Mastercard is a global payment processing company, which is based in the US. The company was founded in 1966 as “interbank” and then named “Master Charge” until 1979 was created by an alliance of several banks against the rival product by the Bank of America. The company is headquartered in New York, United States. It serves customers from the public sector, banks and credit unions, large enterprises, and retail customers. Mastercard has connected businesses and individuals from over 200 countries (Mastercard, 2021). The company is forward-thinking, with an eye on technological progress, and positioned itself for the digital age. It has a culture of diversity and inclusion, and the belief diversity in the teams makes them stronger and brings a different perspective into the fold, which is a necessary component for a more robust and successful organization. Porter’s five forces analysis is a valuable tool to assess the business and financial risk Mastercard is exposed to in the global financial services sector.
Competitive Rivalry in the Market
Mastercard operates in conjunction with two industries financial services and technology. Therefore this hybrid domain not only makes it also specialized uniquely competitive. Mastercard is positioned firmly at the top because of its vast experience and knowledge of the field. Major players dominate the payments processing industry, and the state of the competitive environment is oligopolistic. Its primary competitors are PayPal, Visa, and American express. Mastercard is ranked 191 in Fortune 500 index; the company made a profit of $6.4 billion and revenue of $15.3 billion (Fortune, 2021). In the financial year 2020, PayPal earned $17.5 billion and a profit of $2.5 billion (Forbes, 2021). Visa, on the other hand, reported revenue of $21.4 billion and earned a profit of $10.7 billion, with a profit to income ratio of 52.6%, and the company is at 137th rank in Fortune 500 global companies (Fortune, 2021). However, American Express is the highest-ranked US payments processing company in the Fortune Global Index, ranked at 67; the company reported revenue of $38.1 billion and profit of $3.1 billion (Fortune, 2021). The industry maintains its oligopolistic state. However, the entrance of technology firms and unicorns into the industry will change that landscape.
Threat of Substitutes
The availability of better alternative products is moderate to high. The threat is increased when there is a low switching cost, and better alternatives are also widely accepted. The industry has the potential, and the data-intensive nature has made it the primary target industry for technology companies. The companies automate data collection and processing and leverage the technology to conduct fast-paced secure transactions among the parties. The distributed financial technology has also started to gain momentum. Payment made via credit cards will increase from $1.75 trillion in 2019 to $1.82 trillion in 2024 (Toplin, 2021). Digitization has increased the volume of transactions and makes the industry more competitive. The digital revolution acclimatized the consumers with intelligent appliances; thus, their willingness to use high-tech platforms has increased dramatically. With the dynamic nature of the industry and the high-tech landscape, the threat of substitutes remains moderate.
Threats of New Entrants
The threat of new entrants is assessed to be moderate. The industry has both obstacles as well as opportunities for the breakout companies. The problems are inherent to the industry, and one major problem is regulation; payment processing is a sensitive matter and attracts severe regulatory attention. There are stiff compliance requirements to avoid illegal money transfers and money laundering. Established banks can position themselves and use their existing prowess to harness customers and deter fintech companies (Dan et al., 2016). These strict regulations also make room for new entrants to break the oligopoly state of the industry and compete with the incumbents. The other problem is a high capital requirement; now, venture capital firms support high-tech startups to break into the industry, thus minimizing the barrier. The threat of new players breaking into the sphere is moderate to high
Bargaining Power of Buyers
The bargaining power of the buyers depends upon the nature of the industry, and the value buyers bring to the company. Other factors that affect buyers’ power are buyers’ concentration, switching cost, and available substitutes. The primary buyers for the payments processing company are banks, merchants with private cards, credit unions, and governments. The banks and credit unions hold moderate bargaining power as there are enormous numbers, and they bring the customers for the processing company. However, independent merchants can’t have much say as they are dependent upon the company for authentication of their plastic cards. After the financial crisis, many banks have merged and became more powerful entities; these concentrations have increased their bargaining power. Moreover, banks can easily switch between service providers, which increase their weight. Buyers are concentrated, and low switching costs gave buyers higher bargaining power (Vyas & Raitani 2014). Considering the factors explained above, buyers have moderate to increased bargaining power.
Bargaining Power of Supplier
The bargaining power of suppliers consists of the state of the industry and underlying factors.In the industry, suppliers usually have moderate to low bargaining power. The major suppliers for the card issuers are the specialist software providers to manage the card issuers’ banking stack and the expert human resources with finance, business, and software background. The software providers are duly vetted and are required to meet stringent security standards to provide services to leading card issuers. Many companies are available in this domain, and hundreds are selected out of many public companies gives the buyer more control over services providing vendor. Suppliers assert higher power if they are in concentration, and they can compromise the product quality (Steven et al., 2018). On the other hand, there are available experts in abundance for the entry-level positions, and leading companies have mentorship programs to groom next-generation leaders, therefore, attracting top talent. Therefore, suppliers have low bargaining power.
References
Dany, O., Goyal, R., Schwarz, J., van den Berg, P., & Scortecci, A. (2016). FINTECHS MAY BE CORPORATE BANKS’BEST “FRENEMIES”. The Boston Consulting Group.
Forbes. (2021). Paypal. Available at: https://www.forbes.com/companies/paypal/?sh=3e966c576f44
Fortune. (2021). American Express. Available at: https://fortune.com/company/american-express/fortune500/
Fortune. (2021). Mastercard. Available at: https://fortune.com/company/mastercard/fortune500/
Fortune. (2021). Visa. Available at: https://fortune.com/company/visa/fortune500/
Mastercard. (2021). Vision. Who we are. Available at: https://www.mastercard.us/en-us/vision/who-we-are.html
Steven, A. B., Dong, Y., & Corsi, T. (2014). Global sourcing and quality recalls: An empirical study of outsourcing-supplier concentration-product recalls linkages. Journal of Operations Management, 32(5), 241-253.
Toplin, J. (2021). The payment industry’s biggest trends in 2021—and the pandemic’s impact on digitization in the payments landscape. Business insider. Available at: https://www.businessinsider.com/payments-ecosystem-report
Vyas, V., & Raitani, S. (2014). Drivers of customers’ switching behaviour in Indian banking industry. International Journal of Bank Marketing.