My first investment-related job was on the floor of the New York Stock Exchange (NYSE), more than 40 years ago. So I was feeling a bit nostalgic when I recently visited the NYSE to attend Mastercard’s analyst meeting, which reinforced my conviction about the importance of innovation in the 21st century.
Companies across many industries need to evolve or risk facing secular decline. Mastercard represents this evolution better than most. The company’s core business is card-based credit and debit transactions. Just 15 years ago, Mastercard was a private company, owned by the issuing banks. In other words, it was a service bureau whose main customer was the banks that owned them.
Fast forward to today, Mastercard (and Visa) are public companies serving multiple customers including merchants, consumers and their card issuing banks. If both companies had not evolved, they would have faced slower growth, tighter regulatory scrutiny and greater vulnerability to new competitors.
At Mastercard’s recent meeting, I sensed another pivot in the works. Acquisitions in recent years have extended the company’s reach further into the payments business. The card-based payment business represents $30 trillion of annual payments, with consumer payment representing more than 90% of this total. Mastercard and Visa are the biggest players in this market and, currently, more than 50% of consumer spending is card-based as opposed to paid through cash or checks.
But widening the lens to business-to-business, peer-to-peer and government payments takes the annual market to $235 trillion, based on Mastercard’s numbers. If successful, Mastercard could lengthen its growth runway meaningfully and reduce the risk of a new competitor challenging its core business.
Businesses traditionally pay each other with a time-consuming, labor-intensive process that normally involves a check or wire transfer. Mastercard Track, a planned business-to-business platform unveiled at the meeting, aims to simplify this business by electronifying it, saving participants time and money. Mastercard would get a small fee for enabling the transaction, but the savings to participants would likely be greater than the fee to Mastercard. Global business-to-business payments total $125 trillion in annual spending so the size of the pie is large. Mastercard also announced a similar effort aimed at consumer bill payment.
None of this guarantees that Mastercard has “future-proofed” itself or that the stock will be an attractive investment. But it highlights the need to constantly innovate, as technological changes today happen far faster than they used to.
All of which brings us back to the NYSE. During the summer of 1986, I was “running tickets” on the NYSE floor. I was working for an execution broker and I’d collect the order tickets from the specialists on the floor, bring them back to our office and manually reconcile trades at the end of each day.
That job doesn’t exist today, and the exchange floor is a shadow of what it used to be. In fact, it’s known more today as one of CNBC’s studios and for the ringing of the opening and closing bell, rather than for the trading that goes on. But the NYSE and its owner, Intercontinental Exchange, have evolved the business so that it remains relevant and profitable even as the technology has changed and most trades have moved off the floor. As an active equity manager, our job is to assess what businesses and management teams are up to that task and which ones will fall short. Seeing Mastercard and the NYSE floor was a great reminder of this constant evolution.
