By Patti Murphy
This year marks the 50th anniversary of the first bank-issued general-purpose credit cards. Bank of America was the first one out of the gate in 1966, licensing what was then called BankAmericard. It is now known by the moniker Visa. A group of competing banks soon entered the race with a product that eventually became known as MasterCard (and just rebranded to Mastercard as this article was going to press). What ensued in the half century since has been nothing short of revolutionary.
Revolving credit, a nascent offering in the 1960s, is now a major economic force, driven by Visa Inc. and Mastercard Worldwide, as well as American Express Co. and Discover Financial Services. In May 2016, Americans had $953.3 billion in revolving credit outstanding, representing a 6.2 percent increase over the preceding month, the Federal Reserve reported.
And Mastercard and Visa, once bank-owned consortia, are now public companies generating billions of dollars in yearly income on ever larger card transaction volumes. It's a position that sometimes places the companies at odds with the financial institutions that once owned them, as well as with card-accepting merchants.
"I think they are looking to go into competition with banks to a certain extent," said Eric Thomson, co-founder of KYC SiteScan. Thomson, whose career in payments stretches back to a stint at BankAmericard, pointed to several recent initiatives that have taken Visa and Mastercard far from their origins as bankcard companies. For example, the 2013 deal Visa struck with JPMorgan Chase & Co. That deal led to the creation of ChaseNet, a white-label version of VisaNet that provides cut-rate merchant fees on transactions initiated using credit and debit cards issued by Chase, the nation's largest credit card issuer.
Visa also revealed earlier this year that it holds a 1 percent stake in Square Inc., which has been trying to upstage traditional merchant acquiring relationships with its dongle-style reader and flat-rate pricing, and which has introduced card acceptance to millions of micro-businesses.
"They [Visa and Mastercard] have their own competitive pressures, and things they do relative to those pressures sometimes causes them to collide with other parts of the payments industry," said Marc Abbey, Managing Partner for Merchant Acquiring Global Initiatives at First Annapolis Consulting. "The motivation is not necessarily to compete, but rather is in response to some other phenomenon. We're probably going to see more things like this."
Recently, rumors have been flying about a Mastercard-PayPal Inc. combination. "PayPal and Mastercard would create a financial giant," Lior Ronen, an independent research analyst wrote in a July post to SeekingAlpha.com. "The new potential company could benefit from both sides of the e-commerce business," with significant revenue opportunities.
"The primary directive prior to [Visa and Mastercard] going public was making sure the issuing side of the bank was always happy. Now their primary concerns are the brands," observed industry consultant Paul Martaus.
Steve Mott, President of the consultancy BetterBuyDesign, is less circumspect. "Unless you're Chase or one of the other five or six big guys, life sucks under Mastercard and Visa anymore," he said.
Clearly, the organizational changes at Mastercard and Visa have altered the competitive landscape and the companies' relationships with retailers. Mott, who often consults retailers, described as amicable the relationship retailers had with Visa and Mastercard prior to the two going public. But a series of actions – most related to PIN debit – beginning in the late 1990s have since rendered the relationship contentious.
The final straw, Mott said, was EMV (Europay, MasterCard and Visa), the chip-card security regime that all merchants were supposed to be on board with by October 2015, and that millions of merchants are not yet compliant with. "If they had done it right, it would've been very useful," Mott said, echoing a now familiar complaint. "But it doesn't help when mag stripe technology is still in use."
Many merchants have large investments in PIN debit and are irked that EMV implementation in the United States relies on signature authorizations. A group led by Wal-Mart Stores Inc. and The Home Depot Inc. has taken the card brands to court, arguing EMV implementation has been shoddy. They are demanding support for PIN authentication and the elimination of mag stripes.
The history of payments over the last 30 years is replete with failed attempts by retailers to circumvent interchange with their own initiatives. The Discover card was first, launched in 1986 by Sears Roebuck & Co., which at the time, was one of the nation's largest retail chains. Sears eventually spun off Discover, along with its other financial services businesses.
More recently a group of retailers calling itself the Merchant Customer Exchange built and then gave up on CurrentC, a merchant-controlled app for mobile and online payments, which was intended to compete with mobile offerings from Apple Inc. and the card brands.
Now the focus of retailers appears to be back on litigation and government intervention, but it's not necessarily over pricing. "The fight today is not about interchange relief; it's about changing rules and changing the structure of the system," Mott said. However, they haven't forgotten about pricing either. Wal-Mart recently stated it would no longer accept Visa cards at its stores in Canada due to "unacceptably high" merchant discounts.
In the United States, the National Retail Federation asked the Federal Trade Commission to investigate whether the PCI Security Standards Council violates federal anti-trust laws. The council was formed in 2006 by the leading card brands to establish and maintain uniform requirements that protect credit and debit cardholder data and reduce card fraud.
Meanwhile, a federal appeals court in June 2016 threw out a 2013 settlement that awarded over $5.7 billion to a class of merchants that argued they were being overcharged on credit and debit card interchange. (The original settlement exceeded $7.2 billion, but the amount was reduced after several large retailers opted out in order to pursue their own claims against Visa and Mastercard.)
Martaus characterized the settlement as chump change and contended that the suit was more about keeping mega-retailers like Wal-Mart happy than it was about providing relief to retailers generally. "Despite how angry some people get over interchange, if you ask consumers on the street, all they really care about is whether their cards work and what are the rewards," Martaus said.
Mott agreed the settlements so far haven't amounted to much compared with the revenue card brands generate. He estimated damages awarded in every lawsuit against Mastercard and Visa between 2000 and 2010 totaled just $24 billion. "That is less than one-half of the interchange collected in any one of those 10 years," Mott said. Also, most of the largest retailers have struck deals with the brands for lower interchange, he noted.
Since going public, Mastercard and Visa have invested significant time and money expanding card acceptance and on improving fraud protection. In July Mastercard heralded network enhancements in support of omnichannel payment services enabled by Masterpass mobile products. It also initiated a brand facelift.
"With billions of cardholders across the globe, we are working with our issuers and merchants to ensure that we're delivering digital payments that support consumer expectations for a familiar and secure payment experience both now and in the future," said Craig Vosburg, President of North America Markets at Mastercard.
Rollout of the new Masterpass-enabled solutions, which in addition to payments, support new services such as purchase support and paying with points, began in July. Worldwide implementation is expected to be completed by the end of 2016.
Mastercard partnered with more than a dozen card issuers to get the new solution to market. Those issuers, combined, hold 80 million credit card accounts. The list includes Bank of America Corp., Capital One Financial Corp., Citigroup Inc. and KeyBank. "The expansion of Masterpass represents an important evolution in our business," Vosburg said. "We're packaging the intelligence and insights generated by digital payment solutions to power a wide range of merchant and consumer experiences."
Mastercard also recently began an effort to extend card acceptance to 40 million micro and small merchants around the world within the next five years. In a statement about the new push, Mastercard noted that since 2013, it has delivered programs and services to more than 200 million people who previously had been excluded from the financial mainstream. The company said it is now committed to increasing that to 500 million consumers by 2020.
"We've been on a fantastic trajectory with digital technology being an increasingly important part of our business," said Raja Rajamannar, Chief Marketing and Communications Officer at Mastercard, stated when discussing the company's new logo and brand identity. "Now it's time for our brand to embody the company we have become."
Advancing mobile payments was one of the motivating factors behind U.S.-based Visa's recent acquisition of Visa Europe, which was spun off by Visa when it went public in 2008. "As one Visa we will be in an even stronger position to innovate, to partner with merchants, financial institutions and technology companies, and enable a world that is increasingly relying on mobile technology to pay and get paid," Visa Chief Executive Officer Charles Scharf said about the new combined company.
Martaus said, "I think it's critical to their long-term success." As separate entities, Visa Europe for example, could make decisions with negative implications for overall Visa strategies and programs.
In June, Visa launched the Visa Digital Commerce App, an issuer-branded mobile solution that enables financial institutions (FIs) to offer their own sophisticated mobile apps to customers. It's a move that's intended to help FIs implement mobile services "while keeping their brand and relationship with the cardholder front and center," said Oliver Jenkyn, Group Executive for North America at Visa.
Daniel Van Dyke, an analyst at Javelin Strategy & Research, said it was a smart move. According to Javelin's latest research, consumers are 51 percent more likely to use a mobile wallet offered by their primary financial institutions, "making this an ideal time for banks and credit unions to introduce a branded digital app and capitalize on this preference," Van Dyke said. According to Visa, more than 20 U.S. banks and credit unions are implementing its new digital commerce app. Several of those also are implementing Mastercard's omnichannel push.
In addition, Visa and Mastercard have opened their doors to outside developers who want to create payment apps that support mobile and digital commerce.
On the fraud front, Visa claimed in June that its Visa Transaction Advisor service has made significant inroads in reducing fraud at petroleum retailers, reducing fraud at gas pumps by over 50 percent. (Gas retailers were given until 2017 to have EMV-compliant terminals in place, which has resulted in an uptick in card fraud at the pump, according to numerous sources).
"Visa Transaction Advisor gives fuel retailers a tool for applying Visa's real-time fraud insights to transactions at the gas pump," said Mark Nelsen, Senior Vice President of Risk Products at Visa. Over 35,000 gas stations are using the tool, Nelsen said. "The results we're seeing in the fuel sector attest to the power of predictive analytics for many of our merchant partners," he added. "It's an effective model for combatting fraud and one we hope to replicate with other merchant categories."
Today, the biggest technology threat facing Mastercard and Visa may be blockchain. "I don't think there is any role for intermediaries [Visa and Mastercard, for example] with blockchain," Thomson said.
Blockchain is open source software shared via the Internet that is being promoted as a safer way to exchange payments. It is the underlying technology that supports quick and inexpensive processing of virtual currencies like bitcoin. Blockchain accomplishes this through a collection of computer connections that record and verify transactions between participating parties.
The card companies are making some inroads with blockchain. In October 2015, Mastercard was named as one of 11 investors in Digital Currency Group Inc., a blockchain technology company. In May 2016, Visa said it was expanding its presence in India, in part, to accelerate work on blockchain initiatives. Visa also has money invested in Chain.com, a blockchain platform. The Nasdaq stock exchange, Citi, Capital One and the financial technology firm Fiserv Inc. also have investments in Chain.com.
"The appeal of blockchain is that by removing many of the layers of complexity for settlements and clearing, it reduces time and costs in payments and contracts," Barron's columnist Tiernan Ray wrote in a 2015 blog post. "The fact that no one owns it creates a power vacuum that lots of parties are rushing to fill.
"Blockchain may replace more than paperwork; it may reduce or remove the role played by numerous financial parties, including banks, the Federal Reserve, and similar institutions in other countries, private clearing entities such as Bank of New York Mellon; and card networks like Visa and Mastercard."
Others offer a less dire outlook, pointing to examples of banks embracing blockchain. Santander Bank N.A., for one, is using the technology behind virtual payments for international payments originating in the United Kingdom.
The World Payments Report 2015, from Capgemini and the Royal Bank of Scotland, stated that "Blockchain technology has the potential to improve the efficiency of financial transactions worldwide. … The technology could accelerate the velocity of money, and provide a path for legacy banking systems to interoperate, greatly improving efficiency."
Visa and Mastercard have deep pockets and a razor sharp focus on technology. And then there is size. "They have the advantage of scale when interacting with other players who are innovators," Abbey said. Martaus added, "There are an awful lot of proof of concepts going on in the marketplace today."
Will Visa and Mastercard reign supreme 50 years from now? It's anybody's guess.
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