The Decade’s 12 Greatest Developments in Payments: #1 MasterCard and Visa Go Public

By PYMNTS | January 4, 2010

Why the MasterCard and Visa IPOs Were the Most Significant Development of the Last Decade

MasterCard and Visa emerged as publicly traded financial powerhouses after four decades of working for associations of banks. Their transformation marks a radical shift from the past and will most likely define the shape of the payment ecosystem for decades to come.

To see why MasterCard and Visa going public is by far the most significant development of the past decade it is helpful to remember what the payments biz used to look like.

MasterCard started as an association of banks in 1966. Visa was still a Bank of America franchise operation then, but became an association in 1971. (I’ll ignore the moniker changes over time). Over the years the names of these associations came to mean several distinct things.

“MasterCard” refers to the association of banks that had shares and voting rights in the MasterCard association.

“MasterCard” also refers to the bug on the card that serves both as branding as an indication that a consumer with that card can use it to pay at a merchant that has a sign saying it accepts MasterCard.

And finally, “MasterCard” also refers to the entity that worked on behalf of the association to clear and settle transactions among the member banks and to engage in brand-building efforts. The story is the same for Visa.

The associations consisted primarily of banks that serviced cardholders (issuers) or merchants (acquirers). The banks made the big bucks. The MasterCard and Visa entities were for all intents and purposes break-even operations that supported themselves from fees that the members agreed to pay. No one got rich as far as I know running the entities. In theory the power ultimately rested with the banks. In practice the nature of that power evolved over time as a result of some banks becoming so large that they could dictate decisions by making credible threats to pull out.

Under this business model the banks engaged in what’s known as co-opetition (see Chapter 7 of Paying with Plastic). Banks cooperated in establishing a common brand, acceptance network, and clearing and settlement system. But then they competed to sign up cardholders and merchants. This model appears to have been responsible for the rapid growth of MasterCard and Visa and their swift spread around the world.

The MasterCard and Visa associations decided to end this co-opetitive model in the early 2000s and to, in effect, free the MasterCard and Visa entities that had worked for them. While there were sensible business reasons for turning these entities into for-profit public companies, an important impetus at the time was the threat of antitrust lawsuits over interchange fees. Antitrust authorities in many countries and merchant plaintiffs in the U.S. were claiming that it was unlawful for banks to get together in an association to set the default interchange fee rate. Getting the banks out of any decision-making role on interchange fees could defeat these claims going forward.

MasterCard went first with an IPO in May 2006. Its stock started at $48 and hit $211 on December 31st 2009. Its healthy performance and the rapid rise of its stock helped set the stage for Visa which IPO’d in March 2008. As of the end of the decade, MasterCard had a market cap of $33 billion and Visa of $74 billion making them both top American corporations. (There was on wrinkle in Visa’s IPO. Visa was organized as a series of regional associations. Visa Europe decided it didn’t want to join the IPO party. Visa, Inc. and Visa Europe have an agreement to work together and Visa Europe has an option to sell itself — a put option — to Visa, Inc. Visa’s 2009 Annual Report said the price of Visa Europe depends on a lot of variables under the agreement but could be several billion dollars. The result of this is that Visa does not closely manage the Visa brand for the sizeable European payments market.)

MasterCard and Visa are fundamentally different organizations now than they were before their IPOs. Visa in particular put in almost entirely new senior management when it went public. As publicly traded companies they are subject to all the pressures for better or worse of all firms that are beholden to the markets. They are driven by securing quarterly earnings and driving growth. Both are vastly different drivers than these entities had in the past.

MasterCard and Visa are in a position to radically transform the payments ecosystem in the next decade. They have substantial market caps which provide them with a currency for acquisitions and they will need to make those acquisitions, in addition to pushing for organic growth, to keep their stock prices high. A few years ago these entities faced some threats from some of their former bank owners who might have started competing systems. But most of them are likely to be punch drunk for several years from the many whammies they’ve taken as a result of the financial crisis. MasterCard and Visa showed the real value of their business model during the crisis. They bear no credit-default risk and earn revenues so long as people transact over their systems. Although transactions decline in bad economic times MasterCard and Visa can also count of growth from taking share away from the huge volume of transactions that are still done with cash and checks.

The launching of these two electronic payments businesses was the most significant development of the first decade of the 21st century and will go down in history, along with the birth of Diners Club in 1950 and the birth of MasterCard and Visa in 1966, as a major turning point in the history of electronic payments.