November 29, 2020

Why Mastercard is Devouring Cash

Forget your credit card. Soon you will be able to pay for a burger and fries at the drive-thru with no more than your voice, and you may even get a custom menu.

Mastercard ((MA) -Get Report) announced last week that it is partnering with a pair of start-ups to remove cashiers from the fast food business. It’s another shot fired in its war against cash, and friction.

Rest assured, the Purchase, NY-based company is going to win.

Executives at Mastercard have been trying to kill cash for a long time. The company forte is digital payment processing, for which it earns a small but durable fee on every transaction. Cash payments are the direct competition. Killing it has been great for business.

Mastercard has posted middle teens sales growth since 2016. Last year revenues reached $16.9 billion, a bump of 13% versus 2018.

That’s because from governments to retailers, digital payments are preferred. Uncle Sam gets to track money all the way through the system. Getting rid of cash makes it much more difficult for black marketeers and tax cheats. Retailer gets the other end of transaction, tracking customers.

The business end of this, customer relationship management, is so big that analysts at Gartner believe specialized CRM software to track and monetize customers could be an $80 billion business by 2025.

If managers at Mastercard are successful, that estimate might be on the low end.

Unlocking fast food, referred to as “quick service restaurants” in industry jargon, opens up a treasure trove of new digital gold. QSR is a $293 billion business in the United States alone. And because as much as 70% of sales occur at drive-thrus, most of the sector is immune pesky growth obstacles, like global pandemics.

Mastercard will work with SoundHound Inc. and Rekor Systems ((REKR) -Get Report) to bring voice recognition, personalized dynamic menus and contactless payments to select White Castle drive thrus.

Customers will pull up to the drive thru where they will be greeted by an artificial intelligence enabled voice assistant. Once the customer’s voice print is authenticated, they’ll get a personalized menu based on past orders, the weather or time of day. Behind the scenes, Mastercard tokenization and biometrics software will match the voice print with a credit card, and the purchase will be completed. The final part of the transaction is picking up the burgers and driving away.

In theory the entire process should reduce friction.

Customers get dynamic menus geared to their tastes, and they don’t have to fiddle with cash payments. White Castle staff get to focus making burgers, increasing the number of customers they can serve.

We will know soon enough. The pilot program is being rolled out in October.

There will be some challenges along the way. AI voice assistants, can be hit and miss at best. It remains to be seen how well the speech recognition systems will work in practice. Having a conversation with a human may end up being quicker. That’s key.

Speeding up drive thru times in QSR is akin to pitstops in NASCAR. Every second counts a lot.

McDonalds ((MCD) -Get Report) managers attributed better than expected results in the third quarter of 2019 solely to shaving 20 seconds off drive thru wait times. It was the same track to higher profits at Taco Bell, a Yum Brands ((YUM) -Get Report) company, and Wendy’s ((WEN) -Get Report).

Investors shouldn’t be surprised Mastercard is investing heavily in QSR. The sector is built for speed and contactless payments means no more customers digging through their wallets searching for bills, or staff fiddling to make change.

The sector also represents a huge opportunity. Fully a third of QSR customers in 2018 used cash to pay, according to Fiserv ((FISV) -Get Report). While getting that number to zero is impossible, every tick lower helps the bottom line at Mastercard. Transactions, lots of them, keep profits rolling in.

Admittedly, at 38.5x forward earnings and 21x sales, Mastercard stock is not cheap. However, managers have a long history of putting the company in position to win new business segments.

Shares have soared 1,624% since during the past decade.

Investors should use any near-term weakness to begin taking new longer-term positions. Contactless payments is the future, and Mastercard will win.

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