We are beginning to hear intriguing whispers that, post-IPO, MasterCard will begin authorizing non-banks to be card issuers.
We are not privy to MasterCard’s deliberations. No MasterCard executive has ever called us at midnight to unburden him- or herself about anything. Nor has any source of ours said anything they may have heard about MasterCard’s plans.
But this particular sliver of speculation carries too many far-reaching implications to ignore. If true, it not only has the potential to upset many apple carts, but also to be the idea that delivers MasterCard from the coils, legal and otherwise, that threaten its market position.
If MasterCard begins allowing merchants to be issuers—say, Target or Federated Department Stores—they’d not only be cutting banks out of the payments processing equation, but also be delivering a potentially lethal blow to the interchange class-action lawsuits now gathering steam in the courtroom of Judge John Gleeson, who will be hearing them in the U.S. District Court for the Eastern District of New York.
After all, a large merchant issuing its own cards would in effect be paying interchange to itself, instead of to its bank, a shift with dire implications for issuing banks which have been making so much money from interchange. It would also be unreasonable to expect MasterCard to throw any merchant such a plum, if that merchant remains party to one of the suits before Judge Gleeson.
In reality, a merchant becoming an issuer would only minimize its interchange costs, not eliminate them, since the merchant would still have to pay the costs of processing the payment. Also, the merchant would have to own a bank, or at least an industrial loan corporation, much as Wal-Mart hopes to do in pursuit of what it says is the same goal. But the result would reinforce the merchant’s earnings, a not inconsiderable plus in today’s investment markets. And peeling away plaintiffs by welcoming them, so to speak, into the MasterCard family, would undermine the force of the suits before Judge Gleeson.
There’s at least one big problem to Mastercard’s potential strategy: Political pressures in Washington may make it impossible. The Federal Deposit Insurance Corp. is planning to hold hearings on Wal-Mart’s IDC application, and there’s bipartisan support for denying it. A precedent like that would likely scotch similar plans of other retailers, although there’s no guarantee Wal-Mart won’t be successful: As Voltaire used to say, God is on the side of the big battalions.
If this is one of the ways that MasterCard plans to reshape itself for the future, we have to tip our hats. At the very least, MasterCard knows good ideas when it sees them, and knows how to make them its own—in this case, Debitman’s idea of making retailers card issuers, and American Express’s obvious strategy of dropping defendants from its massive lawsuit against most of the issuing banks in return for their signing up as Amex issuers.
If this strategy is MasterCard’s intent, and the plan succeeds, then we can only observe that in the course of solving its own problems, it will be disrupting the corporate plans of others. But this isn’t MasterCard’s problem. And no battle plan survives contact with the enemy.