The Yoshinoya Beef Bowl of Payments
In the movie "Knocked Up," Ben (Seth Rogen) and his stoner friends are working on their ground-breaking business idea, a website that catalogs all the nude scenes in movies and provides time stamps so you can fast forward to the “good stuff”.
The audience knows this website already exists. It's Mr. Skin.
But we suspend disbelief, thinking that the characters live in a world where Mr. Skin does not exist.
But then comes the crushing reveal.
Not only does Mr. Skin exist, but these would-be entrepreneurs didn't even perform the most basic market research before investing fourteen months of their lives into the project.
After the initial disappointment, most of the group brushes it off and leaves to go watch Spider-Man 3. Leaving Ben and Jay behind.
Ben then offers a perspective that perfectly frames our investment thesis for this month:
"You know what? Just because this site exists doesn't mean ours won't work. Good things come in pairs."
"Volcano, Dante's Peak. Deep Impact, Armageddon. Wyatt Earp, Tombstone."
To which Jay adds:
"Panda Express, Yoshinoya Beef Bowl."1
This scene brilliantly illustrates a truth I’ve observed repeatedly in markets: dominant duopolies can be incredibly powerful investment opportunities. And the company I’m featuring this month belongs to one of the most entrenched, profitable, and growth-oriented duopolies in modern business.
You likely interact with this company's products multiple times daily. Its technology powers trillions of dollars in transactions annually across more than 200 countries. And despite operating in what appears to be a competitive space, it enjoys extraordinary profit margins thanks to its position in a powerful two-player system.
Just as those movie pairs succeeded despite their similarities, our featured company has thrived by offering essentially the same core service as its main counterpart. Together, they've built a global payments infrastructure that benefits from network effects, high switching costs, and strong secular growth trends.
If we’re going to own Visa, then we should also own the Yoshinoya Beef Bowl of payment networks, Mastercard.
Competitive Advantages
Multi-Party Network Effects
Like Visa, Mastercard's strength lies in its intricate multi-party network that connects consumers, merchants, and financial institutions. With a global market share of 29% in credit cards and 24% in debit cards, Mastercard has created an ecosystem where each participant increases the value for all others. The more consumers use Mastercard, the more merchants want to accept it, and the more banks want to issue Mastercard-branded cards.
High Barriers to Entry
Building a competing payment network with Mastercard's scale and reach is virtually impossible. The company processes over $8 trillion in annual purchase transactions across a vast global network. This established infrastructure, combined with complex relationships with financial institutions and merchants worldwide, creates formidable barriers for potential competitors.
Significant Switching Costs
The deeply embedded nature of Mastercard's network creates substantial switching costs for all participants. Banks would need to undertake the expensive process of reissuing cards and renegotiating agreements. Merchants would have to modify their payment systems and risk losing customers who prefer using Mastercard. Consumers would lose access to one of the world's most widely accepted payment methods.
Scale Advantages
Mastercard's massive transaction volume creates significant operational leverage. The company maintains impressive operating margins of 58%, demonstrating how its scale translates into superior profitability. As transaction volumes grow, the cost per transaction continues to decrease while maintaining industry-leading security and reliability standards.
These competitive advantages have helped Mastercard establish itself as one half of the global payments duopoly, alongside Visa. The company's network is so entrenched that even large tech companies and governments have struggled to displace it, leading to returns on invested capital well above any reasonable cost of capital estimates.
Growth Catalysts
Mastercard’s catalysts are going to be very similar to Visa’s.
Cash to Digital
According to McKinsey, in 2024, total cash transactions came to $26 trillion. The developed world is much further along in the cash-to-digital transformation, but the rest of the developing world is still transacting in cash.
Not all the remaining cash transactions will convert to digital, and not all of it will flow through Mastercard’s payment network. But some will, and even grabbing a couple trillion in new transactions is meaningful to Mastercard.’
But the biggest benefit is that the transition to digital payments makes commerce easier and leads to increased spending per Visa.
In fact, Moody’s found that just a 1 percent increase in card usage across those 70 countries and territories produces on average an additional $65–70B annually in consumption of goods and services, which in turn supports local business and drives overall growth. “That creates a virtuous cycle: increased spending generates production, jobs, income, and GDP, which generates more spending, and increasing use of electronic payments facilitates that virtuous cycle,” says Zandi.
E-commerce
Visa and Mastercard are the toll booths of e-commerce.
Every online transaction requires some form of digital payment. Mastercard’s trusted brand, security features, and wide acceptance make it a top choice for consumers and merchants.
E-commerce is still in its early stages of secular growth. It’s expected to be 20% of global retail sales by 2029. E-commerce will grow with consumer spending, but it will also increase its market share of global retail sales.
This provides a huge secular growth opportunity for Mastercard and a higher revenue source.
Interchange fees, the rates charged between acquiring and issuing banks, are higher for e-commerce transactions (card-not-present transactions), ranging from 1.9% to 2.6% versus 1.5% -2.3% for card-present transactions.
Mastercard’s revenue comes from assessment fees (≈ 0.13%) and processing fees. Higher interchange fees lead to higher assessment revenue for Mastercard.
Consumers are also increasingly shopping from international merchants through platforms like Amazon, Alibaba, and Shopify. Mastercard benefits from the higher cross-border payment fees and currency conversion fees. Mastercard adds an additional 0.4% for cross-border transactions and another 0.2% for any currency conversions.
A 0.13% gross dollar processing fee becomes 0.73% (0.13% + 0.40% + 0.2%) on a cross-border transaction with currency conversion.
BNPL & Digital Wallets
New payment options like Buy Now, Pay Later (BNPL) and digital wallets further expand Mastercard's network and increase transaction volume.
Rather than building costly new payment networks, BNPL companies leverage Visa's and Mastercard’s existing infrastructure to quickly access their vast network of consumers and merchants. It would take a lot of time and money to build their own network from scratch.
Most BNPL accounts are paid through a Visa or Mastercard-branded debit card. BNPL purchases typically involve higher transaction values, increasing gross dollar volume on Mastercard’s platform. Additionally, splitting payments into four or more installments increases Mastercard’s processing fees.
Likewise, most digital wallets are backed by debit or credit cards branded by either Visa or Mastercard. These wallets serve as another channel to increase digital payments, further expanding the total transaction volume flowing through Mastercard's network.
B2B Payments
B2B payments cover accounts payable and supplier payments, travel & entertainment, procurement, and Fleet fuel cards.
The global B2B payment market is estimated to be around $120 trillion, with an estimated 10-13% of these payments being digital.
Mastercard is targeting the B2B market in part because of the low percentage of digital transactions but also because the transactions are usually higher value and often cross-border transactions that need currency conversion.
Why would a business pay these higher fees when they could continue to pay via check, ACH, or wire?
Digital payments offer several operational advantages.
Speed. Mastercard can offer real-time or same-day payments versus the 1-3 business days it takes ACH to settle.
Digital payments minimize manual entry errors and reduce the labor required for payment tracking. Companies can also embed Mastercard's payment tools directly into their workflows, creating automations and streamlining the whole process.
Digital payments also lower fraud risk.
However, the most significant advantage is working capital management. The speed and predictability of digital payments enable better cash flow management, and poor cash flow management is one of the leading causes of business failure.
Value Added Services
Value Added Services encompass offerings beyond Mastercard's core payment processing, including Security Solutions, Customer Acquisition & Engagement, Business Insights, and Digital Authentication Services.
The intent is to enhance the capabilities of its customers, the banks, merchants, and businesses.
Financial institutions leverage Mastercard's solutions to minimize losses caused by fraud while gaining valuable insights into spending patterns. They can then incorporate additional services to boost customer acquisition and develop new payment products.
Merchants gain access to robust cybersecurity tools and tokenization to reduce costly chargeback fees. They can also use Mastercard’s Customer Acquisition & Engagement programs to increase loyalty, drive higher transaction volumes, and strengthen customer retention.
Businesses, both large and small, gain access to expense management tools for better control over employee spending, as well as advanced fraud detection to safeguard their high-value transactions.
The more solutions a customer adds on top of Mastercard's core payment processing, the stronger the relationship becomes and the higher their switching costs grow.
Value Added Services also diversifies Mastercard's revenue stream and adds another high-margin, fast-growing business segment.
While Mastercard doesn't disclose specific margins for its VAS business, these services represented nearly 39% of total revenue in Q1 2025. During this period, overall operating margins improved from 58.77% to 59.31%, with revenue growing 16% year-over-year.
Risks
Regulation
The payment networks operate as an oligopoly, dominated by Visa and Mastercard. This concentrated market structure makes them prominent political targets, exposing them to increased regulation and potential fines.
Politicians frequently criticize Visa and Mastercard over interchange fee rates. While they argue that higher interchange fees harm consumers by increasing prices, the reality is more complex. Merchants pay these fees, which are deducted from their transaction amounts, and are the primary advocates for lower rates. Even if interchange rates were drastically reduced, consumer prices would remain unchanged, as merchants are unlikely to pass on the savings.
Mastercard earns only a small portion of interchange fees. The bulk goes to issuing banks, who strongly oppose fee reductions. These fees enable banks to offer attractive rewards programs and incentives that drive credit card adoption. As card usage increases, so does interchange revenue, creating a self-reinforcing cycle.
Lower interchange fees would hamper banks' ability to grow their credit card business, potentially reducing both card adoption and their fee income.
Consumers benefit from and actively seek rewards programs. The more attractive the rewards, the more likely they are to use that credit card for daily spending, generating more interchange fees and interest charges for the issuing bank.
While acquiring banks don't directly receive interchange fees, they bundle high interchange rates into their merchant service fees, allowing them to maintain higher overall charges.
Most large banks operate as both issuing and acquiring banks, giving them strong incentives to maintain higher interchange fees to drive revenue growth.
This demonstrates the effectiveness of the multi-party network: numerous entrenched interests work to maintain the current system.
However, if new legislation caps interchange fees further, then Mastercard's revenue could decline, as they might need to reduce their percentage of the processing fee to keep issuing banks satisfied and committed to their network.
Large Merchants
Merchants as a whole are a disparate group with competing goals and interests. They lack a central organized structure to push back against Visa and Mastercard and their interchange rates. However, companies like Walmart and Amazon that dominate retail shopping and e-commerce are big enough to push back. Their focus has been mainly on Visa, the largest payment network, because if Visa gives in to their demands, then Mastercard will too.
Visa typically yields to their demands, and so does Mastercard to protect both current and future payment volume flowing through their networks. Visa and Mastercard can afford to lower rates for these large merchants due to their scale and ability to continuously reduce per-transaction costs.
If Mastercard didn’t yield and these large merchants dropped the network, Mastercard would lose substantial revenue, diminishing the company's value. It's a delicate balance, as merchants also risk losing sales volume.
Large merchants have another option: steering customers toward ACH/bank transfer payments to bypass the network entirely.
While large merchants can handle the increased data protection costs and infrastructure needed for bank transfers, the main challenge is consumer trust and convenience.
Although setting up your bank information is a one-time process, it creates friction in the checkout process, and increased friction lowers sales conversions. Customers prefer to pay immediately rather than set up a new payment method, especially when they already have convenient access to their Mastercard-branded debit or credit cards.
Real Time Payment Networks
Real-Time Payment Networks (RTPN) are instantaneous bank transfers between financial institutions that bypass third-party payment networks like Visa. Unlike ACH, which has business-hour cutoff times and settlement delays, RTPNs operate 24/7 and settle funds within seconds.
RTPNs charge significantly lower fees than third-party networks like Mastercard and have gained traction in countries like India and Brazil. The U.S. Federal Reserve has also entered this space with its own RTPN, FedNow.
The risk is that payment flows will shift towards RTPNs and decrease Visa and Mastercard’s processing revenue.
Mastercard has adapted to this new competition not by trying to outcompete but to work with them.
Mastercard acquired Vocalink, which powers real-time payment infrastructure in the UK and Singapore. They also acquired NMI and Finicity to power Mastercard's open banking infrastructure, enabling them to link bank accounts and authenticate RTP and ACH transactions. This allows them to build out the infrastructure for RTPNs and assist banks operating within these networks.
RTPNs typically focus on domestic transactions and lack the capability to facilitate real-time cross-border payments. Mastercard fills this gap.
Mastercard's MOVE platform facilitates real-time cross-border payments. Similar to its traditional payment network, cross-border transactions are a high-value service where Mastercard earns a higher fee per transaction, plus an additional fee for currency conversion.
Since real-time payment networks primarily handle bank-to-bank transactions (including peer-to-peer), business-to-business, and business-to-consumer transfers, Mastercard can offer its Value Added Services to banks and businesses to enhance security, fraud protection, and compliance reporting.
While RTPNs represent new competition, they focus primarily on money flows rather than consumer transactions. By working alongside RTPNs and developing their infrastructure, Mastercard gains access to another growth engine and creates opportunities to cross-sell and expand their value-added services.
Recommendation
Mastercard has one of the strongest network effects among publicly traded stocks, second only to Visa. Despite emerging competition and regulatory threats, the company is riding two major secular growth trends—the shift from cash to digital payments and the rise of e-commerce—that will fuel its growth well into the future. This doesn't even account for the high-margin growth that Value Added Services will contribute to Mastercard's bottom line.
If we're going to own Visa, we should also own Mastercard, its counterpart in the duopoly of open payment networks.
Buy Mastercard up to $600 per share and initiate with a starter position, given its strong 6-month relative momentum to the broader market.
Yes, Panda Express is Chinese food, and Yoshinoya is Japanese.
Interesting insights on RTPNs!