MasterCard, Five Years After the IPO

 

Networks

 

Linda Punch

In 2006, the No. 2  card network went public, untethering itself from decades of bank ownership. Has it worked?

 

What a difference an IPO can make.

In the five years since it offered its stock to the public, MasterCard Inc., the world’s second-largest card network, has become a more agile competitor, better prepared to meet the challenges of a constantly changing marketplace and economic upheavals, analysts say.

It has evolved from a non-profit association focused almost entirely on the needs of its bank owners to a company that answers to Wall Street and has a more innovative outlook on payments, they say.

When MasterCard engineered its initial public offering in May 2006, it primarily saw the change in governance and ownership structure as a way to fend off the rapidly multiplying antitrust lawsuits brought by merchants and charging MasterCard, Visa, and major banks of collusion in fixing interchange pricing.

Prior to the IPO, MasterCard had 100% bank ownership, making it “an easy target for the legal community to raise false claims that we were an association of co-conspirators, and were sitting around fixing prices and leading to anti-competitive business practices,” says Chris A. McWilton, president, U.S. Markets, MasterCard Worldwide. “We realized to grow a business and to serve our customers when we’re under that much scrutiny and spending so many of our resources defending our ownership structure, that wasn’t the ideal place to be.”

But while the IPO put MasterCard in a better position to defend against antitrust suits, it also opened the way for the organization to compete more effectively.

“As an association, your role is clearly defined,” says Zilvinas Bareisis, senior analyst with Celent LLC. “You’re an interbank company serving the card market. Now they have a lot more freedom to think about how to best position themselves in the markets and invest in new technologies and areas.”

Adds Gwenn Bezard, research director with Aite Group LLC: “The company clearly is continuing to make the cultural transformation from being an association and becoming more like a regular company that ultimately focuses on what’s best for its own shareholders. It’s more about growing MasterCard’s revenues and less about growing banks’ revenues.”

Central to MasterCard’s new approach to the marketplace is the senior management brought in since the IPO, including a new chief executive.

“The IPO gave them an impetus to bring in new management that are used to operating in a different environment than the association mindset versus a for-profit company—‘I’ve got to do things to make money to survive as opposed to just assessing my association members to offset my costs,’” says George Albright, vice chairman at Alpharetta, Ga.-based Speer & Associates. “They’re more aggressive now and more outwardly focused because of the IPO.”

Ajay Banga, MasterCard’s new president and chief executive, “is pushing the company to move further away from a model where MasterCard is really building a brand but largely in the back seat and letting the banks run the show,” Aite’s Bezard says. “MasterCard is far more focused on being in the driver’s seat.”

Banga brings more of an international perspective to MasterCard, McWilton says. “Ajay is much more focused on the nuances of different markets around the world, he’s more appreciative of those,” he says. “Frankly, that’s where the growth of the company is going forward.”

But his predecessor Robert W. Selander set the stage for the IPO, McWilton says. Selander is vice chairman of MasterCard’s executive committee.

“Bob had a plan in place to get the company better-positioned to grow the business to a place where we could go through a successful IPO, to live up to the standards of being a publicly held company, and to build the platform into which we could grow into the future,” he says.

Selander ran the company like a for-profit company for years before the IPO, McWilton says.

“Bob realized that as a business, you had to have capital, you had to have some cushion and some level of equity,” McWilton says. “Bob got his office thinking like a commercial company before the IPO.”

While the IPO sharpened MasterCard’s attention on the bottom line, “we’d actually been building to this over time,” McWilton says. MasterCard in 2002 switched from a member-association structure to a private-share corporation owned by banks and other financial institutions, and began filing reports with the U.S. Securities and Exchange Commission.

‘Bumping’ into Customers

The company’s focus on growing revenues is reflected in its increased activity in acquiring companies that take it into new markets such as e-commerce, mobile payments, and prepaid card management, analysts say. In the past year, MasterCard acquisitions have included Travelex, a prepaid card program-management operation, and DataCash Group, a European e-commerce payment service provider.

MasterCard plans to expand the DataCash platform to launch a new generation of e-commerce, mobile-commerce, and other payment products.

MasterCard also has formed strategic alliances with companies that can expand its presence in emerging markets. In August 2010, it announced an agreement with Borderlinx, a Brussels-based industry leader in cross-border e-commerce shopping and logistics.

“I don’t think they would have done that if you look back at the team five years ago or more,” Albright says. “They were much more inwardly focused, they didn’t move very quickly. But they move quickly now.”

But McWilton says the market, rather than the IPO, is behind MasterCard’s recent spate of acquisitions. “The market’s changing so quickly and we need to keep pace with it, we need to grow with it,” he says. “Sometimes it’s easier to buy something than to build it out yourself.”

For example, e-commerce and prepaid cards weren’t viewed as major opportunities in the years leading up to the IPO, McWilton says.

“Five or six years ago, e-commerce was one thing,” he says. “Today it’s growing double digits throughout even the darkest days of the economic recession. So being in a space in e-commerce made sense from the DataCash acquisition. And prepaid is an area that’s going to take off, particularly with the unbanked populations around the world. So getting something in program management was very important.”

Moving into new markets potentially puts MasterCard in competition with its own customers, McWilton acknowledges. “We may bump into some customer in different places but we’ll be thoughtful in terms of what the long-term implications are for our relationship,” he says.

‘Sitting Across the Table’

At the same time MasterCard is moving into new products, it is changing its approach to growing its cardholder base, says Celent’s Bareisis.

Prior to the IPO, MasterCard focused on signing issuers as the way to grow its cardholder base, Bareisis says.

“Now they’re actively promoting the consumer brand, not just through advertising but through things like MasterCard Marketplace,” he says. MasterCard Marketplace provides eligible MasterCard cardholders with merchant-funded discounts and special benefits. “It’s very much trying to create a pull for the consumer side to say, ‘I want to have a MasterCard,’ and hoping that the consumer would also create a pull on the banking side, saying, ‘Why aren’t you issuing me a MasterCard, I don’t want Visa.’”

Since the IPO, MasterCard also has “become much more concerned with what goes on in the merchant community,” Albright says, especially in building more of a presence in U.S. debit. “That’s definitely a change from some years ago when debit was a secondary business line for MasterCard and the focus was almost totally on the credit card side.”

In the past, MasterCard focused most of its efforts on the very large issuers and merchants that generated the most transactions, Albright says. “They have broadened that to the mid-size and even smaller players that they know are important in the long run, that Visa always has cultivated,” he says.

For his part, McWilton says MasterCard generally has kept strong relationships with issuers, acquirers, and merchants throughout the IPO process.

“There is a little bit more of an arms-length negotiation process that goes on with issuers and acquirers now because they don’t own us,” he says. “Sitting across the table and negotiating with someone who is a customer and who owns you has different dynamics to it than sitting across the table from somebody who’s simply a customer. You only push so far if that person sitting across from you also owns you.”

On the merchant front, McWilton says the vast majority of merchants really feel the benefits of MasterCard and electronic payments. “There are a few out there that continue to believe that the prices that are charged through our network in interchange are too high,” he says. “That has not gone away since the IPO.”

While the IPO may not have done much to quiet the merchant revolt against interchange rates, it has allowed MasterCard to react more quickly to changes in the economy, McWilton says.

To be sure, MasterCard faces many challenges ahead, particularly from dissatisfied merchants and the Durbin Amendment in 2010’s Dodd-Frank financial reform law. The draft rules from the Federal Reserve, charged with implementing Durbin, call for 12-cent transaction caps that would cut large debit card issuers’ interchange revenues by 70% or more.

But the IPO brought increased confidence to an organization whose major concern in the past had been focused on its bank and acquiring members, McWilton says. Since going public, MasterCard has shown that a former non-profit can survive and thrive.

He notes that since the 2006 IPO, MasterCard has weathered very difficult business circumstances, including the “worst economic crisis since the Great Depression” and handled the scrutiny of being a public company that has to perform every quarter.

“What happens is the people inside say ‘you know something? We’re pretty resilient,’” McWilton says. “I sense a confidence in the company and a bit of swagger that wasn’t there before we went public.”