Differences between Visa Inc. and MasterCard Inc. have been sharpening, and observers expect the divergence to continue as Visa's initial public offering draws nearer.
Even though Visa is much larger, MasterCard, which went public nearly two years ago, has been outspending it on rebates for issuers and merchants. Also, unlike MasterCard, Visa has arranged for member banks to absorb the brunt of potentially large antitrust judgments or settlements. And as a result of Visa's restructuring in preparation for the IPO, the two companies are approaching the European markets with markedly different structures.
Soon there will be even less common ownership of the two companies, giving them more reason to follow different paths. Visa said Monday in a regulatory filing that it planned to raise between $15.6 billion and $17.1 billion in its IPO, assuming a price in the middle of its target range of $37 to $42 a share.
The offering will cap "a sea change in the U.S. payment network world," said Eric Grover, a former Visa executive, who is now a principal with the Menlo Park, Calif., consulting firm Intrepid Ventures. "Historically, these two global payment networks have literally been mirror images of each other on almost every front. Now with MasterCard having been public for a year and a half, with Visa Inc. going to be public … we will see a gradual effort of the two to differentiate."
In a report issued this month, Gwenn Bezard, a research director at Aite Group LLC in Boston, argued that intensifying competition is evident from sharp recent increases in spending by Visa and MasterCard on incentives for issuers and merchants to use their networks.
Such payments spiked after the companies were forced to allow members to issue cards on competing networks in 2004 by a ruling in a Justice Department lawsuit. Mr. Bezard wrote that the rise was particularly pronounced at MasterCard "as it aggressively pursued opportunities to take on Visa." However, he expects Visa to follow suit to "foster growth and fend off competition" once it goes public.
"When you become a publicly traded company, you have no choice but to grow the company in terms of revenues and profit," he said in an interview. "You want to get more large issuers on board, you want to get a greater share of issuers' business, and you want to get more merchants to have … exclusive deals with you or gain a greater share of merchants' business on the acquiring side. … It's going to be true for Visa, as well."
According to Visa's prospectus, it processed $3.2 trillion of transactions in 2006, compared with $1.9 trillion for MasterCard. Visa's relative heft gives it more leeway in rebate spending, Mr. Bezard said. "When MasterCard spends $1 billion on rebates and Visa spends $1 billion, it's going to have a different impact."
Mr. Bezard has argued that as pricing competition heats up, and as consolidation among issuers raises the threat that a large customer will abandon a network, Visa and MasterCard should continue to seek diversification in international processing.
Both he and Mr. Grover identified the independence of Visa Europe as a relative disadvantage in this regard.
After North America, the largest market for the card networks is Europe, Mr. Bezard said, but "any gains for the global brand in Europe is not going to impact the bottom line of Visa Inc."
Mr. Grover said: "Visa is going to be a federation, not … one coherent global network."
While MasterCard "can engage with one commercial proposition globally,"
Visa Inc. and Visa Europe have different interests, he said.
"One has an interest in maximizing … the enterprise value of the network, and one … basically continues to be a bank utility."
But Carl Pascarella, the CEO of Visa U.S.A. Inc. from 1993 to 2005, said Visa's structure would be an advantage in Europe.
"They're going to still be very tightly associated," said Mr. Pascarella, who is now an executive adviser with the private-equity firm Texas Pacific Group. "When you take the focus of Visa Europe — and they're going to be totally focused on a very, very interesting market" as the Single Euro Payments Area takes effect — "being able to have an organization that just focuses on that, but still has a very tight relationship with Visa International … there are going to be synergies there that are going to surpass any issues that come up."
Mr. Grover said Visa is better situated than MasterCard for an array of antitrust challenges. For example, last year Visa and its member banks settled litigation American Express Co. brought in 2004, but MasterCard has yet to do so. Unlike MasterCard, Visa's U.S. banks "effectively indemnified investors against potential liability associated with the major existing lawsuits," he said.
Mr. Pascarella said that even though Visa has been gearing up for an IPO for some time, it still lags MasterCard in its experience as a public company. "MasterCard has been through the … exposure of being a public company now for a while, and naturally that changes the way you operate and, to some degree, your focus," he said. "And Visa will have to go through that transition, which I don't think is going to be difficult."
Mr. Grover said there is "maybe some advantage" in MasterCard's having been public for the past year and a half. "They've been more enterprising than they've been in the past."
Visa would not comment beyond its filing. MasterCard would not discuss the rebate issue or its legal exposure relative to Visa's.
