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CMSPI – IAC State of the Industry Report
CMSPI – IAC State of the Industry Report
Section 2 – Profitability in Payments Please note: All company financial data in Section 2 is based on public filings from public companies The card payments industry can be highly profitable. However, merchants on average generate significantly lower operating profit margins than other system participants (see Graph 2.1).
DEFINITIONS • Net Revenue: A firm’s revenue minus discounts from gross revenue. For most companies, Revenue and Net Revenue are identical, but Visa and Mastercard account for client incentives to banks and merchants as a discount. • Operating Income: A firm’s profit after deducting operating expenses such as wages, depreciation, and cost of goods sold. • Operating Margin: Operating Income divided by Net Revenue. A gauge of profitability. • Valuation (Market Cap): The market valuation of a company. The number of shares multiplied by the share price. • Valuation Multiples: Price/Earnings ratio used: Market Cap divided by Net Profit. This is a measure of the valuation premium investors are willing to pay for a stock.
Note: Company valuations based on the stock price at the end of each calendar year
EXCHANGE RATES: Financial information included in this report is communicated in USD. Where companies report in other currencies, we have used the 31st December 2023 USD exchange rate to calculate the dollar values for each year (e.g. 2020 numbers also use the 31st December 2023 exchange rate). This has been done to strip out volatile currency fluctuations from our analysis, and to better expose the underlying financial performance of the companies.
Graph 2.1 – Average Operating Profit Margins of Payments Industry Participants 44
Our analysis suggests the primary reason for this is the competitive landscape. As shown in Sections 2.1 to 2.3, card issuing, acquiring and network markets are all to some degree concentrated with some large companies, which could be attributed to high barriers to entry in these industries causedby high fixed operating costs and network effects. The card market is also a two-sided market with network effects, which lends itself to high levels of concentration. Retail is very different; there are low barriers to entry, and therefore fierce competition and low operating profit margins. This dynamic may explain why merchant advocates in many countries have long called for regulation of the card payment industry, in addition to launching antitrust litigation. This has proven to be a long drawn-out, fiercely debated area, which we will explore in more detail in Section 5. In this section, however, we take a deeper dive into network, acquiring, and issuer market dynamics around the world.
44 CMSPI estimates based on data from NYU Stern and Company 10ks. This only covers the U.S., but CMSPI has observed similar trends in merchant profit margins across several global markets.
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