Hart Stakes A No. 1 Claim For MasterCard

Alex W. Hart, the president of MasterCard International, has never offered any apologies for being No. 2 in the bank card market. Since taking office more than two years ago, he has said repeatedly that he would be perfectly happy to remain a "strong No. 2" to Visa.

But showing no signs of resignation or complacency, Mr. Hart now claims MasterCard is beating Visa U.S.A. in a measure that should be more important than market share to its member banks.

"We believe very strongly that we are more profitable than Visa for our members," he said in an interview last week.

Mr. Hart is expected to hit hard on that theme next week when credit card executives gather in Dallas for the American Bankers Association's annual bank card conference. The event provides a platform for MasterCard and Visa to play out their traditional rivalry. Each organization's chief executive delivers a major "state of the industry" address - this year to take place Sept. 12.

Running the Right Race

Mr. Hart will put the profitability spin on the Visa-MasterCard battle. Historically, the heads of MasterCard and Visa were more likely to bicker over total sales figures and relative market shares.

"I'm as competitive as anyone around, but I want to be sure I'm winning the right race," Mr. Hart said. "Visa is focused on being the biggest and getting as much volume as they can. I want to be No. 1 in profitability, No. 1 in value."

The reality is that MasterCard is far from being No. 1 in sales volume. In 1990, Visa International - which includes Visa U.S.A. - handled some $345 billion in consumer payments. MasterCard's worldwide volume was closer to $200 billion.

|More than Enough' in U.S.

In the United States, more than 125 million consumers carried Visa cards at yearend 1990; about 89 million toted MasterCards.

That is okay with Mr. Hart. "In the U.S.," he said, "we have, frankly, more than enough cards out there."

Mr. Hart started to implement his decidedly different strategy as soon as he assumed the MasterCard post in late 1988. The card group has spent much of the previous 10 years trying to upgrade what was then viewed as a downscale image compared with Visa's. Mr. Hart believed MasterCard would do better to become the defender of the middle-class bank card heartland.

MasterCard began to go after the retail-oriented mass-market, while Visa did battle in the upscale travel and entertainment market - American Express' stronghold.

Mr. Hart is pleased with the preliminary results of the shift. He believes that MasterCard is becoming a more profitable product than Visa.

"It's hard to make money in the travel and entertainment business," Mr. Hart said. Most of the volume is generated by business people whose employers pay balances off in full each month. Issuing banks, therefore, reap little interest income from the accounts.

"The better returns are when the card is used to buy a roomful of furniture that is paid off over six months," Mr. Hart said. "Our strong mainstream positioning is paying off."

So much so that Mr. Hart said he will soon be able to prove to his member banks that MasterCards yield 30 basis points more than Visa cards on issuing banks' assets. While the difference today is probably closer to five or six basis points, 30 basis points is a "very legitimate target," he said.

"We know we have less chargeoffs," Mr. Hart said. "We know our delinquencies are lower. We believe our revolving [balances] are higher and we know that our interchange [income] is higher," he said. Interchange refers to the charges that determine the fees retailers pay to accept credit cards.

"We think the net effect is that if a member has a chance to issue a MasterCard or Visa card they would be smarter to issue a MasterCard."

To Fight Fraud

Also contributing to MasterCard's healthy returns is its sophisticated risk-management systems, including those that are used to authorize consumer transactions and avert fraud and credit losses.

Under the MasterCard system, a retailer's bank is likely to communicate directly with a card-issuing bank before authorizing a sale. At Visa, it is more typical for transactions to pass from a retailer's bank to Visa to the card-issuer.

"That is a huge, important part of the business," Mr. Hart said. "That's why we're fighting to put 100% of our transactions on-line. We currently can take twice as many transactions back to the [card issuer's] host [computer] as Visa can."

MasterCard says it sends about 80% of its transactions back to the host for verification; Visa about 40%.

Focus on Profitability

According to Mr. Hart, profitability will be a major topic of discussion during the bank card conference. As other areas of banking remain troubled, many institutions are relying on their bank card businesses to keep themselves afloat, he said, and much of the talk at the conference will reflect that emphasis.

A major theme of a speech to be delivered by Robert Heller, president of Visa U.S.A. in San Mateo, Calif., will be superior service quality and reduced expenses for member banks. Some of the topics he will focus on, according to a spokesman, include strategies banks can use to stem attrition and the rise of the gold card.

"The really exciting aspect of our business is that bank cards are profitable," Mr. Hart said. "They are making a bigger contribution to their organizations than they ever have before. We are really very turned on right now."

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