Finishing his first year as president and chief executive officer of MasterCard International Inc., H. Eugene Lockhart seems to exude even more optimism and confidence than he had going in.

MasterCard's payment businesses are blessed with a prosperity that gave Mr. Lockhart the leeway to make a few swift but sure organizational and cost-efficiency adjustments - including top-level appointments and a move of corporate headquarters - that he sees as strengthening MasterCard's foundation for the future.

Those moves also made clear that Mr. Lockhart is every bit the "activist with a vision" that his supporters described when he took the reins from Alex W. Hart in March 1994.

Mr. Lockhart made that transition from First Manhattan Consulting Group, where he gained an intimate knowledge of many of the banks that are prominent in MasterCard, its larger rival Visa, and in payment systems generally. From 1986 to 1992, between stints at First Manhattan, Mr.

Lockhart was chief United Kingdom banking officer at Midland Bank in London. In the following conversation, which took place recently in his New York office, Mr. Lockhart, 44, revealed the thinking behind some of his more visible executive decisions, as well as his realization that business cycles, technology, and intense competition can reshape the landscape at any time in unexpected ways.

Q.: How do you look back on your first year, your expectations, how they were or weren't met?

LOCKHART: It has gone really well. We had a record year. We processed more transactions, had more cards, and registered higher growth than ever before. And I take absolutely zero credit for that. It takes a long time to build a market and momentum, and that comes down to Pete Hart and Peter Dimsey (MasterCard's former international and U.S. chief executives) and all that they did so well.

From a global, market-momentum perspective, things are going great. That doesn't mean there aren't a lot more things to do. But it's been very rewarding.

From members' standpoint, the transition from Pete to me occurred, I would say, seamlessly. Surely they may have seen some change in the nature of some of the discussions we have . . . .

Q.: There is some talk of a change in style.

LOCKHART: I don't think there is necessarily one right style. Pete had his, and I've got mine. Both over time have been successful. Has there been any negative impact on the members, the brand, or transactions? The answer is no.

Q.: This is a true growth business, unusual in this day and age. How does that affect the way you approach this job?

LOCKHART: That's a great question. When I was at Midland Bank, I was dealing with exactly the opposite. And in fact, for most of our members it's the opposite. The problems for me as a banker were growth, which wasn't there, and costs. The mind-set of maximizing returns in a no-growth or low-growth economy and getting costs out of the system is very different from what we have now - seizing the opportunities that our current positioning presents. Growth is a byproduct of that positioning.

We are growing because we have a product consumers find useful. It's the best delivery system known to mankind. It's easy to use, secure, convenient, and people know it works. So the mind-set becomes one of getting in position strategically to take further advantage of the opportunities.

Q.: This is more fun?

LOCKHART: Yes. Also, very hard. Anybody who thinks running an association consists basically of chatting up senior members doesn't understand what a big, tough, complicated business this is. It's a small business in the context of staff size, but it's a very large business in terms of its implications and impact on the industry, in the United States and globally.

Also, this company is relatively new. I came from a bank that was founded in 1823; MasterCard is 28 years old. As new things come along, there aren't historical patterns to fall back on. I used to have to spend a lot of time changing people's mind-sets, so that they didn't always think the right answer was to go book larger loans. At MasterCard, the issue is more one of creating a mind-set - a mind-set for the seizing of opportunity.

Q.: At the same time, you are dealing in many businesses, with many pockets of growth. It's a little misleading just to say that MasterCard, an international payments organization, is a fast-growing company.

LOCKHART: That's right. But keep in mind that volume growth in our slowest region, Canada, was still in high single digits last year. Asia/Pacific will come in around 50%, which is down a bit from 63%. China had a terrible year - the growth went down from 200% to 150%. Debit grew 46%, the U.S. grew about 24% . . .

Is this going to continue forever? Three or four years from now, will it still look like this? I really don't know, but I don't want to assume it will. I could make a pretty strong argument that it will continue, but I have to position the company to understand the range of possible options. And that leads to making sure we spend our money wisely, as in the decision to move the headquarters.

So one of my big jobs was to put the company on a financial footing that will allow it to be very strong under any of the possible strategic conditions.

Q.: How important was the corporate relocation?

LOCKHART: Critical. Of course, we could have afforded to stay in Manhattan. The real issue was did we want to afford it in an era of increased competition? We have estimated that we will save, over about 15 years, $250 million. And that doesn't take into account the fact that we'll own the Westchester County property.

It's a question of what can we do with an extra $12 million to $15 million a year, and frankly, we can use it in a lot of places. One good example: We just won a contract to provide the processing and settlement systems for Guangzhou Province in China. That will cost us a few million bucks (and we hope we are on our way to becoming) the premier card in that country. Extend that logic to other emerging markets, from southeast China to Latin America, and you have a lot of little $3 million investments, and the savings from the move give us more flexibility to pursue them.

Another example is marketing. Visa is spending, according to Advertising Age, about $150 million this year on advertising. We are at $90 million to $100 million. We're going to have to go out and buy that next gold card ad, which isn't cheap, but it's what the members pay us to do.

The building was not the only thing we did to save money. We will increase our budget this year by about 4%, and over the last four years the compound annual growth rate was 20%. I don't think the members have felt that one bit. We are just spending our money more wisely.

To reduce it to a few words, one of the things I've begun to do is bring a sense of commercial practicality to the association.

Q.: What message were you sending with the new people you brought in?

LOCKHART: Evolution, not revolution.

When I was running Midland Bank, we were bust. We had virtually no money. That provided a reason and purpose to tell people why you were taking certain actions. By contrast, this is a very successful company. Sure, there are a lot of issues to deal with, but you don't want to come in and tear it up, or fix what ain't broke, or change all the tires immediately.

In one area, technology, I wasn't pleased with how fast we were moving. That's why Jerry McElhatton (president of global operations and technology) is here. He worked for me for six years at Midland, and everything was on budget and on schedule. His reception here has been outstanding.

Second, I had 20 direct reports, an insane situation that needed rationalization. Hence, Bill Jacobs (executive vice president, global resources) is running staff functions. Not only has he done that before very successfully, he brings a commercial mentality, he knows the markets well, and he will help us get even stronger financially.

Third, our European partner, Europay International, is its own company with its own directors. Just because it manages our brand for us doesn't mean we should abdicate responsibility, and that's why Bob Selander is here (as president for Europe, the Middle East, Africa, and Canada). He has worked in Europe (with Citibank) and understands both the credit and debit side. He will make sure the franchise is well managed and cared for in those regions.

I was very pleased with how Asia/Pacific is working and I thought the best thing we could do was leave Jim Cassin in place and help him grow the region as fast as he can. In Latin America, Richard Child and his staff have done an absolutely first-rate job; what I can do is give them motivation, encouragement, and money to build the strategy.

Q.: How decentralized and autonomous are MasterCard's regions?

LOCKHART: Quite decentralized. But there was not as tight a framework for the management of that I would have liked to see. This year we put in that framework. We started a corporate governance project driven by myself, board chairman Norman Tice, and senior Latin American board member Ernesto Grether. We have defined the responsibilities of the global boards, regional boards, and regional staffs. We now understand whose decision is whose and specific parameters against which the regions and their staffs are measured, in areas that include brand awareness, acceptance, financial management, governance, and compliance with operating rules and their regional variations.

Q.: What about the U.S.?

LOCKHART: Peter Dimsey did a great job over a six-year period. The figures speak for themselves. But the world is different than before. Just look at debit. How it unfolds in the U.S. is a big, big issue. I'm not talking just about Visa Check versus Master Money, but rather an improved national infrastructure for electronic debit payments. Most countries around the world have a sound infrastructure for debit; this country has a mess on its hands. Regional switches do some of the job, national networks do some of the job, there is a proliferation of brands, and a bank has less acreage in which to promote its own brand, which to me, as a banker, is wrong.

Something will have to happen to rationalize debit in this country. I honestly don't know how it will get done. We have set up a subcommittee of the U.S. board to take a look at the situation. There is a lot of operational redundancy in debit processing; each of the major switches does basically the same things. If you are a multiregion bank and want to have a coherent debit program, how many marks have to appear on your cards? Look how many decals are on the average ATM. That takes away from the basic simplicity of what makes a good brand or product. It's not a very sound, long-term consumer proposition.

If I were a banker, I'd want the control I have now over the process, but also a greater rationality in costs and brands. MasterCard as an association could not dictate a solution, but we could lead a debate and get bankers talking about the issues. There is no model here, I don't know which way it will go, but I do think about it a lot.

Q.: In your public speaking, you come off as very diplomatic and above the fray. How caught up do you get in the nitty-gritty of competition? How much do you rejoice when, say, a Wells Fargo Bank drops Visa's debit brands in favor of MasterCard's?

LOCKHART: I love to compete, and I love to win. I can't count how many one-on-one sessions I've had with members. I get very involved in specific, big deals. I'm right in there. How much I rejoice is more the member's choice. People here would tell you I'm involved in almost every facet of the company.

Q.: Is there any validity to the criticism of both MasterCard and Visa that they are dominated by credit card people and their thinking, and therefore are not dealing as best they can with debit and other nontraditional opportunities?

LOCKHART: Not here. When my appointment was announced, I was portrayed as a debit guy. Britain had a well developed debit infrastructure, and I helped develop it. I was also known for (the branchless banking service) First Direct. People forgot I ran a four-million-card credit portfolio.

There is no doubt that the vast majority of people inside MasterCard primarily focus on credit cards. If I were a member, that's exactly how I'd want it, because over 90% of revenues still come from credit cards. We have on staff, and will need more, people who understand retail banking, deposits, and the debit arena. We have people like that in Chris Fredrick and Janet Hartung (remote banking), and Art Kranzley and John Smith (debit cards), who have been in and around retail banking for years.

We have this mature but rapidly growing business in credit cards, which we need to always invest in and nurture, but also this incredible growth curve in debit. What we see in the U.S. is the reverse of a lot of European countries, where debit is king.

Looking to how we replace Peter Dimsey as U.S. president, we are seeking a balance between marketing capability and banking capability, and you can throw in some technology dust too. The person taking that job has to understand the interplay of marketing, banking, and technology.

Q.: What are you doing with the technology structure you inherited, and to what extent is it a competitive advantage?

LOCKHART: MasterCard has a network-based, decentralized architecture with processing nodes all over the world. It gives us a strategic advantage as we move to replace that architecture over time, taking advantage of price-performance curves and networking advances in a gradual and flexible way. We have decided on a two-layer hierarchy, with regional nodes for local authorization and clearing, and central management functions and global settlement in St. Louis.

Q.: Meanwhile, how do you organize for technology-based opportunities like home banking and chip cards?

LOCKHART: We have a remote banking unit in the U.S., because that's the first region where it took, but it will eventually be global. We have spent a lot of time making sure that Master Banking works right, through basic implementation of a core system. I won't go into details now about the expansion that is about to begin, but it will revolve around software that people will get for PCs or screen phones, and a direct connection with credit or debit card accounts, because assuring the connection between the bank and its customer is part of our job.

As for chip cards, it has become clear that the best business case is in Europe, and chip will be deployed more aggressively there than in the U.S. One of our objectives is to complete the specifications with Europay and Visa to promote practical, workable platforms on a global basis. Second is to think through and develop pilots for products utilizing the chip. It's quite probable that our first pilot won't be in this country. It may not even be in Europe. We will launch three pilots this year to evaluate the business case, and they will not be limited to stored value, or cash, applications. Our intention is to come back to ourselves and the members with a better-proven business case.

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