MasterCard and Visa got more than fresh faces when they installed new chief executive officers early this year.
They may have begun a revolution in the ways they are structured and do business.
MasterCard's Eugene Lockhart and Visa's Edmund Jensen have questioned some of the basic assumptions about how their associations operate. They have gone so far as to contemplate some radical reengineering, if not an outright breakup of their corporations, to adjust to new competitive realities.
Recent interviews revealed both executives to be at similar crossroads in their parallel strategic paths. They are clearly of like mind and have high personal regard for each other, but their long-range rethinking is in no apparent way collusive. They are certainly going over much of the same ground.
While they are including the senior bankers on their boards in these conversations, Mr. Lockhart and Mr. Jensen were not pushed into being proactive. There has been only some minor grumbling in the membership ranks about MasterCard's and Visa's effectiveness.
"That may be because the members, because of consolidations and cutbacks, are more dependent on MasterCard and Visa than ever before, and the associations have been, for the most part, responsive," said industry consultant John Benton.
Both leaders are applying their extensive banking backgrounds to historically dominant credit card companies that have been forced to look at payment systems much more broadly. Both are convinced that they are well placed to help member banks understand and cope with the rapid changes in technology and nonbank competition, and each is asking if his organization is right for the task.
"Looking five to 10 years out, I can't read the tea leaves exactly," said Mr. Lockhart, who officially joined New York-based MasterCard International in March from First Manhattan Consulting Group. Earlier, he had been a chief banking officer at Midland Bank in London.
"But it would be wrong to assume that the current association structure over time affords us the most efficient way to act on the members' behalf," Mr. Lockhart stated.
In other words, he wants to put a lot of comfortable old assumptions on the reexamination table. Mr. Jensen is doing the same.
"I have tried in my first year not to carry baggage from the past or be influenced by existing association religion," said Mr. Jensen, the former vice chairman of U.S. Bancorp in Portland, Ore., who joined Visa last January.
"I tried to break everything down to its components and rebuild it, he added. "I wanted to be extreme, to be sure we know where we want to be. I believe the relevancy of our role for access to the payment system is a strong as it's ever been -- but I even questioned that."
Both men are steeped in credit card history. Mr. Jensen spent several years as a Visa director and has spent time talking about Visa's beginnings with the original CEO, Dee Hock. Mr. Lockhart was close to MasterCard as both banker and consultant. But both men carefully avoid what Mr. Jensen called the "baggage of the past."
"These guys are different," Mr. Benton, chief executive of Benton International in Torrance, Calif., said, comparing them with predecessors.
"Lockhart is a superior intellect and is doing some very rigorous thinking," Mr. Benton said. "Jensen and the people he has surrounded himself with are not traditional credit card people. Both are extremely knowledgeable about bank distribution economics, rather than just credit cards."
Their thoughts turn inevitably to the fact that they head membership organizations, which by design do not move as swiftly or as much in the interest of profitability as private-sector companies.
To some industry observers, Visa had a historical edge in entrepreneurship: It is a limited stock corporation with a for-prof-it charter; MasterCard is a non-profit association.
Mr. Jensen prefers not to dwell on such minutiae. He sees Visa as a de facto association, its for-profit charter just an accounting technicality.
"Regardless of what that means, we have to make decisions with commercial accountability," Mr. Jensen said. "We have to allocate resources and drive costs down regardless of what revenues are doing, and if we earn a surplus, we have to give our boards the option to reinvest in the mission, or lower fees, or do both.
"There has to be some risk/return analysis whether we are for-profit or not. We have to be a commercial enterprise and not have a government mentality, and I think MasterCard ends up in the same place on this issue."
Mr. Lockhart sees a dichotomy between "association, not-for-profit functions" -- like the setting of interchange rates, operating rules, and security standards -- and profit-making business ventures that "may need a different financial structure."
He did not mention what those activities might be, but MasterCard's Master Banking remote banking program and its smartcard technology and marketing efforts have the trappings of potential stand-alone business enterprises.
At the recent Bank Administration Institute Retail Delivery Systems Conference in Phoenix, Mr. Lockhart spoke openly about MasterCard's acting on its members' behalf to preserve a role for them when financial services are delivered via Microsoft software or other avenues on the information highway.
Mr. Jensen spoke about Visa in a similar vein. Visa Interactive, the home banking unit that Visa launched in August when it acquired a piece of U.S. Order in Herndon, Va., has the feel of an independent subsidiary, remote from the parent's San Francisco headquarters.
"Some services or efforts that may be necessary on behalf of members may cost more money than the association can afford," Mr. Lockhart said. That might imply separate, spinoff companies capable of raising their own capital outside association constraints.
"I don't think this is a binary, either/or, association/public company question," Mr. Lockhart said. "We do have corporate finance and strategic planning work under way and are looking at all options, including those that may go beyond what an association does. I can tell you this has been discussed with our executive committee."
Like Mr. Lockhart, Mr. Jensen has cultural as well as practical problems to address. He has a term for them: "the politics of control."
The politics of control arises from the fact that a card association's owners, who govern via the board of directors, are also customers. A sales transaction is therefore "more complicated than when I, say, go into a store and buy a computer," Mr. Jensen explained. "After I pay, I don't have a say in how the seller uses the money."
"Owner-customer confusion can be limiting in the politics of control," the Visa chief executive went on. "If it dominates management and board processes, you have inertia, a zero-sum, an inability to perform the common mission.
"That just doesn't happen in a private company, and our job is to make sure it doesn't happen here."
Mr. Jensen, who said he is trying to think as much as 10 to 20 years into the future, admitted that his ideas about politics of control have changed in a few short months. His initial inclination was to create an entirely new, commercial Visa enterprise, perhaps along the lines of the current Visa International, to act like a private company. The controlpolitics issues would then have been isolated in the regional Visa corporations, such as Visa U.S.A. and Visa Europe.
"I have come to think that that model isn't practical," Mr. Jensen said, though he does see a clear difference between free-market entrepreneurship and a more association-like "manager of processes."
He also speaks of the "old game" of association work and the "new game" typified by the information highway and its possible impact on bank-controlled payment systems.
Stressing that this is all "still a discussion and thought process," he said he is still looking for what the right structural model might be, whether it includes spinouts of certain business ventures, and how the association can best bring the industry's collective action to bear.
"The associations have a huge opportunity [to replicate] what they did with credit cards, but they won't by themselves be able to provide all the services they need to be in the [new] game," Mr. Jensen said. "We will have to make sure other providers don't get between the banks and their customers."
The goal for Visa, he added, is to "manage the politics of control to be effective where it's supposed to be, but not let it dominate management and board processes."
"The strategy is to recognize a lot of companies are out there that can make decisions outside of the politics of control, that don't confuse customers and owners," Mr. Jensen said.
Mr. Jensen said "a minority" of his bankers are saying that the association form should be abandoned. While he is perfectly willing to consider the possibility, he is not jumping to any conclusions.
He has also heard "a surprising number of members say we are wasting resources [by] having two systems."
"I don't have an opinion on that," Mr. Jensen said. He, like Mr. Lockhart, still sees value in intersystem competition, and besides, the U.S. Department of Justice's antitrust division might not look kindly on any actual or de facto merger of the card associations.
Even if that became a viable option, it would present itself only after the more immediate structural questions are resolved.
"Banks have two solid associations working for them," Mr. Lockhart said in a recent conversation about home banking. "If I look at them the way a banker would, I think I could make more money because of the brand choice and the ability to play the two against each other. I think they offer me more opportunity to compete, not less."