* Adj. EPS of $1.78 beat est. of $1.68
* Quality of revenue beat concerned investors - analysts
* Gross dollar volume misses KBW's estimates (Adds analyst comment, background; updates share price)
By Aparajita Saxena
Oct 30 (Reuters) - Mastercard's shares reversed course to fall sharply in afternoon trading on Tuesday as investors worried the company's third-quarter revenue growth was largely being driven by rebates and incentives and not by transaction volumes.
The payments processor said its revenue rose 14.7 percent to $3.90 billion in the quarter, out of which rebates and incentives accounted for $1.74 billion.
Payments processors and card companies use rebates and incentives to forge alliances with banks and merchants, which then pass on these incentives to customers who begin using their networks for transactions.
"If I had to pick at something ... it would be that the quality of revenue came mostly from incentives and rebates, rather than from gross revenue trends," said Darrin Peller, managing director and senior research analyst at Wolfe Research.
The company's gross dollar volume - the dollar value of transactions processed which is considered the core source of revenue - rose 9 percent to $1.47 trillion, but missed KBW's estimates of $1.51 trillion.
Shares of the company, which rose more than 2 percent before the opening bell, fell 4.2 percent to $186.60 in afternoon trading, overshadowing the quarterly profit and revenue that beat estimates on the back of strong consumer spending. Several analysts said the increase in the company's organic revenue was weak and the revenue growth powered by incentives and rebates is not an ideal way to grow.
Mastercard's net income rose bit.ly/2AyIxbl to a record $1.90 billion, or $1.82 per share, in the three months ended Sept. 30. Excluding items, it earned $1.78 per share, trouncing estimates of $1.68 per share, according to Refinitiv data.
The Purchase-New York based company processed 23.12 billion transactions worldwide in the quarter, up 19.2 percent. Its customers had issued 2.5 billion Mastercard and Maestro-branded cards, as of Sept. 30, the company said.
Mastercard's expenses rose 11 percent, mostly due to investments in strategic initiatives. (Reporting By Aparajita Saxena; Editing by Sai Sachin Ravikumar and Arun Koyyur)