Summary
Very real risks to both Visa and MasterCard are often glossed over by analysts. It is flawed to assume that their business is immutable and “risk free.” Both companies need to anticipate new market entrants and continue to evolve and innovate. Very real competitive threats abound.
Analysis
MASTERCARD AND VISA: THREATS ABOUND FROM MOBILE OPERATORS AND OTHER NETWORKS
Both MasterCard and Visa are often described as 'bullet proof"[i] and “insulated”[ii] because of their ability to generate consistent profits even during a challenging economic environment. After all, credit, debit and prepaid cards are ubiquitous payment types and neither MasterCard nor Visa actually loan money, issue cards or get involved in consumer credit risk. For the most part both companies act as utilities for banks worldwide - offering a highly secure global communications platform that enables cardholders, merchants and banks to transact and settle with each other. Analysts and investors take comfort in the massive global scale of Visa and MasterCard as protection against market and competitive forces.[iii]
What seems to get glossed over is that there are some very real risks to both Visa and MasterCard. Unlike ever before, there is a tremendous appetite at a legislative, consumer, merchant and bank level for a change in the status quo of payment networks. Some believe that now is the time for a new payments network to emerge while others are looking for a fundamental change in pricing. The forces for change appear to be converging and stand to compound each other’s effects.
What seems to get glossed over is that there are some very real risks to both Visa and MasterCard. Unlike ever before, there is a tremendous appetite at a legislative, consumer, merchant and bank level for a change in the status quo of payment networks. Some believe that now is the time for a new payments network to emerge while others are looking for a fundamental change in pricing. The forces for change appear to be converging and stand to compound each other’s effects.
· Legislative: Following "reform" in Australia and on the back of the CARD Act, legislators are evaluating the merits of regulating interchange in the US.
· Consumer: Although the 7-Eleven convenience store petition campaign was arguably misguided it does serve as an indicator for just how angry millions of Americans are at the card networks.
· Merchant: Never has the merchant coalition under the National Retail Federation and National Association of Convenience Stores been more vocal, militant and savvy than of recent.
· Banks: Then Bank of America CEO Ken Lewis in the April 26, 2006 issue of The Wall Street Journal stated that he was considering launching a new card network to compete with Visa and MasterCard. With the association model a thing of the past, banks no longer think of publicly traded Visa and MasterCard as their cherished, private fiefdoms.
Is it realistic to imagine an alternative network that could challenge and potentially replace Visa and/or MasterCard? What entity or consortium of entities could possibly bring reliability, global scale and massive transaction processing experience and capabilities to the market? Could a foreign card network such as China Union Pay emerge as a global challenger? Could Google, Apple, Amazon, Microsoft or PayPal … or a consortium of some or all pull it off? PayPay announced on November 4, 2009 that that they are now “looking to partner with the financial services industry and ecosystem as a whole.”[iv] That sure sounds like a bold step in the direction of competing with the card networks. Similarly, a Citibank executive made the prescient observation in a recent American Banker article about the potential for Apple to compete with banks, “[t]hey are arguably creative enough and sneaky enough to find a way to disintermediate us."[v]
A payment network run by the mobile phone companies has long been on the whiteboards of payment industry strategists. The mobile operators handle millions of calls a day. They securely connect every type of entity (consumer to consumer, consumer to business, business to business) and they do it reliably 24/7. The mobile operators have a piece of plastic (albeit a phone and not a card) in the hand of nearly every American (legal and illegal, banked and unbanked) over the age of 16 in the US. It is really not very difficult to imagine the top mobile operators forming a new payments network.
I am a payments industry strategist and not a stock analyst. I do not mean to suggest in any way that Visa and MasterCard are anything less than the financial services powerhouses that they are. In fact, I believe that both companies will continue to convert cash and check to plastic and should continue to profit. However, I cringe when I read about these companies described as “bullet proof” and “immune.” The reality is that Visa and MasterCard need to anticipate new market entrants and continue to evolve and innovate. It is flawed to assume that their business is immutable and “risk free.”
Philip J. Philliou
PHILLIOU SELWANES PARTNERS, LLC
New York City, New York
[i] And in the last six months both Visa and MasterCard have increased certain fees they charge to financial institutions, according to Moussa. "Besides the competition amongst themselves that the networks are going through and the recession, in which they have been almost bulletproof, I don't see anything that can really hamper their march,"
[ii] Visa is well insulated from the credit problems that have scarred many of the lenders that issue the cards bearing its brand.
[iii] MasterCard Immune To Rough Economy, Lisa LaMotta, 11.04.08, 04:10 PM EST
[iv] PayPal Moves to Start Collaborating with Banks, American Banker | Wednesday, November 4, 2009 .By Daniel Wolfe. “ PayPal Inc., which has long positioned itself as a direct competitor to banks, has begun to work with them.
[v] Can You See Your Balance Now? With Mobile, You Can, American Banker | Friday, November 6, 2009 By Steve Bills
This author consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
