This should be a watershed year for payments cards. The approaching MasterCard IPO, and Visa’s likely response, will likely reform the sector’s fundamental business structure. Meanwhile, First Data Corp. is undergoing profound changes, and it’s unlikely that either Discover or American Express will be twiddling their thumbs while the future of the card associations is decided.
The MasterCard IPO will likely have the greatest impact on the space, thinks David Evans, founder of Market Platform Dynamics. "It will force them to become a much more entrepreneurial and different organization than it’s been in the past, partly because of changes in the marketplace, but also because of organizational changes that will change the dynamic of that entity," because of the need to satisfy its new investors, he says.
Among the possible fundamental changes: Five years from now, the banks now controlling MasterCard may not be major shareholders. That alone will change how MasterCard approaches the marketplace, says Evans. Expect new products from MasterCard, as well as new joint ventures with other, unnamed partners. "You could imagine entities within the Internet space, and even the merchant space, deciding that MasterCard is not all that expensive a piece of property to have, if they want to have a worldwide payments system and brand," he speculates. Since it will be a public entity, he adds, someone could just buy it.
Visa’s reaction to whatever emerges from MasterCard is unknown right now. It’s played its cards extremely close to its vest, and most observers, Evans included, profess real puzzlement about its intentions. About all observers can say about the subject is that while it’s extremely unlikely that Visa will be letting anyone steal a march on them this year, they were unimpressed by Visa’s announcement last year that it was re-vamping its board. The company said it was increasing the number of directors to 17, including eight independent directors, seven directors from financial institutions, and two non-voting directors from the company itself; currently, it has 14 directors, including 12 directors from financial institution, two directors from Visa with votes, and no outside directors.
One thing is sure for both associations; they’ll be doing everything they can to maintain their market share. This will mean solving the problems posed by the enormous business potential of micro- and contactless payments, now attracting so many creative minds. The contactless idea, combined with the continued miniaturization of computers, will, in retrospect, likely be seen as only the first step in entirely new payments vehicles. Those vehicles may, with hindsight, turn contactless cards and cellphone-based payments into mere detours on the way to the future of retail payment methods.
Evans thinks the card associations will meet this turn of events. "These guys aren’t stupid," he says. "They know as well as anyone else that Google and PayPal and other ventures are out there and would like to pick up part of the transaction business and disintermediate them."
First Data Corp., meanwhile, is under pressure to re-create its business model this year in the face of great challenges to Western Union, which is its main source of revenues-about 40 percent in 2004. Western Union’s domination of the remittance business is being challenged by cheaper, innovative competitors like MoneyGram, as well as a variety of card-based remitters to overseas recipients, and most observers have little faith that Western Union’s huge network of locations can sustain its business over the long term.
As a result, the company, which among other things last year lost its long-time chairman, Charles Fote, folded its Encorous mobile payments unit, and said it was exploring the possible sale of its card issuing division, is in for big changes. It successfully held onto the enormous processing business it had with MBNA, for instance, while First Data’s main competitor, TSYS lost its Bank of America contract as part of that decision. But TSYS is considered to have a more advanced computer platform than First Data, giving it an edge in future competition for business. How First Data meets these challenges, and especially, how it responds to the other changes in the card business, will have a substantial impact on the company’s future. Just this week, it announced that David Coulter, the former J.P. Morgan Chase & Co. vice chairman and current managing director and senior adviser at investment banker Warburg Pincus, was joining its board.
As for Discover: Expect it to keep growing its brand. "I’d expect it to continue to be a vigorous competitor," and go after as much business and it can get its hands on, says Evans. Discover’s parent, Morgan Stanley, has been growing its overseas credit card portfolio, for instance, and it’s not out of the question that those assets could be folded into Discover at some point, giving Discover the international reach it needs to be a truly major brand.
The acquisition last year of the Pulse debit card network is another example of how Discover has the potential to loom ever-larger in the payment card landscape, he says. "That was a very interesting acquisition, and while we don’t know exactly what direction Discover will go in with Pulse–or with the deal it did with Wal-Mart–it does seem they’re doing some very interesting and creative things that are different than what either Visa or MasterCard are doing." Discover seems to be taking a leaf from the playbook of oft-reviled Confederate general N. Bedford Forrest, who used to tell his subordinates to "Hit ’em where they ain’t."
Meanwhile, we can expect American Express to sign one bank after another to the sort of deals it cut last year with CitiGroup, Bank of America (as the result of BofA’s MBNA buy), and, most recently, HSBC. Once it signs those new banks, it will likely also drop them-as it dropped the former ones–from the multi-defendant lawsuit it filed after winning in court in 2004 against MasterCard and Visa. Amex’s apparent strategy gives new meaning to Al Capone’s old dictum, "You can get more with a kind word and a gun, than a kind word alone."
Which brings us to the wildcard in the future of payment cards; the class action suit against MasterCard and Visa being fought in U.S. District Court for the Eastern District of New York, and other, similar cases being fought elsewhere. This year will not decide anything; the class action suit will probably take at least five years, costing the litigants at least $2 billion between them, before any decision is reached.
But early motions give some indication of how tough this fight will be. Last year, the plaintiff’s attorneys filed a motion to the effect that the MasterCard IPO papers, filed with the Securities and Exchange Commission, didn’t disclose that the likely future liabilities from any unfavorable decision in the case exceed MasterCard’s capital, and that the proposed structure of the offering meant that the future shareholders would be liable for what the plaintiffs estimated could be over $10 billion. MasterCard denied the idea, and then file its own motion, to the effect that one of the plaintiff’s main attorneys had sued MasterCard when he was with the Justice Department, and should therefore be removed. Expect plenty more along these lines. (Contact: David Evans, Market Platform Dynamics, 617-266-6839)