CASE 7

MASTERCARD: GOING UPSCALE

Check, cash, or credit card? How many times have you heard that

question and replied “credit card” without even thinking about it? When you

do think about it, however, credit cards are a relatively new phenomenon. Yet

when it comes time to pay, it seems we’re more likely to use the credit card

(and to have several of them) than checks or cash. Indeed, some writers have

even suggested that, in the not so distant future, we will all operate with

“plastic money” all the time.

MasterCard had its beginnings in 1966, when a group of banks joined

together to form the Interbank Card Association (ICA). The ICA was founded by

an association of banks rather than by a single dominant bank. Member

committees ran the association by establishing rules for authorization,

clearing, and settlement as well as marketing, security, and legal matters. In

1968, ICA went “global” by forming an association with Banco Nacional in

Mexico and later with Eurocard in Europe. Since then, MasterCard has

expanded around the world—even into the communist world of the 1980s

when it entered the People’s Republic of China in 1987 and Russia in 1988. By

1993, China was the second largest country in terms of MasterCard sales

volume.

Today, MasterCard is affiliated with more than 23,000 financial

institutions around the world and has nearly 370 million credit and debit cards

in use . These cards are accepted at more than 13 million locations worldwide.

Gross dollar volume in 1995 was almost $500 billion. At present, MasterCard
offers several global products, including Maestro (the world’s first truly online

debit program) and Cirrus (the world’s largest ATM network). Wherever you

are, you can use your MasterCard to pay for goods and services, obtain cash,

or debit your checking account directly.

MasterCard faces fierce competition from systems such as Visa and

American Express, so selling 370 million credit cards requires a lot of ingenuity

in finding prospects. To keep ahead of the competition, MasterCard constantly

seeks new segments and fashions new product offerings. One segment that

MasterCard has targeted with a vengeance is the health care market. To be

successful in this market, MasterCard must convince doctors, dentists, and

other medical practitioners to accept credit cards. For decades, medical

practitioners have complained of difficulties in collecting payments for their

services. Few doctors actually want to initiate legal proceedings against

nonpayers, so credit cards should have a strong value for them. With such

cards, the credit card company takes care of collections. Of course, the doctor

must pay transaction fees, but these may well be less than the costs

associated with fee collections.

There are other reasons why medical practitioners might be interested in

accepting credit cards. Many doctors demand immediate payment, which can

be difficult for patients when cash flow is tight. In such situations, credit cards

are a useful option. A survey by MasterCard found that many would-be

patients postpone both routine and emergency visits to the doctor because of

financial problems. Most medical practitioners realize, however, that early

detection of problems will likely lead to faster and perhaps less expensive

“cures.” So, the failure of patients to come to the doctor when symptoms first

strike often makes the doctor’s job more difficult later on. Finally, MasterCard

might be especially attractive to Medicare patients needing a medical

procedure not covered by Medicare—the patient can still receive treatment

even if it means spreading payments out over time.

For the patient, MasterCard offers more than just a payment mechanism.

It also provides a free Health Care Guide and Planning Kit, which enables

consumers to track previous medical expenditures and plan for future ones.

MasterCard offers lots of health-related tips, and its Website links cardholders

to different types of health care associations. MasterCard holders also receive

coupons with savings of up to 60 percent on health and fitness products such

as NordicTrack, Jenny Craig, Pearle Vision, Xenejenex health videos, and Solgar

Vitamins and Herbs. In addition, MasterCard has ties with services such as

SMOKENDERS, the Nutrition Action Healthletter, the American Running &

Fitness Association, and the American Medical Association.

One of the newest MasterCard health products is a joint offering with

Mellon Bank Corporation. These two companies provide a package of

depository, payment, and processing services for medical savings accounts

(MSAs). Included in the package is a MasterCard MasterMoney debit card that

allows holders to pay for MSA-related medical expenses. MSAs are health

plans that combine money-saving, higher-deductible healthcare polices and

tax-deferred savings accounts for the self-employed or for people working for
companies with 50 or fewer employees. In an MSA system, employers buy

high-deductible health insurance policies coupled with tax-deferred medical

savings accounts. Employees make pre-tax contributions to their accounts,

which can then be used through the MasterMoney debit card to pay for

medical care. Such plans enable employees of participating companies to pay

healthcare providers directly for services, quickly and easily.

Another market that MasterCard targets is the sports enthusiast. To

reach sports markets worldwide, MasterCard has sponsored World Cup Soccer.

One of its newest ventures is the Jordan Grand Prix Formula One team

sponsorship. MasterCard sponsors the B&H Jordan Mugen-Honda Formula One

team worldwide, and announced expansion of this sponsorship in January

1998. “Expansion of the Jordan Grand Prix Formula One team racing

sponsorship provides MasterCard with all the key elements of a successful

program: a global sport with a year-round calendar of races and events, a

high-performance, competitive team, famous personalities, and countless loyal

and passionate fans,” says Mava Heffler, senior vice president of Global

Promotions and Sponsorships for MasterCard. She continues, “Sports

sponsorships are among the most powerful tools MasterCard has to effectively

build our brand and our business.” MasterCard can tap into the vast emotional

affinity that racing fans have for Formula One through Jordan MasterCards,

Jordan team licensed merchandise, and cardholder promotions such as the

opportunity to drive a Jordan car.

There’s another reason why MasterCard wants to expand its sports

sponsorships to Formula One racing. Whereas stockcar racing is the darling of

the masses of the U.S. population, Formula One racing attracts many well-

heeled fans. After decades of building volume by attracting millions of credit-

hungry consumers, MasterCard decided recently to go after a different target—

the affluent. Although providing credit to the rich might seem like a

contradiction (you might think that the affluent don’t need credit), the affluent

are actually a good target for a credit card company. One of the major

benefits of a credit card system is the ability to pay when cash and check

would be unacceptable or difficult. The rich need this benefit as much as

others—perhaps more.

Traditionally, however, you might think of a credit card system as

making money from people who incur high interest charges on outstanding

balances carried from month to month. So, how could MasterCard improve its

revenues by catering to the wealthy, who pay their credit card bills on time?

The answer is the 1 to 2 percent interchange fee that credit card companies

receive on each transaction made by these big spenders. According to Michael

Auriemma, a credit card consultant, the average card user charges $3,000 a

year, resulting in interchange fees of $42. Assuming 80 percent of card users

carry a balance, averaging $1,800 each, he estimates that a customer paying

16 percent interest would accrue $230 in annual interest charges. By contrast,

a wealthy card user may charge $20,000 a year, meaning that, even without

interest charges, the bank will earn $280 in interchange fees, in addition to

annual fees paid for the cards.

 To attract these consumers, MasterCard will provide elite cards offering

special perks, from 24-hour-a-day concierge services—running errands,

arranging travel, booking tickets, and the like—to VIP treatment at concerts

and sporting events. BankAmerica Corp has become the first credit card issuer

to launch a World MasterCard. Like cards from rival American Express, the

World MasterCard will charge a higher annual fee, which is $75. Not to be

outdone, Visa is working on a comparable card.

Targeting the wealthy has another benefit for MasterCard. Many of the

millions of MasterCard holders are mired in debt and are failing to pay their

credit balances, which results in losses for the banks in the MasterCard

system. Furthermore, the ready availability of credit cards from numerous

banks has conditioned consumers to shop for no fee and low fee cards—the

best rates and rewards programs. These are actions that further reduce the

revenue to MasterCard banks. By targeting the wealthy, MasterCard reduces

its reliance on more debt-ridden, less loyal consumers. However, in targeting

this upscale market, MasterCard pits itself directly against American Express.

Is AmEx worried? Gail Wasserman, an American Express spokesperson, claims

that AmEx is not overly concerned. “History has shown that Visa and

MasterCard have often come out with cheap imitations of American Express

products. They never are quite as good as ours.”

Some industry observers remain skeptical that MasterCard can succeed

with this venture. “No issuer in the world has committed itself to the same

level of customer service that American Express has,” says David Robertson,
president of the Nilson Report, a credit-card research firm in California. He

adds, “The crux of the matter is Visa and MasterCard can’t control their

member banks; and since the members have that flexibility, no matter what

the product, it’ll be a variation of gold and platinum. Ultimately, it’ll all become

middlebrow.”

His comments raise another issue. So many member banks have issued

gold and platinum MasterCards that the image, value, and status of such cards

have been tarnished in the minds of Americans. In contrast, since its

introduction in 1984, the American Express Platinum Card has dominated the

market for very affluent card holders. AmEx charges an annual fee of $300

and offers perks such as free upgrades at leading hotels and free companion

tickets for customers buying a first- or business-class international ticket on

selected airlines. There are only 300,000 to 400,000 platinum AmEx

cardholders, compared to the millions of MasterCard platinum cardholders. It

stands to reason that, if necessary, AmEx will defend its market fiercely and

aggressively. And AmEx has experience in serving this market, whereas

MasterCard does not.

Questions for Discussion

1. What segmentation criteria has MasterCard used in the healthcare,

sports, and affluent market segments? What segmentation criteria are
implicit in MasterCard’s selection of these segments?
2. How does MasterCard differentiate its offerings for each of these target
segments? How has MasterCard positioned its offerings?
3. What competitive advantages and disadvantages does MasterCard have
with its World MasterCard, targeted to the affluent?
4. In your opinion, will MasterCard’s World card be a success? Why or why
not? What recommendations would you make for marketing the card?