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Visa Inc.'s planned purchase of CyberSource Corp. shows that the payments company is serious about mobile commerce — and the potential risks of this emerging channel.
April 21
MasterCard Inc. is zeroing in on an e-commerce technology business that could help the payments company expand its online services and, perhaps more significantly, develop further mobile payment offerings.
MasterCard's plan to buy DataCash Group PLC for $520 million may or may not give it a competitive advantage on Internet transactions, in terms strictly of market share. But industry watchers see enough room in the online world for major players to grow, and DataCash should be of some help to MasterCard, not least in terms of dollar volume.
"You're talking about trillions of dollars in play over the next 10 years," said Leonard DeProspo, a research associate at Janney Montgomery Scott LLC in Philadelphia.
In discussing the deal's benefits during a conference call Thursday morning, the Purchase, N.Y., card payment network's executives talked up DataCash's fraud prevention capabilities as well as its established relationships with merchants in Western Europe.
"We felt that an acquisition of this nature allowed for a quicker European market entry rather than retooling our existing MiGS gateway," said Gary Flood, MasterCard's president of global products and solutions, in a reference to the MasterCard Internet Gateway Service it offers in 25 Asia-Pacific countries. The gateway, established in 1999, connects merchants to acquirer banks for processing e-commerce, mobile, telephone and other transactions.
Flood said DataCash's connection to merchants through their acquirer relationships would also "accelerate" the acceptance of MasterCard's Maestro card brand for Internet purchases. These connections also make it relatively easy to deliver new products and services, such as mobile payments, cardholder authentication services and e-wallet applications, to existing customers "with only minimal integration challenges."
The deal bodes well for MasterCard, which is competing with other card networks to develop ways of letting people make payments using their mobile phones, according to consultant Philip Philliou.
"If I'm the guy enabling the merchant to do business in a mobile environment, I'm going to have a lot of leeway and influence into what payment types are accepted," said Philliou, a partner in Philliou Selwanes Partners LLC in New York.
MasterCard's current intention for DataCash is to expand e-commerce capabilities, but "there is no doubt that as we go along this will be helpful in terms of a mobile payment gateway," Ajay Banga, MasterCard's president and chief executive, said during the call.
Banga played down connections between the DataCash purchase and Visa Inc.'s recent $2 billion purchase of CyberSource Corp., which operates an e-commerce gateway and supplies transaction-fraud services. But analysts saw MasterCard's announcement as an answer to its San Francisco rival's deal.
"It does seem to be a pretty sizable game of chess," DeProspo said. "I think that Visa had a pretty strong strike with CyberSource, and this is sort of MasterCard's response."
In terms of size, Visa seems to have secured a much larger piece of the pie with its deal, he added.
CyberSource counted about 295,000 customers, processed about 2.5 billion transactions and generated $265 million in revenue last year, according to company filings.
DataCash, a London company, processed more than 240 million transactions for more than 1,400 merchants and generated $58 million in 2009 revenue, according to MasterCard.
Despite the size difference, DeProspo said, plenty of room exists for both Visa and MasterCard to better establish themselves in the e-commerce market.
"They're both getting into a very 'growthy' part of commerce," he said.
Philliou also noted that CyberSource has a big U.S. presence and DataCash's strength lies in Western Europe, giving both companies elbow room.
Banga said that he sees plenty of room to expand in the broader e-commerce sector, specifically in the United States.
"I don't think the U.S. is in a stage of e-commerce development where all opportunities for people are saturated in any form whatsoever," he said, adding that online transactions constitute a "relatively small portion" of total U.S. retail sales.
Regarding Visa's CyberSource deal, he said, "I think that the really important thing here is not who's reacting to what. I really, firmly believe the e-commerce business is in [an] early stage of development."
Both the MasterCard and Visa deals could help the payments networks develop a mobile payments system, which Philliou views as a natural extension of the types of products and services DataCash and CyberSource provide.
"I think for both companies it's going to serve as a launching pad for mobile commerce activities," said Philliou.
"It's all about the drive to mobile," he said. "If this DataCash acquisition helps MasterCard grab a foothold in a mobile environment, that will better position them against PayPal, and any other alternative payment provider for that matter."
The two deals also could help the companies cushion the potential impact from the debit interchange provision in the Dodd-Frank Act.
The provision, which gives the Federal Reserve Board power to set "reasonable and proportional" interchange fees for debit card transactions, lets fraud mitigation costs be taken into account when determining rates.
Though Visa and MasterCard do not collect interchange fees, the law gives the card brands more incentive to provide strong fraud-prevention services, said James Van Dyke, the president and founder of Javelin Strategy and Research in Pleasanton, Calif.
