CI: How will Discover’s transition to a publicly traded company help it to compete for market share against Visa and MasterCard?
SS: “I don’t necessarily know that being a public entity is going to directly impact Discover, although it will allow them to have greater capital at their disposal, which they didn’t really have under Morgan Stanley. The transition to a public entity definitely gives them capital now to maybe make acquisitions or further build out their infrastructure.
“One of the strategic moves they made recently was signing on with a number of merchant acquirers. That should help them overall, because their goal is in two years to have parity, or at least 90 percent parity, with Visa and MasterCard as far as acceptance goes. Prior to the US Department of Justice ruling [of 2004], the Visa and MasterCard bylaws prevented merchant acquirers from signing on for relationships with Discover and American Express. Over time, as their strategy unfolds and as acceptance grows, it will help them in regards to their existing cardholders, who weren’t able to use their Discover cards at certain merchants.”
CI: Will Discover’s lower merchant pricing help it to secure more merchant relationships, or will that be a possible hindrance to its growth plans?
SS: “With Discover’s acquisition of ATM network Pulse, they have something like 4,400 bank relationships now. There is organic growth in debit cards of something like 15 percent-plus per year near term, which is very solid growth. In addition to that, they’ve done a good job in taking share away from some of their competitors like the Star network. If they can continue to do so, certainly that would help too. While it’s a small part of their business today – Pulse, third-party issuing on their credit card network – I think it has the potential to grow from here, as far as its representation of the total company.”
CI: MasterCard recently published its second-quarter results which showed growth, but the pace of growth seems to have slowed in comparison to last year, which led to the stock price falling. What’s behind this and does it mean that the company’s shares are overpriced?
SS: “It’s not so much that growth has slowed. With the last three quarters, the growth numbers were artificially high because in the previous year, they didn’t have Washington Mutual in their numbers. This was the first quarter where they had Washington Mutual in the year-ago quarter as well as the quarter that they reported. True organic growth in the US is in that range. Obviously what it does show is that if they can take share away from Visa, that growth could be materially higher. But investors, given where the stock is trading and given what’s transpired in the marketplace, are obviously looking for areas where stocks have very high multiples – when investors see a slowing growth trend, even though the real growth rate didn’t change, they tend to sell off the stock. It’s also been a very successful stock, and I’m sure that investors were looking to take profits.”
CI: Although Visa is the larger of the two, is MasterCard ahead of Visa in rolling out contactless technology?
SS: “It certainly appears that way. But the reality is that any of these pilot schemes that they’re doing with banks like Citi, or even vendors, such as the New York City subway system, at some point will have to be opened up for everyone. It’s good in terms of brand recognition but I’m sure they’re subsidising a lot of vendors’ costs in undertaking the test phases. If it’s factored into the cost numbers now, those costs may come down, and they’re going to see top-line growth from it because card acceptance is going to grow along with payment volumes, because there’s going to be an increase in small ticket transactions.”
CI: What do you make of Bank of America’s decision to launch a MasterCard debit card? (See Bank of America aids Master Card in debit battle with Visa) Does it represent a straining of relations with Visa, with which Bank of America has traditionally had much stronger ties?
SS: “MBNA [which Bank of America acquired two years ago] had a very strong relationship with MasterCard, and the people that were at MBNA now have a greater influence on Bank of America’s card issuing and card segmentation.
“Maybe having a MasterCard debit card resonates with other customers, so why not have that option? When you have a network and you can add incremental volume, generally the benefit of any incremental volume on the revenue side is higher than the increase in costs. There’s also tremendous operating leverage potential, as you can sign on additional partners.”
CI: How will Visa’s forthcoming initial public offering impact on the industry?
SS: “When you’re a public company you can no longer run as a not-for-profit organisation. You have to manage your business prudently and you cannot be irrational. I don’t know if it will accelerate Visa’s growth trajectory but it certainly makes it interesting for everyone else out there. In my opinion it’s a net positive for some of their peers. That said, Visa is not taking its European entity public – it’s not going to be consolidated within Visa Inc, it’s going to remain not-for-profit.”
CI: What do you make of speculation about a European bank-owned rival debit network being established in Europe?
SS: “Visa is an association there, so why wouldn’t the banks just rally behind Visa? Isn’t that bank-owned? But each of these banks has a payment infrastructure already, and if they were to sign on with MasterCard or Visa, they’d essentially have to shut that infrastructure down. Setting up their own debit network is a way to salvage their respective infrastructures.
“Also, the most important thing is to not have this one company have a monopoly over payments. As has been previously well documented, Visa obviously is not as far advanced as MasterCard is with its SEPA-compliant debit. My sense is that for the banks, if they don’t rally behind Visa, it makes sense for them to try another alternative. The last thing they’d want is a monopoly, but it takes a long time to establish such a scheme. It took MasterCard ten years to develop a product for the Europe region. I don’t know if the banks can do that within a year. It would seem to me that there’s definitely a reason why the banks would want to do it, but maybe there’s alternatives.”