Now that they're public ... Industry experts makesense of the MasterCard and Visa IPO outcomes.

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At a time when credit cards are still a big source of bank revenue despite waning consumer confidence, a vexed Congress, and other pressures, some in the industry are looking at a public MasterCard and soon-to-follow Visa and wondering if, and how, such a move could

Competitive trouble down the road for issuers, some speculate, might come in the form of new distribution channels for cards, new card features, or deals that kill the luster on profitable classic cards, or make them look a little less inviting.

Quite aside from today's economic picture, there is the matter of how the payments industry will change and what sort of customer segments and "form factors" (e.g., chip cards, mobile phones) will emerge as winners over the next decade.

Not that anyone is citing any activities or announcements from either MasterCard or Visa portending, in effect, a compromise of the existing bank card system.

Quite the contrary. Tim Mills, senior vice-president at Atlanta-based Global Concepts Payment Systems Consulting, has an optimistic read on both deals.

"MasterCard or Visa won't do anything to upset the relationship with card-issuing banks," says Mills. "It wouldn't make sense and it would ruin a very viable model that they've built their businesses on--nobody wants to cannibalize that."

Mills was not alone, among the group of card experts whom ABA BJ contacted, who said, in effect, that MasterCard's and Visa's structural changes will not change either operating model to such an extent that it will damage bank card issuers. "Competition is a good thing for this industry, and any shift in thinking or product design that gives bank card issuers new options will get everyone continuing on a path of innovation," says Robert Hammer, CEO of RK Hammer, Thousand Oaks, Calif., a long-time consultant to the card sector.

Perhaps, then, it's better to reframe the matter of IPOs and potentially different competitive postures in terms of broad industry challenges. Like today's performance indicators, which are mixed in the aftermath of credit quality challenges facing many consumer segments, the long-term outlook for the credit card industry and payments generally is an unknowable mix as well, hinging on such factors as the fate of the alternative payment upstarts like PayPal or BillMeLater; changes in the cross-border business that has contributed much to profitability for both MasterCard and Visa; the uptake rate of mobile banking and payments; and shifting merchant practices and consumer habits.

Building global empires

In the simplest sense, MasterCard's 2006 IPO, which raised $2.4 billion, and Visa's intention to raise $10 billion (rescheduled for the first quarter), is really about amassing capital and letting bank owners benefit from years of infrastructure and business development, consultants say.

MasterCard--which operates in 210 countries and territories--serves nearly 25,000 member financial institutions. As the second-largest payment system in the U.S, it provides the transaction authorization network, and the marketing, for its credit and debit card and Maestro (debit card) brands. As part of its operating model, MasterCard establishes guidelines for use and collects fees from members and also operates the Cirrus ATM network.

Yes, it has been noted in numerous articles citing MasterCard's situation, some motivation for a public MasterCard could have been a defensive play for the payments provider to gather funds, given the regular litigation that the industry attracts. (The most recent suit, brought by American Express, regards alleged anticompetitive practices and will be brought to trial in September 2008.) Others point out that banks might have wanted to distance themselves from the reputation risks associated with litigation.

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But on the whole, says Hammer, MasterCard has developed into a valuable payment system that is worth more as a public, transparent company.

Marc Sacher, managing director of Auriemma Consulting Group, Westbury, NY., points out that support of global commerce is really the brass ring in an industry that is making its gains the geographic way. Chris McWilton, president, global accounts, MasterCard Worldwide, says that the IPO allowed the company to address the perceived conflicts of interest in ownership structure and realign its leadership to bring even more to the consultative sales and service model that relies on local knowledge, whether the market in question is Chicago or Singapore.

"By leveraging a unified global structure, a strong brand, innovative payment solutions, an advanced processing platform and our professional services organization MasterCard advisors, we will be able to build a faster, more efficient link among financial institutions, businesses, cardholders, and merchants worldwide," says McWilton.

In the first half of this year, the Purchase, N.Y.-based giant posted $467 million of net income, or $3.42 a share. Analysts had predicted earnings to grow 20% by next year, according to Reuters Fundamentals, although its current legal issues are among many current stressors that could dim earnings prospects.

Visa, which doesn't yet release earnings data, saw more than $3.34 trillion in payments and cash volume conducted on 1.4 billion cards. It also sees a new global future in the demands and capital accessible as a public company. Currently operating the world's largest consumer payment system, it too licenses the Visa name to member institutions, which issue and market their own Visa products and participate in the VisaNet payment system for authorization, transaction processing, and settlement services.

Still, ownership means differences

And yet, a few analysts have pointed out that as public companies, with ties cut from card association roots, MasterCard and Visa will answer to shareholders first, not all of whom are banks.

Paul Turgeon, vice-president of Dove Consulting, Boston, notes that as financial institution-owned associations, the two companies have behaved responsibly and grown along predictable paths. "There were challenges but issuers knew the model and had two brands to chose from, and there was an understanding of how policies and strategies would be made," he says. "Now, there will be four brands," he says, referring to Discover and American Express. In his view, each has--in terms of their broadly stated corporate objectives and operating models--comparable offerings. The differences will play out over time and will require issuers to re-evaluate options.

Turgeon says, in the aftermath of the IPOs, bank card issuers should question how changes will be made to processing infrastructure and whether standard practices such as providing pricing breaks for exclusive use of a given card association's infrastructure will remain.

"Issuers should explore all brand options and really think about the segmentation of their portfolios," says Turgeon. He thinks it's naive to assume that being public will leave the two brands as quasigovernmental entities that rely on traditional practices going forward. "Issuers should look at their portfolios and customer bases and see what markets they would like to get into, he says.

Bank card issuers should also market themselves and take steps to better position issuer brand on payment cards.

What will the model look like?

It's certainly conceivable that MasterCard and Visa will put creative twists on their business models that have unforeseen--and not strictly positive--effects. Of course, bankers are already looking at the parallel universe of alternate payments and seeing experiments that feel threatening.

And, new advancements such as the decoupled debit card have many banks eyeing their deposits and antsy about disintermediation possibilities anyway, notes Mills.

The reality is, old alliances are subtly different now. "There won't be any short-term differences in MasterCard and Visa but each will probably evolve along very different lines," predicts Auriemma's Marc Sacher. Certainly, all traditional vendors are concerned about staying relevant.

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Richard Crone, president Crone Consulting, San Carlos, Calif., is not alone in thinking that the quest for innovation was the second big driver of MasterCard's IPO and Visa's following act.

"If you look at the money that those two will have raised, if all goes as planned, it will put the card industry on par with non-financial services industries in mobile payments," Crone says. "It's conceivable that plastic will become irrelevant, and that new devices and new providers could take over some serious market share," he adds. "These deals are all about preparing for the next phase of the payments evolution."

Dove's Paul Turgeon thinks technology is the big question mark going forward. Yet he also believes that emerging competitive dynamics will come from big-box retailers, given their rising importance in affecting customer behavior at the point of sale. Issuers might explore participating more directly with merchants to drive card use and help them build card loyalty.

"It might make sense for bank card issuers to work with them on programs in some cases," he explains.

Interestingly, one irony will be that the very same credit cards that are largely perceived by consumers as interchangeable (with the exception of American Express, which retains a kind of mass-affluent cachet) may become increasingly differentiated in terms of loyalty, pricing and other features.

"The industry has been advancing its segmentation efforts, and it will have to think about its overall bank and card branding strategy with further segmentation in mind to stay competitive," Turgeon explains.

By Lauren Bielski, senior editor