For U.S. Issuers and Processors, are There No Boundaries?

  Like many U.S.-based credit card issuers and transaction processors hungry to expand into international markets, Global Payments Inc. needed a place to anchor its operations in Europe. Looking at a map, it became obvious to Paul R. Garcia, chairman, president and CEO of the Atlanta-based processor, that the geographic center of Europe is in Prague, in the Czech Republic, not in a more obvious financial capital such as London.
  "Prague is very much at the heart of Europe and close to various markets where we want to expand our operations. We realized this would be a wonderful place to start," says Garcia. So in 2003 the company bought a 52.6% stake in the Czech Republic company Muzo and acquired the rest of the company the following year. Global Payments Europe is now the company's wholly owned subsidiary headquartered in Praque.
  The move put Global Payments close to several of Europe's emerging credit card markets, and the subsidiary has become the engine for its expansion in Eastern Europe, where it now processes cards and a variety of other payments for clients in the Czech Republic, Russia, Bosnia-Herzegovina and, most recently, Kazakhstan.
  Many other U.S.-based payments-industry players, facing a slowdown in domestic credit card growth and transaction volume, are seeking similar footholds in foreign countries near emerging economies. These countries often have populations that are familiar with debit cards but largely are untapped for credit products and services.
  Although each week seems to bring news of another international deal inked by a U.S.-based processor, for issuers the path to earning profits in many international markets may be trickier than what appears on paper.
  Analysts point to a host of concerns particularly affecting issuers, including foreign regulatory mazes, the lack of credit-scoring tools, the puzzle of managing risk and receivables among consumers unfamiliar with credit, and the lack of mass-marketing tools such as direct mail that are used widely in the U.S.
  Steve Thogmartin, vice president and director of New York-based Boston Consulting Group, advises caution to U.S. payments-industry players looking to expand into foreign markets. "The credit card industry in the U.S. is based on some unique conditions that don't exist in most foreign countries, including the wide availability of positive and negative consumer data, the legal and cultural acceptance of direct mail, and reliable infrastructure systems to support a largely national, automated business model," he says.
  Although demand for credit products certainly exists in foreign markets, "there is no certainty of creating scalable business models there," Thogmartin says.
  CAUTION ADVISED
  Indeed, a cautious attitude is well-advised, says Michael Archer, regional business leader and a managing director of MasterCard Advisors, who has studied the Latin American credit card markets extensively. But despite the risks, the potential for growth is too compelling for U.S. card companies to ignore, he says.
  MasterCard's own second-quarter gross dollar volume increased 16.4% on a U.S. dollar-converted basis, to $555 billion from $476 billion for the same period a year earlier, a gain MasterCard Chief Financial Officer Chris A. McWilton attributes to growth in international activity. "While the U.S. remains our largest region in terms of both volume and revenue, regions outside the U.S., such as South Asia, the Middle East and Africa and Latin America, continue to grow at faster rates, demonstrating the global strength of our business," McWilton says.
  MasterCard's U.S. gross dollar volume grew 9.8%, an 8.1 percentage point decrease from the same period a year earlier, caused mainly by the passing of the anniversary of Washington Mutual's large debit conversion that took place early in 2006.
  Visa International still has a dominant market share in international credit cards, but the company declined to comment for this story.
  Citing MasterCard research, Archer notes that more than 40% of the population in Latin America is younger than 15 years old. In less than five years, those estimated 161 million consumers will be eligible to request banking products. In countries such as Mexico and Brazil, where incomes are expanding, it could be a huge market opportunity, Archer says.
  China is equally alluring to many card-industry companies, which see a middle class rapidly emerging among a youthful population and an expanding economy.
  According to research by Greenwood Village, Colo.-based payment processor First Data Corp., only about 50 million of the 1 billion payment cards issued in China are credit cards. Although debit cards are far more prevalent-which is the case in most countries outside the U.S.-credit cards are one of the fastest-growing sectors, according to First Data.
  Chinese consumers are adapting quickly to credit, with spending and transaction volumes on the rise, processors report. Whereas there are 2.4 cards for every man, woman and child in the U.S., in China there is only one card for every 56 citizens, according to Total System Services Inc., or TSYS, a Columbus, Ga.-based payment processor.
  "China is one of the hottest markets right now for U.S.-based credit card companies looking to expand overseas because the market potential is so big," says Adil Moussa, a payments-industry analyst with Aite Group, a Boston-based consultancy. "Large countries with large populations offer better economies of scale than smaller countries because when you have to spend money and time clearing regulatory and infrastructure hurdles in each country, you want to make those investments in larger markets where your return on investment will be bigger. In smaller countries, you're spending a lot to get into a market with a lower return," Moussa says.
  Around the world, the only U.S.-based credit card issuers with a significant presence in more than one market include Citigroup and GE Money, says Nelson Irizarry, a principal with the Linthicum, Md.-based credit card consultancy First Annapolis Inc. Before joining First Annapolis in 2005, Irizarry worked heavily on international expansion at Visa International.
  "Most U.S. banks have been fairly timid about issuing credit cards outside the U.S. on a broad scale, largely because of distribution problems," Irizarry says. "Without direct mail or a branch delivery system, it can be difficult to reach customers."
  Issuers soon may overcome some delivery-system problems with new cell-phone and Internet-delivery channels. Citi recently announced a 24-hour card-approval process in Taiwan. Prospects begin the application process at a kiosk or by calling a dedicated telephone number, and banks send approvals via mobile-phone text messages. New cards are mailed within three days, according to Citi's announcement.
  CONSUMER ADOPTION LOW
  The numbers of consumers adopting U.S.-based issuers' cards are still relatively small, however.
  "Many of the big multinational banks in the U.S. have commercial and investment-banking operations in foreign countries, and when you dig down to the retail-banking side, their consumer credit card portfolios often number only in the thousands of customers," says Kurt Brenneman, a market researcher in the Raleigh, N.C., office of Randolph, N.J.-based Performance Solutions International, who has studied U.S. issuers' overseas operations.
  BofA also has achieved success issuing credit cards in Europe, through its acquisition of MBNA. In the United Kingdom, MBNA claims to be the No. 1 issuer by total outstanding credit card volume, according to a spokesperson at the Chester, England-based MBNA Europe headquarters. In the decade since MBNA credit card operations launched in Ireland, the company claims to be that country's No. 3 issuer. And since MBNA began issuing credit cards in Spain four years ago, it has achieved a 6% overall market share, the spokesperson says.
  Although Capital One CEO Richard Fairbank said in 1999 that the company would roll out credit cards "aggressively" in overseas markets including in South Africa, the company pulled out of that market after four years in a partnership there with Nedcor Ltd., citing difficulties, a Cap One spokesperson confirms. Capital One still offers products in the U.K. through Capital One Bank (Europe) plc, with offices in London.
  Citi also pulled the plug on its plan to issue credit cards in France. But according to one credit card industry analyst who requested anonymity, the company now is reconsidering that plan because France is opening its market to cobranded cards. Citibank did not return calls seeking comment about its international credit card operations.
  For both issuers and processors determined to go overseas, the first question is whether to expand by acquisition, by forming joint ventures or partnerships, or by establishing a de novo bank from scratch in a new country, commonly called a "greenfield startup."
  Pamela H. Patsley, senior executive vice president of First Data Corp. and president of First Data International, says her company is expanding overseas using a combination of organic growth, strategic acquisition and partnerships. Every new market calls for a different approach, she says.
  Western Europe has a high penetration of electronic payments, but the processing industry is very fragmented, Patsley says. In Eastern Europe, penetration is lower, growth rates are higher, and there also is a great opportunity for payment processing. In Latin America, India and other parts of Asia there is much room for growth, but Brazil is not developing at the same rate or along the same path as Russia, she says.
  "At the core, our products fit each market. But in each market we need to flex our model to accommodate local regulations, local currencies and settlement. One size never fits all," says Patsley, noting that First Data now has 8,500 employees outside the U.S.
  Teaming with a local banking partner to satisfy local regulations and to gain local market knowledge usually is the fastest way to enter an overseas market, MasterCard's Archer says. Plus, with a partner a company is more likely to be able to tap an existing base of customers, he adds.
  But partnerships require giving up a stake in ownership, and joint management can be tricky. "There is the loss of some autonomy in a partnership," Archer says.
  Acquisition may be a better approach for those with deep enough pockets, but it has its own challenges. Determining the value of a foreign card business can take months, and a smooth transition usually requires the cooperation of existing management, observers say.
  A greenfield startup probably is the toughest route for a U.S. company to take because of the difficulty overcoming local regulatory hurdles, says Archer. Wal-Mart Stores Inc. took a "modified greenfield" approach in Mexico, he notes, by acquiring a retailer with many outlets, then applying for a banking license. This fall, Banco Wal-Mart de Mexico Adelante S.A. will launch in-store credit and banking services in some of its 800-plus stores in Mexico, with plans for a national rollout.
  "Wal-Mart has avoided the entanglements of partnerships and appears to be using a retail model to build a banking business in Mexico," Archer says.
  Global Payments' international expansion also has been fueled by partnerships, such as its joint venture with U.K.-based HSBC Bank, which has provided access to payment-processing clients across Asia. The company has not conducted cold startups, which are riskier, says Garcia.
  "Just because we've been successful in the U.S. or Canada doesn't mean we can walk in and be successful as a startup in a foreign country," he says. As such, finding the right partner is crucial, even if it takes a great deal of time, Garcia says.
  "We've spent years evaluating some of these opportunities, and we have a team of people looking at opportunities around the world," he says. "Right now we're looking at 60 or 70 possible deals outside the U.S., and we'll be lucky if 3% of them happen. It takes the right price, the right team, the right company and the right geography."
  One place Global Payments is not looking to operate right now is in Latin America because of its current focus on Asia and Europe. "(Latin America) is a very attractive opportunity, but right now it's a bridge too far for us," Garcia says. "The opportunities for us are huge in Asia and Europe, so that's where we're focusing our efforts."
  TSYS also has relied primarily on partnerships and acquisitions to get traction in the dozen countries where it now has operations, says Gaylon Jowers Jr., executive vice president of TSYS and president of TSYS International.
  Although Europe is currently TSYS's largest foreign market and London is its hub for global payment services, the company has high hopes for its joint venture with China UnionPay Data, Jowers says. Last year TSYS increased its investment to a 44.5% stake in the Chinese processor, and this year the venture announced it is now processing bank cards for Huaxia Bank Co., one of China's largest banks.
  Through its acquisition last year of the London-based card processing company Card Tech Ltd., TSYS now has operations in India that look promising for future business growth, Jowers says. TSYS does not have a payment-processing presence in South Korea "but we are monitoring it," he adds, and the company also is not processing in South America yet, although it opened an office in Sao Paulo, Brazil, in 2005.
  "The international arena for payment processing holds great opportunities for us, especially as populations grow in emerging countries in Asia and a consumer culture expands," Jowers says. "Our goal is to have 30% to 35% of our revenue coming from our international operations by 2011."
  SEGMENTATION AND SPECIALIZATION
  Another approach to international growth for U.S.-based issuers is segmentation or specialization. Offering commercial cards, for example, could be an effective way for domestic issuers to expand overseas by tapping into the $54 trillion business-to-business payments market, says Steve Abrams, global product group executive of MasterCard Worldwide's commercial products division.
  "Only a third of the global B2B payments are in the U.S.," he says. "There's a huge opportunity for U.S.-based issuers to export their knowledge and target new charge cards and revolving credit cards, especially for small and mid-sized businesses outside the U.S."
  FleetCor, a Norcross, Ga.-based operator of fuel card programs, is an example of one U.S. company that is venturing overseas to address such a narrow market segment. Over the past two years, the company has been absorbing significant market share in its niche in Europe by buying small companies that operate local B2B fuel charge card programs and converting legacy systems to FleetCor's.
  "Many of these companies are using 20-year-old systems. We're able to adapt their processes over to ours and improve the efficiencies tremendously," says Ronald Clarke, FleetCor chairman and CEO.
  In late 2006, FleetCor purchased a 50% stake in CCS Slovakia, the leading fuel card processor in the Slovak market. The company also purchased Walsall, England-based CH Jones/Keyfuels, which serves hundreds of U.K.-based corporate fleet vehicles. In July of this year, FleetCor purchased the remaining half of CCS Slovakia, and earlier this year the company bought The Fuel Card Co., a U.K.-based fuel charge card company with 5,000 business customers.
  "We decided to go deep with our product and wide with geography," Clarke says. "Although we are still experiencing strong growth in the U.S., we also see great potential in Europe. We saw a lot of small, fragmented companies there without our size, scale, management and systems. We realized that by exporting our technology, we could buy these companies and improve performance immediately."
  The biggest challenges for FleetCor in integrating its new European operations were the language, currency and tax systems. But the company overcame those challenges one by one, Clarke says.
  "There were probably six or seven areas that needed to be customized from the acquired companies to fit into our processes, but we have systems that are adaptable," he says. "Still, we took things step by step and provided enough resources to adjust to the nuances of doing business in a different country."
  FleetCor is now talking to one of Europe's largest petroleum providers about a deal that would provide access to many more companies seeking a centralized fuel card program, Clarke says.
  "We're approaching Europe in two distinct ways," he says. "The first is locally, country by country. We bought some, and we will buy more. The second is looking for a pan-Europe strategy. If we can find a partner that serves 14 European countries, and we can provide a solution for them, that will be a big opportunity for us."
  Once past the regulatory, geographic and business-process issues, U.S.-based card issuers face a few more challenges in expanding into international markets: the lack of credit bureaus, cultural unfamiliarity with credit and no established credit card marketing mechanisms.
  As one of the three major credit bureaus in the U.S., TransUnion has staked out a position in Latin America, where it is helping to build consumer credit files country by country, usually with the assistance of local banks, says Maria Olga Rehbein, the president of TransUnion's Latin American operations.
  "The goal is to create full-file reporting, which has not existed here before," she says, noting the company is doing so by establishing data-sharing processes with banks, telecommunications companies, utilities and other organizations. TransUnion also has a substantial presence in Hong Kong, South Africa and Canada, but it does not have a presence in Europe, where competitor Experian dominates.
  BEHAVIORAL SIMILARITIES
  Issuers' experiences in Latin America and China show that although using credit, and revolving a balance, is a new concept to many consumers in emerging economies, individuals soon adopt credit card behaviors similar to U.S. card customers, says MasterCard's Archer.
  Although direct mail is not prevalent in most countries outside the U.S., in Latin American direct marketing has proven effective, as have other forms of credit marketing, including print ads and billboards, Archer says.
  The final challenge is the art of managing on a mass scale the relationship with first-time credit customers who have limited credit-history information, says Moussa of Aite Group.
  "There could be a huge adoption rate of credit cards by young audiences with consumerist appetites, and this will be a fine line for companies that issue credit," he says. "Risk management and decisioning will dictate whether or not they make a profit."
  Banks in Korea learned a tough lesson in 2002 and 2003, Moussa says. During that time, local banks overextended credit to new customers, many of whom defaulted and caused chaos for several of the country's top credit card issuers.
  Although U.S. credit card issuers could realize opportunities for growth and expansion overseas, there also are many reasons to move cautiously, says Thogmartin of Boston Consulting Group.
  "A U.S.-based issuer is facing not only the obvious challenges, but also fairly steep competition," he says. "Everyone else is looking at the same promising markets. The tough question an issuer has to ask is, 'Why would we succeed there versus someone else?'"
  Card issuers and transaction processors face both growth potential and risk as they review expansion opportunities in foreign markets. Proper, and often painstaking, due diligence could significantly reduce the chances of making a strategic mistake.
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