Strategy Comparison Report of MasterCard worldwide and Visa inc.

Payment Card Industry

Strategy Comparison Report of

MasterCard worldwide and Visa Inc.

Conducted by:

VAMSI KRISHNA SYAMALA

syama1v@cmich.edu

For:

MBA 689-Strategic Management

Dr. Hyungu Kang

Central Michigan University

College of Business Administration

12/9/2010
 Strategy Comparison Report of MasterCard worldwide and Visa inc.

ABSTRACT

This report is an analysis of the payment card industry including international and regional level.

The main objective of the report is to analyze the external, internal and macroeconomic issues

facing the industry and the strategies of the companies within the industry. The analysis includes

a comparison of MasterCard worldwide and Visa Inc. who mainly focuses on electronic

payments and funds transfers between the financial institutions globally. Understanding the

internal environment and major competitors in the payment card industry would help in aware of

company’s exact capabilities and strategies in order to overcome economic challenges, with the

help of competitive advantages and opportunities, and finally achieve the accomplishment in the

future.

KEYWORDS: Electronic payment, Payment cards, issues, strategy, MasterCard worldwide,

Visa Inc.
 Strategy Comparison Report of MasterCard worldwide and Visa inc.

INTRODUCTION

Payment card industry consists of a wide variety of services such as credit, debit, and prepaid

cards. In the stiff competitive market two well known companies named MasterCard worldwide

and Visa Inc. playing important role. This report examines current strategic issues of the industry

and the sources of internal strengths and weaknesses of the two companies MasterCard

worldwide and Visa Inc.

The main intention of this report is to better understand the strategies of the two companies

MasterCard worldwide and Visa Inc. by gathering relevant information about the companies.

The report examines the external environment of the industry which includes current strategic

issues within the industry, overview of the industry and an analysis of opportunities and threats.

Business models used for the analysis of industry-wide opportunities and threats are porter’s five

forces, macro-environmental factors, and strategic groups. An internal analysis of MasterCard

worldwide and Visa Inc. was performed in order to identify sources of strengths and weaknesses

based on the four factors of competitive advantage and distinctive competences between two

companies.

The basic information for this research was collected from various resources such as journals,

books, business related articles, and publications. Official company websites of MasterCard

worldwide and Visa Inc. also provided necessary background information about the company as

well as industry.
 Strategy Comparison Report of MasterCard worldwide and Visa inc.

EXTERNAL INDUSTRY ANALYSIS

Payment card industry overview

The industry gets its revenue in the form of fees by providing financial services to financial

institutions like banks, credit unions, etc. these financial services include co-branding credit and

debit card; E-pay services for high volume merchants; automatic bill payer services; and cash

back services for frequent card usage (IBIS World Industry Report, 2010). Major players like

MasterCard worldwide, Visa Inc, and American Express gaining profits by providing services to

the financial institutions.

Current strategic issues

The Payment Card Industry currently facing two major strategic issues. These issues are

affecting the industry to a great extent.

The first and most important issue is the global economic recession. Many companies in

different industries filed bankruptcy due to economic downturn. Especially, the Payment Card

Industry affected badly due to this recession. The industry is mainly relayed on transaction

activity. The main fueling sources for transaction activity are customer spending and business

activities. Industry operators like Visa Inc. and MasterCard worldwide generate revenue in the

form of fees from transactions including consumer purchases and services. Due to great

recession many people became jobless and reduced spending on goods purchases resulting sharp

decrease in industry revenue. In 2008, the Payment Card market affected badly due to housing

bobble burst, unemployment and global financial crisis which lead to drop industry revenue by

0.6% to $44.2 billion. In 2009, due to financial stress many consolidations took place in banking

sector with these consolidations potential clients for Payment Card industry reduced to great
 Strategy Comparison Report of MasterCard worldwide and Visa inc.

extent and industry revenue dropped by 3.8% to $42.4 billion. This financial information shows

that global economic recession had a great impact on the Payment Card Industry and the market

players needed to have right strategies in order to overcome this recession.

The second important issue industry facing is data security. Particularly companies facing data

security issues in credit card segment. There are many credit card frauds found all over the world

which caused billions of dollars loss to credit unions as well as payment card companies. In

2007, industry had approximately 9.91 million US customers in the form of credit cardholders

and lost nearly $52.7 billion in the form of credit card frauds. There are different types of credit

card frauds. These are counterfeit credit card, lost or stolen cards, no card fraud, non receipt

fraud, identity theft fraud. In 2007, Canada also faced this credit card fraud. Nearly 64.5 million

credit cards were issued in Canada and MasterCard and Visa companies generated $240.6 billion

dollars in the form of revenues but card counterfeiters are using sophisticated technologies like

advanced computer devices including encoders, decoders, and magnetic stripe readers in order to

steal credit card data. Due to these frauds payment card industry lost $4 billion dollars in one

fiscal year.

Growth of industry

The payment card industry is growing rapidly due to technology change. People all over the

world are adopting paperless transactions instead of traditional cash and check payments.

Industry growth mainly depends on credit, debit and prepaid card penetration. In general,

developed countries have more penetration compared to other countries. But recent years

developing countries like china and India also have high credit and debit card penetration due to

government involvement into electronic payments and awareness in the people. Prior to
 Strategy Comparison Report of MasterCard worldwide and Visa inc.

economic recession the global payment card industry is growing at a rate of 12.9% annually. By

2009, almost 80 countries switched from paper transactions to electronic payments transactions.

Visa Inc. and MasterCard worldwide are growing at an annual rate of 23.2% and 13.8%

respectively. Industry life cycle is at growing stage.

Customers and competitors

This industry provides services on fee basis to the financial institutions. These institutions are

divided into different sectors such as banking, credit unions, government treasury department,

etc. in banking there are many customers for this industry like JP Morgan chase & co, Bank of

America corporation, Citigroup Inc. American express company, etc. similarly different credit

unions and treasury departments are main customers for Payment Card industry. There are five

major competitors present in this industry. Those are Visa Inc, MasterCard worldwide, Discover

financial services, American Express, and JCB. Among these Visa Inc has highest number of

debit cards and MasterCard worldwide has highest number of financial institutions tie-ups.

Product/services and suppliers

As mentioned earlier this Payment Card industry provides services to individual customers,

businesses and governments. Main products/services of this industry are credit services, debit

and prepaid services. Through credit services companies provide credit platform to their

financial institution customers so that they can have worldwide acceptance and flexible spending

power in order to satisfy end user needs. Debit services are provided for end users in order to

make electronic payments through available funds in their accounts. Prepaid services are

provided for the clients in order to access a selected pool of funds and these prepaid cards are
 Strategy Comparison Report of MasterCard worldwide and Visa inc.

reloadable. Major suppliers of this industry are plastic card suppliers, investors, computer and

peripherals suppliers, and software package providers.

Industry-wide opportunities and threats analysis

Porters’ Five Forces

Porter’s five forces model is used to analyze the external business environment and identify

potential opportunities and threats in the industry. This includes evaluation of the threat of new

entrants, threat of substitutes, bargaining power of suppliers, bargaining power of customers, and

competitive rivalry among existing players.

Threat of new entrants

The threat of new entrants is low for this industry due to high entry barriers. This industry’s main

focus is on financial services for financial institutions. The economies of scale for this industry

are high and new entrant should invest high capital because of high fixed costs. Existing players

have good customer relations so as a new player it is difficult to attract customer group. Existing

players have brand loyalty in their customers and they can enjoy cost advantage over new

players. High switching costs for customers and Federal Reserve Bank regulations also added

advantages for existing players. High competition among industry players is also a major barrier

for new entrants.

Bargaining power of suppliers

Bargaining power of suppliers in this industry is medium. Main inputs for this industry are

plastic cards, computer and peripherals suppliers, and software package providers. The supplier

market is fragmented and there are less dominant players. Revelry among suppliers also added
 Strategy Comparison Report of MasterCard worldwide and Visa inc.

advantage for this industry. But consolidations among suppliers might raise the bargaining

power. So overall bargaining power of suppliers is moderate.

Bargaining power of customers

Bargaining power of customers is medium in this industry. The payment card industry serving

three major sectors like banking sector, credit union, and government treasury department so

number of customers in these sectors are very high and there are less dominant customers these

sectors. But due to economic recession many consolidations took place in banking sector which

increased bargaining power in this sector. Governments also changed regulations to control

payment card companies which gave the bargaining power to the government. But there are few

players in this industry and switching costs are also high so customers have no choice to switch

to other company. There are high fixed costs in the payment card industry but substitutes are

low. By considering all these factors bargaining power of consumers is moderate.

Threat of substitutes

Substitutes for payment card industry products are cash and paper based payments like checks,

demand drafts, etc. there are less number of substitutes for this industry products so the threat of

substitutes is low. Consumers in many countries are switching from paper transactions to online

transactions so the dominance of substitutes is decreasing gradually. Finally, threat of substitutes

is low for this industry.

Competitive rivalry among existing players

Competition among the existing players in this industry is very high. MasterCard worldwide,

Visa Inc, American express and Discover companies are competing with each other in order to
 Strategy Comparison Report of MasterCard worldwide and Visa inc.

gain market share. Companies have similar services and market strategies and all of them are

financially strong. Already Visa Inc has high market share in debit services sector and

MasterCard worldwide has highest number of financial institutions as its customers. So other

companies are trying to grab market share of dominant players in that particular sector.

Overall, the industry is not so attractive because three factors are rated from medium to high. See

table 1 for a summary of porter’s Five Forces Model.

Insert Table 1 here

Macro-Environmental Factors Analysis

Macro environmental forces are used to analyze strategic issues beyond the industry

environment.

Demographic Forces

Consumer’s income levels are increasing in developing countries like China and India with that

number of customers for this industry are increasing. In developing countries, educated working

population is high which lead to increase in payment card services.

Political and legal Forces

Political and legal forces are helpful for industry analysis. Different country’s governments have

different regulations for this industry for example Reserve Bank of India is governing body for

all financial matters in India. Similarly, in US Federal reserve bank is responsible for financial

matters. Every country has regulatory body in order to control financial companies in those

countries.

Technological Forces
 Strategy Comparison Report of MasterCard worldwide and Visa inc.

Technological forces are very important in this industry. In order to serve better to their

customers companies should adopt latest technologies and spent more on R&D. Recently,

payment card frauds are increasing rapidly and counterfeiters adopting new techniques to steal

data from cards. So companies must focus on technology innovations.

Macroeconomic and Social Forces

Economic factors can impact whole industry either way. Due to global economic recession and

unemployment many financial institutions faced tough time and payment card industry growth is

reduced by 3.8% but before recession due to income growth in developing countries the industry

growth rate is12.9% annually. Social factors like cultures, spending behavior, customer

satisfaction are also having major impact on this industry.

Global forces

Potential financial institutions like Citigroup Inc, JP Morgan Chase & co, and Bank of America

might enter into this industry which leads to decrease in market share of existing players.

Financial institutions in developing countries could become global force for the payment card

industry.

Strategic Groups Analysis

Strategic groups of payment card industry can be divided into major segments based on service

diversification. High service diversification segment players provide highly diversified service

line such as credit, debit and prepaid card services and other online services. Medium service

diversified segment players offer limited services to their customers. Low service diversified

segment companies’ offer less services compare to medium level players. Market shares of Visa

Inc, MasterCard worldwide, American Express, and Discover Card are 44%, 31%, 20%, 5%
 Strategy Comparison Report of MasterCard worldwide and Visa inc.

respectively. Visa Inc and MasterCard worldwide are high service diversified players with high

market share. The strategic mapping can be found in Figure 1.

Insert Figure 1 here

Opportunities

After examining the macro environmental factors, there are some potential opportunities for the

players in the payment card industry. There are good opportunities for service diversification and

technology innovation which leads to high market share. After considering global factors, there

are potential market opportunities in developing countries like China and India. Focus on

mergers and acquisitions industry players can acquire supplier companies like computer

peripherals suppliers and software package providers so that payment card companies can reduce

their cost gain more market share. Companies could maintain strategic teams so that they can

observe economic fluctuations and design appropriate strategies for those fluctuations.

Threats

Economic recession is major threat for payment card industry because financial institutions are

major consumers for this industry and they are the main sufferers for recession. Market share

could be affected due to continual change in customer needs because they can switch to other

substitutes. Lack of technology innovations also major threat for this industry because credit card

frauds might continue until companies does not use secure transactions. Mergers in client

companies also threat for the existing players because they might enter into payment card

industry and can become potential competitors. Sometimes Government regulations also become

threat for the industry operations in that region.

 Strategy Comparison Report of MasterCard worldwide and Visa inc.

INTERNAL ANALYSIS

Company Information- MasterCard worldwide

The origin of MasterCard was in the year 1940’s. In U.S. banks were using special papers

instead of money which has equal value. The first credit card was introduced by national bank in

New York in the year 1951. An Interbank Card Association (ICA) was started in the year 1966 in

the month August this was later converted into MasterCard in the year 1970’s. MasterCard

provides services in more than 210 countries and territories.

The interchange rates were paid by the card holders for the transactions they make that is the buy

or purchase they perform using the card. The logos of MasterCard’s have gone under great

changes the first logo of master card was letter ‘I’ that was in the year 1966 and the next logo

was changed in the year 1969 where the logo do not consist of ‘I’ in the logo it has to circles red

and yellow and on the circles written master card. Then again in the year 1979 and again in the

year 1990, again the logo created in the year 1996 was the final one which we see today. The co

operate signature is one of the MasterCard which is not used for regular they are used for the

business purposes and Etc. see figure 2 for summary financials

Insert Figure 2 here

Company Information- Visa Inc.

The headquarters of the company is located in San Francisco, California. This is global

payment Technology Company. In November 9, 2007 visa has started. This technology is used

mostly by the Visa-Branded credit and debit cards so to transfer the money worldwide. The Visa

Inc. do not issue cards or do not extend credit or set rates but it provides payment products by the

customers can make cash access with the credit, debit and prepaid cards. Visa has a 38.3% of

market share of the credit card market place and the market share of debit card is 60.7% in
 Strategy Comparison Report of MasterCard worldwide and Visa inc.

United States. 62 billion transactions with a total volume of $4.4 trillion is processed by the

Visa’s global network. It connects financial institutions, businesses and consumers in more than

200 countries and territories. Visa Inc. provides value-added services, including risk

management, fraud protection, loyalty, dispute management and debit issuer processing. It has

15,700 financial institution consumers. 1.8 billion Visa cards. US$5.0 trillion total

volume.US$3.1 trillion payments volume. 1.7 million ATMs and 6.8 billion total transactions.

See figure 3 for summary financials.

Insert Figure 3 here

Company analysis and Strategy comparison

MasterCard worldwide strengths and weaknesses

In terms of efficiency, MasterCard worldwide is effectively entered into Asian, African and

European markets with its global strategies. It has contracts with highest number of financial

institutions throughout the world. In 2009, the company processed nearly 22 billion transactions

through its services network. The company effectively lunched MasterCard integrated processing

solutions in order to provide better services to its customers. The company also provided data in

51 languages all over the world.

MasterCard worldwide has some weaknesses in efficiency are area. It is inefficient to gain

highest world market share. It is still second largest player in the debit card services segment. It

has faced legal and regulatory challenges and inefficient to solve acquisition and interchange fee

issues.

In terms of quality and responsiveness to customers, MasterCard worldwide company main

strength is its quality service. The company is providing better services to its customers in the
 Strategy Comparison Report of MasterCard worldwide and Visa inc.

form of customer support and data security. It has attracted highest number of clients with its

quality services. MasterCard customers can process their transaction anywhere in the world.

Customers have global accessibility with this MasterCard service.

In terms of innovation, MasterCard has strong research and development team which enabled the

company to attain advancements in technology which is a key element of success. The company

adopted many secure data processing technologies. The company launched Open Application

Programming Interfaces in order to provide open platform for third party software developers. It

launched services such as inControl, MoneySend, MasterCard PayPass, mobile phone base

payments etc. to serve better to their customers.

MasterCard worldwide has some drawbacks in this innovation segment. The major drawback is

data security. Though the company has advanced data security technologies still it is facing

credit card fraud problems from counterfeiters. In some key areas like mobile phone based

services it is lagged behind competitors.

Visa Inc. strengths and weaknesses

In terms of efficiency, Visa Inc. effectively entered in to north, central, and South American,

European, African markets. It has nearly 40% global market share and effectively increased its

debit card market share to 70%. The company implemented its US market strategy to global

level efficiently in order to get global market share.

Visa Inc. has some weaknesses in terms of efficiency. It is inefficient to attract more customers

compared to other competitors. It is failed to gain more market share in the credit card services

segment and lagged behind customers. The company failed to attain global acceptance.
 Strategy Comparison Report of MasterCard worldwide and Visa inc.

In terms of quality and responsiveness to customers, Visa Inc. is providing quality services

compared to competitors it is providing PLUS ATMs to its customers and company also

providing commercial payment solutions for corporations and governments. For Visa card

customers it is not necessary to have photo ID. The company providing many customer

satisfaction programs to gain more market share.

In terms of innovation, Visa Inc. strengths are Mobile Payments and Services provided by Visa

wants to extend its services through mobile channel as the mobile devices are increasing rapidly.

The company launched mobile phone based transactions by having contracts with mobile

operators. Visa provides a secure and quick transfer of funds from account to account. Visa

protects online transactions through multiple layers of security and online authentication. This

helps in ecommerce and money transferring. It supports deployment of chip technology. Chip

cards small, powerful embedded microprocessor that can provide enhanced security, and

increased transaction speed. Visa Inc. is still facing security issues like data field encryption

which can cause unauthorized access to the personal cardholder data. Counterfeiters are using

technology advancements which cause the company to face severe data security issues in near

future. So the company needed to improve its data security technologies and invest more on data

security.

Comparison of strengths and weaknesses

Both MasterCard worldwide and Visa Inc. facing data security problems and they can overcome

these issues with implementation of high security standards and more investment on R&D.

MasterCard has high volume of customer base but Visa Inc. has large service diversification and

gaining more market share. Visa has tie ups with mobile operators to provide services through

mobile phones where as MasterCard is providing global access to its customers through its
 Strategy Comparison Report of MasterCard worldwide and Visa inc.

network. Master card is facing regulation issues and interchange fee issues where as Visa is

facing global expansion due to less number of client institutions.

Competitive Advantages and Distinctive Competencies

Competitive advantages for MasterCard are its high consumer base, technology innovations and

quality service. Core competency for this company lies in its fast service and high customer

satisfaction. Competitive advantages for visa are high volume of debit cards, more number of

electronic transactions and innovation. Its core competency lies in is its service diversification.

SUMMARY OF FINDINGS

Recently, the Payment Card Industry is facing challenges mainly due to recession economic

recession and data security issues. Industry life cycle is at growth stage and there are many

opportunities for companies to become successful. Providing diversified services to specific

customer groups can facilitate the Payment Cars Industry players become successful. Analysis of

external and internal business environment including macro environmental factors and strategic

group analysis will give the awareness of growth, profitability and competitors in the industry.

Both MasterCard worldwide and Visa Inc. are major players in the Payment Card Industry, one

is famous for one type of services and the other one is famous for some other type of services

having their own market shares. Both are needed to develop effective strategies in order to gain

more market share from their strengths and overcome their weaknesses. MasterCard needs to

concentrate on service diversification and innovation while Visa Inc. could target on its low

customer base. Both the companies could adopt innovative technologies and service

diversification in order to gain more market share. The two companies are needed to adopt global

level strategies to expand in global market and overcome their inefficiencies.

 Strategy Comparison Report of MasterCard worldwide and Visa inc.

REFERENCES

Hitt, M., D. Ireland & R. Hoslisson (2005). Strategic Management: Competitiveness and

Globalization, 5th ed., South Western.

Luffman, G., E. Lee, S. Sanderson; & B. Kenny (1997). Strategic management: An Analytical

Introduction, 3rd ed., Blackwell publishers Inc.

Porter, M. E. 1993. ‘The technological dimension of competitive strategy', in R. S. Rosenbloom

(ed.), Research on Technological Innovation, Management and Policy, Vol. 1. JAI Press,

Greenwich, Conn.,

Porter, M. E. 1991. ‘Towards a dynamic theory of strategy’, Strategic Management Journal, pp.

95-117.

IBIS World Industry Report. (2010, November 2010). Money Transferring in the US. Retrieved

December 2, 2010, from http://0-

www.ibisworld.com.catalog.lib.cmich.edu/industryus/default.aspx?indid=1303

Visa Inc. (2010). Annual report. Retrieved December 4, 2010, from www.visa.com:

http://investor.visa.com/phoenix.zhtml?c=215693&p=proxy

MasterCard worldwide (2010). Annual report. Retrieved December 5, 2010, from

www.mastercard.com: http://investorrelations.mastercardintl.com/phoenix.zhtml?

c=148835&p=irol-reportsannual

Royal Canadian Mounted Police (2010). Counterfeiting and credit card fraud. Retrieved

December 2, 2010 from www.rcmp-grc.gc.ca: http://www.rcmp-grc.gc.ca/count-contre/cccf-ccp-

eng.htm.
 Strategy Comparison Report of MasterCard worldwide and Visa inc.

APPENDIX

Table 1: Porters’ Five Forces Model

Payment Card Industry – Porters’ Five Forces

Porters five forces Low Medium High

Threat of new entrants x

Bargaining power of suppliers x

Bargaining power of customers x

Threat of substitutes x

Competitive rivalry between x

existing players
 Strategy Comparison Report of MasterCard worldwide and Visa inc.

Figure 1: Strategic Groups Analysis

Market share

High

Visa Inc.

MasterCard
Worldwide

American Express Low

Low Medium High

Discover Service diversification
Card

Figure 2: MasterCard worldwide summary Financials

 Strategy Comparison Report of MasterCard worldwide and Visa inc.

Source: http://0-www.ibisworld.com.catalog.lib.cmich.edu/industryus/default.aspx?indid=1303

Figure 3: Visa Inc summary Financials

 Strategy Comparison Report of MasterCard worldwide and Visa inc.

Source: http://0-www.ibisworld.com.catalog.lib.cmich.edu/industryus/default.aspx?indid=1303