Analysts cheer a safer, more secure MasterCard

Posted on Tuesday, August 6th, 2019 Chris Markoch

MasterCard (NYSE: MC) reported their second-quarter earnings on July 30. Revenue came in at $4.11 billion which was higher than the consensus estimate for $4.08 billion and was a year-over-year increase of just over 12 percent. The news was equally good in terms of earnings per share (EPS). The credit services giant posted an EPS of $1.89 which beat the consensus estimate of $1.82. That number was over 15% higher than the $1.66 that it posted for the same period in 2018.

However, after the positive earnings report, the stock declined, dropping to $275.45 and closing at $278.19. The stock has then struggled to regain that high. In fact, despite outperforming the market for most of 2019, the stock has struggled to break above its 52-week high of $283.33. That doesn’t seem to be bothering analysts who continue to list the stock as a buy and have set a consensus 12-month price target of $288.31 which would show upside growth of 10.69 percent.

But if MasterCard has fundamentals that similar to competitors such as Visa (NYSE: V) and American Express (NYSE: AXP) which trade at lower P/E ratios, why are analysts still so bullish on MasterCard? The answer in a word may be blockchain.

MasterCard is going all-in on blockchain

MasterCard is not hiding their embrace of blockchain technology and, perhaps, cryptocurrency development. In the fourth quarter of 2018, MasterCard ranked third in the number of blockchain-related patents they had filed.

To that end, the company has already entered the emerging “cryptocosm” with their own secure and scalable blockchain solution that provides a safe, simple and smart way for consumers, businesses, and banks to transact. The company has sent their own application programming interface (API) to financial institutions and merchants for them to use as a test case. The MasterCard blockchain will help consumers clear card payment transactions in real-time, removing the need for the reconciliation process and improving settlements.

Furthermore, MasterCard’s blockchain is applying their integration “at scale” because as MasterCard’s vice chair stated businesses cannot just “replace existing technology with blockchain because they may not create a better user experience”.

Security is the new convenience

But the move towards blockchain is about more than faster transaction speed. With the hack of Capital One still fresh on every investor's mind, consumers and investors don’t need to be reminded of the need for a new, more secure approach to payment processing and electronic. At its core, blockchain technology changes the existing payment paradigm by making security the focal point of every transaction. In their recent patent filing, the company stated their intention of using blockchain technology to find solutions that provide both security and convenience.

“… there is a need for a technological solution to enable the conveyance of payment credentials to a point of sale device that requires minimal participation by the consumer, while still maintaining a high level of security, particularly against skimming.”

With the MasterCard blockchain, the details for the transaction can only be seen by the participants in that transaction. This would help prevent the practice of skimming which can occur when hackers pull payment credentials from a payment instrument as they are being wirelessly transmitted. The card information is encrypted and stored on the blockchain after which a public and a private key are issued. Whenever the card is used to make a purchase, a retrieval request is sent and the system will then use the keys for decoding and verifying the card information.

Faster, safer transactions are the tip of the iceberg

Among the patents that MasterCard has filed includes a patent for a method to partition a blockchain that would be capable of storing multiple transaction types and formats. Using a partitioned blockchain would address the need for an alternative solution to current blockchain systems that require blocks to “be of the same format and include the same types, and sometimes even sizes, of data.”

The proposed patent would give MasterCard a potential solution, coining the term “subnet” for the partitions that would be internally consistent but interact in a wider, single system. The application goes on to state, “a partitioned blockchain may include transaction records for three different subnets, where the transaction records associated with each respective subnet may be formatted differently and may involve the transfer of a different cryptographic currency as associated with each subnet.”

Why cryptocurrency may be the endgame for MasterCard

Recent job postings for blockchain and cryptocurrency-related product lead analysts to believe MasterCard is using blockchain to enter the crypto wallet space. MasterCard is also reported to be a partner in the Libra association. This consortium was established as a governing body for Facebook’s planned Libra cryptocurrency.

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