SunTrust Banks Inc. is dropping its current debit partner Visa Inc. in favor of MasterCard Inc., the market's scrappy underdog.
Visa is by far the dominant player, and the agreement announced Wednesday is an important win in MasterCard's efforts to expand its debit portfolio.
Analysts said MasterCard almost certainly presented better pricing and other financial incentives, and SunTrust said the switch will also enable it to take advantage of analytics and other services that Visa does not offer.
"There are some capabilities that we can offer clients working with MasterCard … that are of great interest to us in our client acquisition and growth strategies," said Hugh Gallagher, SunTrust's senior vice president for deposit product management.
For example, MasterCard's debit network enables cardholders to block transactions by merchant type, so a parent could prevent a child's debit card from being used at liquor stores.
Gallagher also cited MasterCard's analytic tools, which can help the Atlanta banking company determine where and how to refine its debit marketing efforts.
These capabilities were not available through Visa, and some of the more advanced services Visa does offer were not compelling enough for SunTrust to stay. Gallagher said the contract was up for renewal, but would not say when it expires.
For example, SunTrust has participated in a Visa test of card activity alerts, but Gallagher said SunTrust was moving forward with its own service.
"We'll be having a broader alert infrastructure … in 2010 where it's SunTrust driving the alerts to our clients," Gallagher said. "It would cover more than just the card business."
Switching debit brands will "help us better manage our debit portfolio, grow it faster and make more money," Gallagher said. "Prior to the recession, debit card [use] was growing at 10%-15%, but it has now slowed to 5%-6%. When the economy rebounds, we expect debit card usage to resume its double-digit growth."
A Visa spokesman said by e-mail that "the payments business is highly competitive, so it is not unusual in our industry for client financial institutions to move between payment network providers now and again, especially as the debit category is evolving."
SunTrust is the No. 7 debit issuer, according to data compiled by SourceMedia Inc.'s PaymentsSource.com, and would add about 5 million accounts to the MasterCard portfolio. (SourceMedia also publishes American Banker.)
The Purchase, N.Y., company's debit business is still much smaller than Visa's.
According to the most recent earnings figures available from both companies, MasterCard had 118 million debit accounts in the United States on Sept. 30 and Visa had 248 million at the end of June.
MasterCard has stepped up its efforts in the debit market, notably by introducing a processing platform in 2008 designed to handle both signature and PIN transactions.
However, one of its biggest scores in recent years — Washington Mutual Inc.'s decision in 2005 to convert its debit portfolio to MasterCard — has become something of a black eye with the Seattle thrift company's failure and the sale of its banking operations to JPMorgan Chase & Co., primarily a Visa issuer.
Aaron McPherson, a research manager for payments at IDC Financial Insights in Framingham, Mass., said that even though JPMorgan Chase says it is reissuing some Wamu cards with MasterCard's brand, the relationship is now perceived as a loss and might be hindering MasterCard's efforts to woo other banks.
"There is pressure on MasterCard to show that they can compete in this space and that they can get large issuers," McPherson said. The SunTrust win "sends a signal to other issuers that they should take a second look at MasterCard."
Chris McWilton, MasterCard's president of U.S. markets, said the contract validates his company's debit capabilities.
"In a competitive banking environment … to make a switch of debit cards is not something you take very lightly," he said. That SunTrust is willing to go ahead with this conversion is "a vote of confidence for our debit platform," he said.
SunTrust said the deal makes it one of the few places to get a MasterCard debit card in the Southeast, a region Visa dominates.
MasterCard has few other major issuer relationships in that region. McWilton highlighted existing relationships with JPMorgan Chase for its Continental Airlines Inc. cards; Bank of America Corp. for some affinity debit cards; and, elsewhere in the South, Capital One Financial Corp.
SunTrust said it plans to begin converting existing debit cards to the MasterCard brand this year, and expects to complete the conversion process within a year.
Neither company would disclose the financial terms of the contract. SunTrust plans to continue issuing MasterCard- and Visa-branded prepaid and credit cards.
Beth Robertson, the director of payments research for Javelin Strategy and Research in Pleasanton, Calif., said that it typically takes more than just a good price to persuade issuers to switch card brands.
"I'm sure pricing was a compelling factor, but I'm sure also there were other factors, like the support and the conversion process," she said.
Because converting a massive card portfolio from one brand to another is such a complex process, "it's very difficult to win a contract as a replacement," she said. Aside from conversions that result from banks acquiring one another, most new card contracts are in addition to — not in replacement of — the existing contract with a rival brand.
Adil Moussa, an analyst at Aite Group LLC in Boston, said competitive takeaways like this are uncommon in the debit market. "This is different from what we have seen in the past few years, where one bank purchased another and converted its debit card program," such as the JPMorgan Chase-Wamu acquisition.
MasterCard typically "provides marketing dollars for banks, and the network offers attractive pricing to attract new issuers," Moussa said. The partnership likely resulted from a lengthy courtship, he said.
Visa's "contract was up, but the negotiations did not begin immediately," Moussa said. It is possible that MasterCard began wooing SunTrust the last time its Visa contract came up for renewal and never gave up in its efforts, he said.
"These negotiations are years in the making … it's not something that is taken lightly," Moussa said.