021, it was predicted to be only 11.2%. If you’re wondering US GDP in 2021 was $23.3 trillion. That means there is a potential market for $2.6 trillion of transactions that can be moved from cash to cards. This is in the US market alone.

What makes them extraordinary?

Let’s put it all together. Visa and Mastercard have a huge competitive advantage over other payment companies due to the size of their network and its reinforcing effects. With an unassailable lead, these companies are able to capture more value than smaller competitors, while making attacks on their market share very costly. This is why Visa and Mastercard have become a duopoly and are extraordinary companies.


But why did we buy both of these companies when Visa is the clear leader? Well, as a shareholder, there is only one thing better than a duopoly and that is a monopoly (i.e. one company dominating the market).

Fortunately for us as investors, we can simulate a monopoly by purchasing shares in both companies. We now benefit from 80% US market share, 99% European market share and whatever their combined market shares are elsewhere in the world.

We also know the trend has a long way to go because cash is so prevalent globally. But we understand that as countries and economies develop, more and more people will use the banking system and payment products. So there is a secular trend underpinning the business model.

Unfortunately, great companies don’t often sell at bargain prices. From our point of view, the biggest threat that we face in the portfolio is whether we paid too much for them. You can stay out the market waiting for them to become cheap. But that is just as big a risk as overpaying. Missing out a decade or two of massive growth is a recipe for disaster.

A long holding period is a potential mitigant for high priced equities, if you have purchased companies that are growing and which earn good returns. Under these circumstances, you can expect the share price to follow the fundamentals over time.

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