In the Public Eye

  It did not take long for MasterCard Inc. to reap financial gains from its initial public offering last May. Just months later, its stock was hovering around $100 per share, more than double its original price.
  But that stock took a hit on Feb. 9 when MasterCard released its fourth-quarter earnings. Analysts declared the quarter impressive, with $40.9 million in net income driven by 14% more credit and debit transactions on 12% more cards than during the same period the previous year. What sent MasterCard's stock south, at least temporarily, was a mention by the network during a conference call with analysts that there would be no sizable increase in the prices MasterCard charges issuers and thus no revenue bump from higher fees.
  In the past year, MasterCard has been gaining experience in handling such calls, U.S. Securities and Exchange Commission filings and other aspects of life as a public company. If Visa goes through with its plans to go public, perhaps later this year, it will have to share the same openness. So why the sudden eagerness to switch? And can Visa expect the same financial windfall its chief adversary has enjoyed?
  Many experts say the networks are going public to minimize legal-liability issues, particularly related to merchant unrest over interchange, and that Visa ultimately will also reap financial gains from its IPO. But public status opens doors to all sorts of innovation and possibilities, even the purchase of one or both networks, that were stifled under the association model.
  Indeed, the shift away from the association model of card issuing and acceptance already is changing the relationships MasterCard and Visa have with issuers and acquiring banks. Financial institutions now are customers and shareholders of MasterCard, and would be of Visa, as opposed to being members. And investors in the card networks want profit.
  Moreover, merchants probably will remain skeptical in their dealings with the payment card industry. But retailers already are seeing networks more open to providing the details of their policies and pricing schemes once shared only with financial institutions.
  There is wide agreement among analysts that the pending merchant lawsuit against Visa, MasterCard and their largest issuing members prompted the shift to go public, mostly to blunt the exposure of issuing banks to charges of collusion in setting interchange rates.
  At a shareholder meeting last July, MasterCard President and CEO Robert W. Selander promised new openness with merchants. "Transparency is an advantage," Selander said, explaining that it would help eliminate merchant speculation that issuing banks were "doing anything untoward."
  In September, MasterCard said it would give in to merchant demands by posting its interchange rates on its Web site. A month later, Visa announced its own plans to go public and published its interchange rates on its Web site shortly before MasterCard got around to doing the same.
  Such sharing is an early effect of the networks' moves to go public, says Celent LLC analyst Dan Schatt. "The biggest change is transparency," he says.
  Publishing interchange rates does a lot for merchants who previously were at the mercy of acquiring banks or independent sales organizations for information. "If you're a mechanic in a remote area, and you've got one ISO jacking up the price, you have no idea what [fair] pricing is," Schatt says. "A merchant questioning an ISO now has some recourse in looking at the actual pricing to see if they're being fairly treated."
  Whether clearer pricing leads to pricing breaks for merchants remains to be seen. "I'm not expecting a huge change in pricing and, therefore, of the basis of merchants' unhappiness with MasterCard and Visa," says Prudential Equity Group LLC analyst Matthew Park.
  Mallory Duncan, senior vice president and general counsel of the National Retail Federation, is not holding his breath on interchange relief occurring any time soon. "The bottom line is there is really no correlation between the change in ownership and the relationship with merchants," he says. "The question I have to ask myself is, does the leopard change his spots?"
  Whether disclosing information to retailers, issuers or the general public, the flip side of transparency is that, under SEC rules for public companies, both MasterCard and Visa now must be more careful not to appear to game the system with announcements of changes such as new deals and technology upgrades, analysts say.
  MORE INFO, MORE QUESTIONS
  The networks, as public companies, are more likely to forego any talk of pending announcements with individual analysts or reporters, preferring instead to wait to release formal announcements to everyone at once, according to network spokespeople and industry analysts.
  Stifel Nicolaus & Co. Inc. analyst Christopher Brendler agrees that MasterCard as a public entity and Visa as a practicing-to-be-public company creates a type of transparency schizophrenia. "With MasterCard becoming public, we do learn quite a bit about some of the operations, but quite a lot of it is still shrouded in secrecy," he says.
  When MasterCard disclosed, as required, to the SEC in January that it had changed certain terms of its debit card-issuing agreement with Bank of America Corp., which only issues Visa-branded debit cards, neither MasterCard nor BofA would cough up any more details than the few lines in the SEC filing. That left analysts and reporters to ponder about the world's most-prolific signature-debit card issuer negotiating both with MasterCard and Visa. After all, why would BofA not only strike but modify a debit card-issuing deal with MasterCard when it has made no announced plans to issue MasterCard debit cards?
  Perhaps change is afoot, or perhaps it is the type of contingency agreement many issuers maintain. Either way, as stockholders, as opposed to association members, large issuers such as BofA may have less control over network workings. But they still have a lot of leverage now as customers demanding differentiation and value.
  "The presumption has been that issuers have some loyalty to the associations that they've been most affiliated with over time," Prudential's Park says. Now, he says, Prudential expects MasterCard to offer better financial incentives to cut deals with issuers. "Our modeling reflects the thought that the networks would be competing a little more to retain their (bank) relationships," Park says. "One should expect that there will be higher competition by payment networks for transaction volume."
  That pricing pressure will only increase as both networks become public, according to Brendler. He also expects tighter cost containment, which both networks already have begun. Visa disclosed in November its plans to cut 200 jobs at Inovant LLC, a reduction of 10% of the technology unit's workforce, for example.
  And there is budget tightening elsewhere in the networks. "The marketing spend hasn't been as robust as in previous years," Brendler says. "They're more (tightly) managing the bottom line."
  Some of that tightening has been to put more cash in reserve for potentially costly outcomes of merchant lawsuits, analysts agree. But the cash could be used in other ways. MasterCard's Selander in July told reporters and investors the network could have as much as $1.9 billion in the bank for acquisitions and expansions, particularly into markets abroad.
  With cash like that, Brendler says he does not believe either network will use its public status to raise capital by selling more shares. "These are very successful, profitable organizations to begin with, and their networks are pretty much built," he says.
  The networks also will be more nimble in their negotiations with issuers and other parties now that they are independent from association-member influence, according to Brendler. "They have additional leverage and additional options to renegotiate pricing," he says. "That's more likely given that they're independent organizations now."
  Schatt says MasterCard and Visa will be "more open to new markets and to making changes to become relevant in those new markets." That includes expansion worldwide and to new merchant segments in saturated markets, such as the U.S., where both networks are pushing contactless and other technology to try to attract more merchants to accept cards for even the smallest transactions.
  MasterCard will look to expand its remote payment and presentment service to attract more billers, and Visa will work to expand online bill payment with its cards, too, according to Schatt. And the networks also will be under pressure from shareholders to curb encroachment from nonbank payment options such as PayPal.
  THE EUROPE QUESTION
  MasterCard's success in keeping its European operations in the fold has put it into a stronger position to compete with Visa, according to Eric Grover, a partner at Intrepid Ventures, a Silicon Valley-based payments consultancy. Visa's international body and five of its six regional associations will merge when it incorporates, but Visa Europe will remain a not-for-profit, bank-owned association.
  "It weakens Visa's story," Grover says. "Picture Visa trying to do a global deal with Citi or HSBC. Inevitably there will be alignment challenges."
  Visa's IPO also will differ from MasterCard's in its leadership. MasterCard kept its top management intact through its IPO process. But Visa recently hired Joseph Saunders as executive chairman of the board of directors to help lead it through its IPO and to recruit a new CEO and directors. Analysts say Saunders' experience leading other business integrations, such as Providian Financial Corp.'s sale in 2005 to Washington Mutual, will come in handy.
  BALANCED COMPETITION
  Prudential's Park believes Visa's planned IPO will be good for investors in both Visa and MasterCard stock, as both networks will have to play by the same rules and keep costs and revenues balanced to please stockholders.
  "We've been supportive of the networks becoming publicly traded, with the thought that would make the corporate behavior more rational," Park says. "It will be better from a shareholder perspective if most of your competitors are subject to investor scrutiny."
  Analysts interviewed agree that MasterCard's first months as a public company foretell good things for Visa's IPO, with MasterCard's stock price rising from the $40 range to more than $100 in less than a year and market capitalization, in mid-February, at $14.6 billion. But both Visa and MasterCard will have to work harder to keep all stakeholders happy. "They're going to need to every day really show how they're bringing value to their network, how they're able to grow volume and grow acceptance," Schatt says.
  Finally, the transformation of MasterCard and Visa into public companies enables another possibility, says David Evans, founder of consultancy Market Platform Dynamics and author of the book Paying with Plastic. "Unlike before, those companies can be bought," he says. "When you start thinking about global players like Google, Wal-Mart and GE, doing [a multi-billion dollar] transaction isn't that difficult."
  That may sound far-fetched, but freedom to innovate and pressure to perform mean anything is possible in the new world of public card networks.
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