Credit Card Companies, Decoupled from Banks, Explore New Worlds

Have you noticed that your credit cards have divorced themselves from banks?

MasterCard went public in 2006 and Visa followed suit in March of 2008. They benefit from access to more capital and flexibility in the marketplace. However, now they face pressure from shareholders to share the wealth.

Profit targets were much more modest when under the purview of the banks. Management tended to be complacent because they did not have stockholders pushing for more revenue and profits. The credit card companies were member-owned, meaning that if they were considering a buyout of a merchant processor to add value to the company -- it could still be vetoed by any member issuer. At least theoretically, that is. The banks also had a lot of input into matters like pricing, new technology, and more.

Now you are likely to see MC or Visa try to expand into global markets. Handling international payments had been left to co-ops, but now the prospect of real growth in revenue may be too tempting to pass up.

Changes have already come this business. Many of you may already possess an uncoupled debit card -- MasterCard has a decoupled debit card thru Capital One. Most banks really do not like this product because they get stuck with ACH fees while losing out on interchange. Meanwhile Visa has rolled out a MoneyCard for Wal-Mart. MC and Visa are also working thru businesses like Green Dot to build up networks of prepaid reload outlets.

The down side, as already indicated is that stockholders will be much more demanding than member banks ever were about profit and loss. And Wall Street, too, will demand that their marketing expenses be more transparent. The days of mass mailings of cards with few recipients actually qualified to keep it are long past. The card companies will have to work smarter to uncover qualified prospects.

One benefit to merchants in this new era is that they will have more power and influence with the credit companies in terms of bargaining for lower rates or breaks on volume. Merchants feel that they charged more than the actual cost of processing even allowing for a cushion to cover fraud, underwriting and other losses.
But Mastercard is assessing higher fees outside the United States. It has been raising acquiring and access fees about 2% a year and these increases look to continue for the foreseeable future.

Such tactics will be harder to pull off in the United States due to the different split in merchant fees here. Merchants will get hit harder by cost increases and can no longer absorb them. Shrinking profit margins may mean that some merchants will look for other options.

One such alternative is PalPal. You might be shocked to know that PayPal has expanded into digital payments -- no longer an online-only service, PayPal is now accepted by larger online vendors like Moosejaw Mountaineering and Grapevinehill.com.

MasterCard has moved to drop their fee for utility bill payments. It now charges a flat fee of 65 cents on most cards, down a dime. For their consumer debit cards the fee has dropped from 75 cents to 45 cents. This reflects the simple fact that their risk does not in fact rise with the size of the utility bill -- the customer and utility already have a contractual relationship.

One interesting scenario is if Wal-Mart were to buy stock in either company -- or even buy them outright. They are one of the few merchants who could swing such a deal financially. They already have a big influence on the credit card companies just because it is what it is -- the 800 pound gorilla of retailing.

Other specialized retail sectors might demand that fees better reflect actual costs. One such area is that of the pop song download. When you buy a download from iTune, iTune has to pay about 20 cents out of your 99 cents or a dollar to the credit card that you bought it with. Merchants like iTune are going to press for cheaper solutions and could drive down that fee.

Some speculate that the credit cards will have to lower fees as low a nickel a song for these kinds of transactions. This would increase acceptance of their cards for one of the fastest-growing segments of online business.

You will probably see more prepaid cards offered by non-banks such as supermarkets and pharmacies. One example already on the market is the Wal-Mart MoneyCard, a prepaid card handled by Visa and marketed to the under-banked. Visa also handles the prepaid cards offered by Springbok, used as employee incentives, rewards, and product promotions.

Coupled with the prepaid cards are reloading kiosks, part of the Visa Ready-Link program. You may have seen some of them already at merchant locations. Merchant clients share in the revenue from this program so it is likely to prove popular with both consumers and merchants.

Another area still in the pipedream phase is some kind of interface or competition with wiring services like MoneyGram or Western Union. Those two both have cushy markups, and Visa or MC could easily compete with them and still make a comfortable profit. Whether they decide to offer the same, competing services, try to get customers to switch to plastic prepaid cards, or simply buy them out is still unknown.

But think of the possibilities with that. Money transfer with money-card to mobile-phone or card-to-card, or some hybrid service are things that could soon be on customers menu.

It’s going to be a whole new world in the plastic card business.

(Interchange is the rate charged to acquirers and passed on to merchants.)