Visa and MasterCard have evolved in recent years both inside and out, developing from bank-owned associations into public companies. Now they are facing external pressures of alternative payment schemes and a payments world that is rapidly moving beyond cards.

Visa and MasterCard have grown into payment card icons, with banks around the world issuing cards with their internationally recognised brands. The latest phase in their development began with their initial public offerings (IPOs), which transformed them from bank-owned associations into public companies, and now they face the challenges of a payments landscape that has witnessed rapid growth in e-commerce, mobile payments and emerging markets. 

Their brands may be synonymous with cards, but Visa and MasterCard have adapted to the new payments environment, along with the changes to their governance and ownership. 

They both began as bank membership associations. Visa grew from the first credit card – BankAmericard, which was issued by Bank of America in 1958 – into a network of banks that were linked into the payment card system. And MasterCard’s history began when the Interbank Card Association was formed in 1966. 

This membership structure, however, became problematic and it could be argued that Visa and MasterCard became victims of their own success as their dominance led to several anti-trust lawsuits. Merchants began to take issue with the fee structure, and the networks were accused of conflicts of interest as bank members were sitting on the boards of both Visa and MasterCard. 

The separation of governance and ownership became a pressing issue because of these perceived conflicts of interest. In 2006, the year of MasterCard’s IPO, merchants had filed more than 40 class action lawsuits alleging that the interchange fees violated anti-trust laws, and the lawsuits alleged that the setting of interchange fees constituted horizontal price fixing between and among MasterCard, Visa and their member banks. 

Credit cards' reshuffle

In a filing to the Securities and Exchange Commission (SEC) in 2005, ahead of its IPO, MasterCard stated that its new ownership and governance structure would enhance its business. “In particular, we believe that perceived conflicts of interest in our business will be addressed by transitioning to a board of directors that includes a majority of directors who are independent of us and of our customers, and through the broader diversity of our share ownership,” it said. MasterCard’s IPO in May 2006 raised $2.39bn.

MasterCard had been a private-share corporation since 2002, but Visa was still a collection of membership associations at this time. In 2007 it restructured so that the previous associations of Visa USA, Visa International, Visa Canada and Inovant, which operated the processing network, came under the umbrella of Visa Inc. Visa Europe, however, remained as a bank association and has a framework agreement with Visa Inc to license the trademark, technology and services. In March 2008, Visa Inc raised $17.9bn in its IPO, which at the time was the biggest public offering in the US.

“The IPOs were about two separate things: separating the governance of Visa and MasterCard from the banks, and establishing value for the owners,” says Moshe Orenbuch, an analyst at Credit Suisse.

Joseph Saunders, chairman and CEO of Visa Inc, says: “After going public, Visa created a new structure which has allowed us to operate as a cohesive, centrally managed company.”

The main reason for us to be a membership association is because it’s what Europe wants – and overwhelmingly so

Peter Ayliffe

Now the boards of Visa and MasterCard have directors whose expertise lies outside the banking industry, such as William Shanahan on Visa Inc’s board, who is the former president of household goods manufacturer Colgate-Palmolive. One of MasterCard’s directors is José Octavio Reyes Lagunes, president of the Latin America group at soft drinks company Coca-Cola. 

Euro difference

The Visa Inc board has a different flavour to Visa Europe, which has remained as a bank association, and could be viewed as a microcosm of what Visa and MasterCard would look like had they remained bank-owned. The payments environment in Europe is unique because of the creation of the Single Euro Payments Area (SEPA), which influenced Visa Europe’s decision to remain as an association. 

“The main reason for us to be a membership association is because it’s what Europe wants – and overwhelmingly so,” says Peter Ayliffe, president and CEO of Visa Europe. “Our members have always been adamant that this is the most appropriate model for them. Also, the regulators continue to make it clear that they expect European payment systems to be owned and governed by European institutions.” 

One of the visions regulators had for the SEPA region was to move away from the patchwork of domestic bank-run schemes and create a pan-European debit network that would offer seamless payments across national borders in Europe. Part of the SEPA Cards Framework lays out guidelines to separate – or unbundle – the card scheme’s acceptance network from the routing and processing of the transactions. This has been a boon to Visa and MasterCard, which previously struggled to penetrate the domestic debit market in Europe because many domestic acceptance schemes also had a stranglehold on the processing of the payments. A number of domestic debit schemes have now been phased out in favour of MasterCard’s debit brand Maestro or Visa’s European debit solution V PAY. 

“We are free to develop products that build on European investments,” says Mr Ayliffe. “V PAY has quickly become a debit leader and, as any issuer will tell you, the membership model was an absolute pre-requisite for this success.” 

On the issue of ownership and control, Mr Ayliffe says: “Our ownership structure allows us to take a longer-term investment strategy, focused on building the eco-system for the benefit of all stakeholders, developing efficient, reliable payment systems that are in a position to replace cash. The members also know that the only agenda we follow is theirs.” 

New relationships

While Visa Europe is adamant that a bank association is the best strategy to pursue, Visa Inc and MasterCard have taken a different approach. Now that their ownership structure has changed, so has their relationship with the banks, which are now simply clients or customers, rather than their owners.

One consequence of this is that both companies are free to pursue relationships that make sense for the shareholders, without being beholden to the interests of the banks. For example, in February 2012, Visa announced a partnership with telecommunications company Vodafone that will enable consumers to pay for goods on the Visa network with their mobile phones. Commenting on the partnership with Vodafone, Zilvinas Bareisis, senior analyst at Celent, says: “In the past that simply would not have happened.” 

MasterCard has similarly been pursuing a mobile strategy. In 2011, Google Wallet launched in the US using MasterCard’s PayPass contactless network, which means consumers can pay for goods by tapping their phones against payment terminals. Another example, also in 2011, was MasterCard’s joint venture in Brazil with telecommunications company Telefónica.

Mr Bareisis says that such partnerships, which in the past may have been viewed as conflicting with the interests of banks, have been one of the most dramatic changes to Visa and MasterCard since they became public companies. 

“Since going public nearly six years ago, we have strengthened our focus on delivering value to customers, consumers and society with innovative payment solutions that are safe, simple and smart. We work closely with all of our stakeholders – consumers, merchants, banks, government entities – while ensuring that we consistently deliver value to our shareholders. MasterCard’s commitment to driving innovation within the payments space has connected us with other innovators – including Orange, Telefonica and Google to name just a few – to shape the payments landscape. Ultimately, we are well positioned to continue growing the business and innovating to ‘a world beyond cash’,” says Ann Cairns, president of international markets for MasterCard Worldwide.

TABLES-Visa, MasterCard and the battle to stay ahead of the payments revolution

E-commerce focus

Visa and MasterCard have also been active in developing e-commerce payments. In July 2010, Visa Inc completed its $2bn acquisition of CyberSource to expand its online payment, fraud and security management. A few months later in October 2010, MasterCard completed the acquisition of DataCash, which also expands its e-commerce presence. 

Although Visa and MasterCard have their origins as cards companies, they have moved well beyond cards and have focused on becoming payments companies that operate a global acceptance and processing network, which is reliable and secure, regardless of the form of payment.

“Looking ahead, as we lead the industry towards next generation payment technologies, Visa is already building upon the critical foundation of our centralised network. We have made significant investments in our network to ensure payments made online or via a mobile device are just as convenient, secure and reliable as what we deliver at the point of sale,” says Mr Saunders. 

Visa and MasterCard have pursued similar paths in e-commerce and Mr Bareisis describes the CyberSource and DataCash deals as “tit-for-tat acquisitions”. However, Mr Bareisis points out the strategies for mobile payments have been slightly different. MasterCard has opted for partnerships, with Google Wallet, for example, while Visa has been developing its own wallet and has invested in mobile money companies Monetise, Fundamo and others.

Mr Orenbuch says that the networks’ recent partnerships and acquisitions can be attributed to the changing payments environment, rather than just because they are now public companies. “They had to adapt their business models,” says Mr Orenbuch. “With their corporate structure, they now have an easier way to raise money to achieve their objectives.”

Network/bank relationships

When asked if the networks may now be pursuing strategies that may conflict with the interests of banks, Mr Orenbuch says that there have always been tensions between the banks and the networks, even when Visa and MasterCard were bank-owned associations.

“We continue to enjoy excellent relationships with our bank customers, working closely with them to ensure we are delivering products and services that make life easier for consumers, merchants and governments. I have travelled the world to meet with our customers, and it’s apparent that we collectively recognise the incredible value of working together. And because MasterCard is a unified global company, our teams around the world can act with a sense of urgency to deliver the best products and solutions,” says Ms Cairns. 

Both Visa and MasterCard are well poised to use their international acceptance networks to adapt to the changing world. “[Since Visa's IPO] many of our customers have evolved and are now international businesses with global portfolios. To help our customers meet their growing needs, Visa also had to become a globally unified company, attuned to the trends in the worldwide marketplace,” says Mr Saunders.

The trends in the marketplace have also brought a change in the services that the payment networks now offer. “Historically, [Visa and MasterCard's] business was transaction processing around cards, now it is electronic payments and mobile payments,” says Mr Bareisis. “In the past they would not have made acquisitions – they would have grown organically,” he adds, commenting that Visa and MasterCard have become much more commercial and dynamic.

Andrew Neeson, head of research at Lafferty Group, believes that the network fees are the main source of revenue for Visa and MasterCard. He points to a change in what the networks are now able to offer their clients. “It is a package of services. It is also about product innovation, customer service and all the support mechanisms that go into it.” Mr Neeson adds that banks may not go for the cheapest option and will consider the whole package, including the incentives and advisory services that may be needed for launching a new cards programme. 

And in terms of which networks the banks issue their cards on, Visa is the bigger player. In terms of the number of cards in issue, at the end of 2011, Visa had a total of 1.9 billion cards in issue versus MasterCard’s 1.1 billion. In 2011, Visa’s billed volume on debit cards was $4684bn compared with MasterCard’s $1185bn. And Visa’s billed volume on credit cards for the same period was $2548bn, compared with MasterCard’s $2065bn.

Visa, MasterCard and the battle to stay ahead of the payments revolution2

Mobile strategy: in 2011, Google Wallet launched using MasterCard’s PayPass contactless network

Banking the unbanked

In terms of general trends, Mr Neeson says that in developed markets there has been a decline in credit cards, but that has been mitigated by developing markets, such as the “explosion of Brazil” and the growth of its credit cards market. 

Debit card usage is growing across the globe as people in developed markets are generally using their credit cards less, while in developing markets some people are using debit cards for the first time. “A lot of the increase in debit cards comes from banking the unbanked,” says Mr Neeson. 

Visa and MasterCard’s legacy as cards companies in a world that is rapidly developing mobile technologies is a challenge for the companies. “It is difficult to predict the future,” says Mr Neeson. “Cards will be around for a long time, but markets such as Africa could jump ahead straight to mobile.” 

Kenya’s M-Pesa is a prime example of such leapfrogging, and many point to the competitive threat that this poses to payment networks such as Visa and MasterCard. 

Mr Neeson, however, argues that the biggest challenge for Visa and MasterCard comes from Asia. “China is potentially the biggest debit card market in the world,” he says, adding that the domestic card scheme China UnionPay (CUP) up until recently had a monopoly of domestic payments. 

“The next big market that has not quite exploded yet is India,” says Mr Neeson. He explains that India is an underpenetrated card market where previously Visa and MasterCard had an advantage because there was no competition. That changed in March 2012 when the National Payments Council of India launched RuPay, a national debit scheme that aims to provide a lower-cost payment network. 

“Visa and MasterCard from a position of relative strength are now suddenly on the back foot,” says Mr Neeson of the growing threat from the likes of CUP and RuPay. 

In terms of the competitive threats that the new payments landscape poses, Mr Saunders at Visa Inc says: “The reality is: this is, and always has been, a highly competitive industry, from established players to emerging upstarts. Competition benefits everyone – it is a guiding principle of our economy – and we welcome it. And we remain extremely confident in our strategy, and our ability to compete for our clients’ business against the other players in payments.”

In their post-IPO era, Visa and MasterCard will continue to confront the challenges of these other players – and alternative payments – as the companies adapt to a rapidly changing payments landscape and seek to maintain their position as icons of consumer payments. 

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