During our third quarter portfolio update, we profiled portfolio holding, Mastercard, Inc. (MA). Below is a replay of our live commentary on the company from our quarterly portfolio update WEBINAR and an excerpt from our QUARTERLY LETTER.

Mastercard: Mastercard is a company that pretty much everyone has heard of. In fact, when we meet with Ensemble’s clients, we occasionally tell them that we’re nearly certain that they are carrying a Mastercard in their wallet or purse as we speak, and if not, they are carrying a Visa. Most people carry both.

People carry Mastercard and Visa because they are accepted nearly everywhere in developed markets. And they are accepted in most emerging economies, at least at locations where higher income people spend money. As a shopper you can show up at a bodega in Peru, a high end hotel in Tokyo, a truck stop in Alabama, or an ice cream cart in Milan, show them a piece of plastic and they’ll let you walk away with goods and services without any worry that they aren’t going to get paid.

Importantly, these companies do not lend any money. If you look at your credit or debit card, you’ll find that it is issued by a bank. If it has the name of a non-bank company on it, such as American Airlines or Apple, these companies have just partnered with a bank to issue the card. In American Airlines case, its Barclays and the Apple credit card is issued by Goldman Sachs. The issuing bank is the one whose checking account a debit card is tied to, and they are the ones lending the money to fund credit card payments.


On the other side of the transaction is the merchant and its bank. No matter whether you swipe your card, or wave your smartphone, or use an online digital wallet to make a payment via your credit or debit card, in each case your bank and the merchant’s bank need to exchange information across a communication network. And that network is almost always provided by Mastercard or Visa. While you might hear about how merchants pay 2% or more in credit card fees, Mastercard or Visa are only collecting between 1/10th and 1/20th of that fee, with the banks, the ones taking the credit risk and covering the risk of fraud, earning the bulk of the fee.

Americans are so used to using debit and credit cards that it is easy to lose sight of how amazing the Mastercard and Visa networks are. The fact is that when you walk into a store anywhere in the United States, you take it for granted that the merchant will allow you to swipe a little piece of plastic with either the Mastercard or Visa logo on it and they will then let you walk out with your purchase. The reason you carry a Mastercard or Visa is because you know they are accepted everywhere. And the reason they are accepted everywhere is because everyone carries one. This is a classic example of a “chicken and egg problem”. Before everyone accepted these cards, it was difficult to convince consumers to carry one. And before everyone carried one, it was difficult to get merchants to accept them.

Having solved this problem, Mastercard and Visa now have a competitive moat around their businesses, which makes it very difficult for any new company to compete with them. Let’s say that some new payment network was launched that offered superior benefits to merchants and customers. To be successful, a new payment network must offer superior benefits to both sides of the transaction because driving a change in the long ingrained behavior of using credit and debit cards demands a change by both sides.

Even if a new network offers superior value to both sides of the transaction, adoption is still difficult. While early adopters might be attracted to the new payment option, they will find it difficult to actually use until there is widespread adoption such that a customer can expect most merchants to accept it, which will only occur once merchants can expect most customers to have adopted the new offering.

Building a globally accepted payment network was hard in the past. But today it is even harder because not only must a new company in the payment industry solve the chicken and egg problem themselves, but now that it has already been solved, a new competitor must solve the problem in a way that is much better than the existing solution. Credit and debit payments were a significant improvement compared to paying in cash and checks for both customers and merchants. But even with so many technological advancements in the payment industry over the last decade, there has been little in the way of significant improvements versus the existing debit and credit card payment networks. The one major improvement has been the increasing ease of use of credit and debit cards for both merchants and customers, such as the ability to carry a card within your phone, or a merchant’s ability to easily set up and accept card payments via tools like Square or online services like Stripe.

While some companies are subject to highly unpredictable changes in macro factors, such as an oil company being dependent on the price of oil, Mastercard’s business is driven by far more stable trends. The key metric for them is global consumer spending trends, which even during recessions does not decline by more than a couple percentage points and which we are confident will grow at a modest, but steady rate over the very long term. On top of that growth driver, the company benefits from the relentless shift of consumer spending from cash and checks to credit and debit. While it might seem that this shift has already played out in developed markets, we can look to near cashless countries like Sweden to see that even US consumers are likely see continued declines in their use of cash and checks.

Despite their incredible ease of use, and the broad based benefits that card-based payments have brought to consumers, merchants, and the global economy as a whole, it is not uncommon to hear complaints from merchants about what they view as the high cost of accepting credit cards. But it is important for observers to understand that these complaints are primarily an argument between merchants and banks about the share of economic value they each capture from the existence of card networks. One way to illustrate this reality is by noting that if accepting credit cards was inferior to getting paid with cash, merchants would simply refuse to accept credit cards. But instead, we see the opposite trend. More and more merchants are no longer accepting cash. Why are they refusing cash and requiring customers to use credit or debit cards?

Cash is expensive to accept.

At first glance it appears that cash has no transaction costs. A customer simply gives cash to a merchant and there are no fees involved for either party. But it turns out there[…]

During our third quarter 2023 investment update, Ensemble Capital Management’s Chief Investment Officer Sean Stannard-Stockton and Senior Investment Analyst Arif Karim  discussed the current market and economic conditions, as well as two of our holdings; Analog Devices, Inc. (ADI) and Mastercard, Inc. (MA). The webinar concluded with a live Q&A session with the team.

Below is a replay of the full webinar as well as a link to Ensemble Capital’s QUARTERLY LETTER.


Each quarter, Ensemble Capital hosts a webinar to discuss the current market, economic conditions, and a few of our portfolio holdings. This quarter, we’ll discuss these items as usual, as well as share our thoughts on Analog Devices (ADI), and Mastercard (MA).

The event will use a webinar format. Participants will have a chance to ask live questions of the research team during the Q&A portion of the event.

This quarter’s webinar will be held on Tuesday, October 17 at 1:30 pm (PST)

We’d love for you to join us, which you can do by REGISTERING HERE.

If you’d like to listen to our previously-held quarterly updates, an archive can be FOUND HERE.

We hope to see you there!

Last month, Ensemble’s CIO sat down for a longform interview on the Talking Billions podcast. Host Bogumil Baranowski used the conversation to dig deep into the Intrinsic Investing archives to get Sean to elaborate on many of the themes explored on the blog. In the interview, Sean and Bogumil discussed:

  • How Sean’s sociology and psychology minded parents influenced how he thinks about investing.
  • The linkages between the first blog post on Intrinsic Investing in early 2016 to the posts published this year that explored the Charlie Munger quote, “Over the long term, it’s hard for a stock to earn a much better return than the business which underlies it earns… even if you originally buy it at a huge discount.”
  • Why the elevated returns earned by equity investors vs bond investors comes in exchange not for volatility, as academic work suggests, but rather from the anxiety which equity investors must manage.
  • The concept of equity duration and the lessons we can learn from the 1970s on how inflation, duration, and growth impact the path of equity returns.
  • The role of empathy in investing and why it is a critical element of expanding an investor’s circle of competence.

Ensemble’s CIO Sean Stannard-Stockton recently appeared on Compounders, a video podcast with host Ben Claremon. In the interview, Sean talked about;

  • Why some businesses create and build value, while others do so to a much more limited degree, and why Warren Buffett and other “value investors” pivoted to investing in value creative businesses.
  • Why Ensemble centers competitive advantage analysis in our investment process.
  • Why offering wealth management services allows us to pursue long term investments.
  • Why we blog, appear on podcasts and are active on social media.
  • Why understanding how a company creates (or extracts) value from its stakeholders is such an important question for all investors who seek high returns for shareholders.