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MasterCard Inc.'s $100 million purchase earlier this month of Orbiscom Ltd., shows how Orbiscom's credit card processing model can be used for debit and prepaid cards.
"One of the valuable pieces about this technology is that there is no real difference in what it can do across the segments," says Michael Fiore, MasterCard's president of emerging solutions.
"It's very consistent technology. Whatever the segment is, it basically has the same core functions. MasterCard is discussing their bank customers' interest in using the credit model and applying it to debit and prepaid.
Banks' interest in additional functionalities is what sparked the company to acquire Orbiscom, which is based in Dublin, Ireland, Fiore says.
The Orbiscom acquisition is MasterCard's second since it went public in 2006–it absorbed Europay France last year–and its first for a provider of ancillary services. Orbiscom's technology enables banks give their customers control over how their cards are used.
It also shows how the payment networks are trying to broaden their offerings to win and retain issuers' business.
For example, consumers who do not trust online merchants with their personal information can get one-time-use account numbers.
For a little more than a year, the vendor has had a partnership with MasterCard to offer inControl, a service that enables cardholders to set limits on spending and where and how cards can be used.
Royal Bank of Scotland Group PLC signed up for the service last year.
Wendy Murdock, MasterCard chief product officer, says the card company wanted a lock on a "pretty unique" property.
"We wanted to secure our access to that software and the intellectual property associated with that software," she says. "We recognized that the skills and talents that that company brought to the table would enable us to do further product development in other areas that could then be" integrated with MasterCard's payment network.
Analysts expect other networks to take similar steps, given the new competitive pressures for MasterCard and Visa Inc., which went public last year, to do more for banks than their core job of facilitating transactions.
"The greater their penetration into their card-issuing banks, the better," says Craig Maurer, an analyst at Credit Agricole Group's Calyon Securities. "The more services you provide someone, the less likely they are to jump ship."
Discover Financial Services, a MasterCard rival, is an Orbiscom customer.
"It's really too early to speculate on any of the specific customer contracts that Orbiscom has in place, other than we will continue to honor existing contracts," a MasterCard spokesperson said when asked if MasterCard intends to continue the relationship.
Though Orbiscom is a relatively small acquisition for MasterCard, "any opportunity for these processors to enhance the platform that they can offer to the banks is a good thing assuming it's done at the right price," notes John Williams, an analyst with Macquarie Group.
Over the next six to 12 months, MasterCard could make additional acquisitions that amount to "a logical bolt-on to what they can already offer," he says.
It has "a very strong balance sheet, so they have the ability and the currency to go out and get deals done if the right opportunity presents itself," Williams says.
The company also has more flexibility now that it has settled litigation from Discover and American Express Co., though a consolidated case brought by merchants is still pending.
The economic downturn likely has made acquisition prices better, and MasterCard is in a position to capitalize, Williams says.
The networks "need to offer what the banks want in this environment," he says. "Visa and MasterCard both know that they need to try and be unique and differentiate, especially now with the banks potentially consolidating and customers could be moving from one processor to another."
Such conditions will "probably encourage more product development and more unique products."
Philip Philliou, a former MasterCard executive and a partner at New York-based payment consulting firm Philliou Selwanes Partners LLC, says issuers, which formerly sought to keep development of products and services in-house as a way to differentiate themselves, have been forced to cede ground to the networks because of credit losses and the recession.
The purchase of Orbiscom, he says, is a move toward "making new features and functionality available to MasterCard issuers.
And whether that happens organically or whether that's through acquisition, the market's right for MasterCard to do both." Some of the $100 million purchase price for Orbiscom is contingent on the performance of the business, MasterCard says. ATM
