A duopoly dominating digital payments

When consumers reach into their wallets or handbags and pull out a Mastercard or Visa card, they may not realize they are tapping into the core of the fintech industry, according to Fidelity’s Ruth Nagle, and both companies are positioned as leaders poised for growth.

“As two of the longest-operating competitors in the payment-processing space within fintech, each company has established a deep competitive moat, given the difficulty of replicating the global networks they operate for credit and debit card payments,” says Nagle, portfolio manager of Fidelity^® Select FinTech Portfolio (FSVLX).

Both Mastercard (MA) and Visa (V) partner with banks to offer products such as credit, debit, and pre-paid card options for consumers and businesses. Through Mastercard and Visa’s networks, payments are authenticated, authorized, and processed, making them valuable resources that enable digital payments worldwide.

Nagle’s conviction in the two companies is evidenced by her decision to make them the biggest holdings in the fund as of November 30. In addition, Mastercard was the fund’s largest overweight position versus its industry index, while Visa was the second-largest overweighting.

“These are two higher-quality companies that I believe have strategic advantages and a long runway for growth,” she says.

Another key differentiator for Nagle is the fact that many start-up fintech companies ride on the network rails of Mastercard and Visa. For example, mobile-payment service Venmo, which is owned by PayPal Holdings, clears the majority of its transactions through debit cards, most of which are linked through Visa.

Mastercard and Visa also facilitate the growing movement in equitable wage access, she says. In particular, Visa recently partnered with on-demand pay provider DailyPay to allow employees to access their wages daily, rather than waiting for a weekly paycheck.

Both companies support cryptocurrency, according to Nagle, noting that consumers can use credit cards to buy crypto assets, as well as convert these assets into traditional currencies for spending.

Many market watchers believe “buy now, pay later” companies and cryptocurrency appear poised to take market share from these two traditional payment-processing companies and disrupt their ability to compound returns, but Nagle believes these new entrants may create more opportunity for Mastercard and Visa, which are paid a small percentage of the total transaction value, plus a fee for each card swipe.

Under the buy now, pay later model, the total transaction value remains unchanged, but the payments are equally divided and automatically withdrawn over time, so the networks receive payment for multiple swipes instead of just one.

“If assets are being transferred digitally, they are most likely passing through Mastercard and Visa’s networks,” says Nagle. “That is a major competitive advantage, and it provides each company with the ability to compound returns and grow earnings.”

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