MasterCard Inc.'s canceling of a contract with eFunds Corp. suggests that the card company may bring in-house the processing of PIN debit transactions and try to gain share in a field where it has lagged, analysts said.
Last week, the Purchase, N.Y., company disclosed that it had canceled its alliance with eFunds in December. Late last month, eFunds filed a complaint in Arizona Superior Court, alleging that MasterCard's termination of the alliance was "improper." At press time, eFunds had yet to serve the papers on MasterCard, holding out for a possible settlement.
MasterCard hinted that a change was coming when it held a tour of its St. Louis data center for analysts and investors in October.
Robert J. Dodd, an analyst at Regions Financial Corp.'s Morgan Keegan & Co. Inc., who took the tour, said that a MasterCard representative said the company was considering a move in-house. "They mentioned something to the effect that they might consider doing it at some time in the future," he said.
If MasterCard does choose to bring processing in-house, it could build its own PIN debit network, which would "cost them some money but it's not going to cost them a lot of money," he said. "They're not going to have to build a new center to do it."
Alternatively, MasterCard could buy one of its PIN debit rivals, which would let the company gain market share sooner, Mr. Dodd said. But that might not be so easy because all the major networks are owned by large publicly traded companies.
ATM&Debit News, a sister publication of American Banker, reported that Visa U.S.A. Inc.'s Interlink was the top PIN debit network last year, processing 330 million transactions per month.
It was followed by First Data Corp.'s Star network; Pulse EFT Association, owned by Morgan Stanley's Discover Financial Services LLC; and NYCE, owned by Metavante Corp., a subsidiary of Marshall & Ilsley Corp. Maestro, MasterCard's PIN debit brand, trailed in 18th place, processing 6.4 million transactions per month.
Tien-Tsin Huang, an analyst at J.P. Morgan Equity Research, who also took the tour in October, said, "I think they're still deciding what they want to do, but that includes looking at other providers as well as going to an in-house solution."
A spokesman for MasterCard said by e-mail that it would continue to use eFunds, a Scottsdale, Ariz., processor, to serve "a limited number of existing customers. The termination of the agreement only applies to new customers."
He would not discuss what MasterCard might do in the future, or what it said during the October tour. eFunds would not discuss the situation.
Most analysts agree that MasterCard "missed the boat" for PIN debit transactions, as Brandt Sakakeeny of Deutsche Bank wrote in an October note. MasterCard did not "articulate its strategy to gain share in the PIN debit market, where it … has virtually no presence" in the United States, he wrote.
The top four PIN debit networks control about 90% of the U.S. market, he said. Analysts and industry experts have said for years that Maestro is strongest in Europe, where it is a dominant PIN debit brand.
When the PIN debit networks were smaller and more numerous, Maestro was a "network of last resort" for cards that lacked regional PIN debit brands corresponding to the merchant's PIN debit terminal. But over the years consolidation has essentially made such backstops obsolete, and MasterCard has tried to redefine Maestro to banks.
Tim Sloane, the director for debit advisory service at Mercator Advisory Group Inc. in Waltham, Mass., said banks have been "taking a much deeper look" at Maestro than they had in the past.
But frequently Maestro ends up being used "as a bargaining chip," he said. "Very frequently the issuers are going to look at MasterCard simply to leverage a better deal with Visa."
Rather than buying another PIN debit network, MasterCard is more likely to align itself with one, which would help banks reduce the number of PIN debit networks on the backs of their debit cards, Mr. Sloane said.
This would help reduce the cost to banks, which would get "comparable coverage at basically the same amount of money or less than it had with Visa," Mr. Sloane said. "But I can't stress enough that the bank looks at the cost of switching brands as the primary decision."
