2017

MBA6043 BUSINESS INFORMATICS

CASE STUDY 2

By:

A. HARIS AWANG(MBA2016-04-1001)

&

MOHD. ZAINI ZAKARIAH(MBA2016-04-1025)

Submitted to:

MR. PARAMJEET SINGHSenior Lecturer

Faculty of BusinessASIA METROPOLITAN UNIVERSITY CHERAS

Tel: 03-9080 5888 Ext: 73104th March, 2017

Case Study 2: Can DSS Help Master Card Master the Credit Card Business?

(15%)

Credit (change) cards have been very big business for several decades. In 2001, over $30 trillion in payments for goods and services were charged using credit cards. The cards have made life easier for many people because they do not need to carry large amounts of cash for most purchases. Many people also use the cards as a way to borrow money because they need only pay a small percentage of the amount they owe each month, although they are usually charged very high interest rates for the unpaid balance. The interest goes to the issuing bank, making credit cards a very profitable service for them. However, the credit card industry is intensely competitive, highly fragmented, and growing at a rate of 3 to 4 per year, making those profits difficult to achieve.

Visa and MasterCard are associations of banks that issue the credit cards. They market their cards, often several different cards, and provide support for the transactions, making networks available to collect and use the data. The most popular credit card has been Visa, with 44.5 percent of the business in 2001, while MasterCard is number two with 31.6 percent. Being very much second to Visa, MasterCard is trying to overtake it. While it had been number two since the beginning, MasterCard began to emerge from “its doldrums” in 1997, according to Robert Selander, MasterCard’s CEO. It began to realize it might really be able to overtake Visa and become number one. To reach that goal, MasterCard needed to present itself so that potential user will choose a MasterCard rather than a Visa. It also had to spur the bank issuers to promote MasterCard cards rather than those of their competition.

In 1998, when MasterCard had only 28.8 percent of the credit card charge volume while Visa’s was over 50 percent, MasterCard decided it needed  a new computer center, partially to handle all the data as the company’s business expanded as a result of its drive to overtake Visa. It also foresaw growth as a result of its change in strategy. The company’s new strategy required a system that would be able to keep a record of every transaction of every customer for three years. The strategy included ways MasterCard and its member banks could use that data to increase their credit card business. MasterCard wanted to increase its daily volume of 30 million transactions in 1977. At the time it had three separate computer centers on four floors in the suburbs of St. Louis, Missouri, and it wanted to consolidate the computer centers while enlarging the new center so that it would be able to handle both the current volume and the planned volume as it expanded. At that time it was storing nearly 50 terabytes (50 trillion numbers and letters) of data, including the dollar amount, merchant, location, and card number. MasterCard also planned

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to add other data fields, such as ZIP codes, to make the data more useful. However, to protect MasterCard users, it did decide not to include demographic data such as incomes and ages.

Nonetheless, “The credit card business lives and dies by data”, said Ted Iacobuzio, director of consumer credit research for the consulting and research firm, TowerGroup. While both Visa and MasterCard had already been warehousing so much data, they were both moving toward providing reports to their member banks. MasterCard’s goal was to give its members (the banks) direct access to their customers’ data as well as tools to analyze all of this data, all in order to persuade the banks to choose MasterCard over Visa. For example, if banks could use MasterCard tools to improve their analysis of the profitability of the cards in their portfolios or gain more customers and transactions to process, they would be inclined to push MasterCard more often. Such analysis could help banks determine the types of customers that were most profitable or find ways to appeal to more potential MasterCard customers. Many banks issue both Visa Cards and MasterCard cards (sometimes several of each), and if the banks can use this information from MasterCard while Visa does not have or make available such information, the MasterCard company can gain a strategic advantage. For example, in 2001, MasterCard persuaded Citigroup, the largest issuer of credit cards, to push MasterCard over Visa so that 85 percent of its credit cards came from MasterCard versus only 15 percent from Visa. J. P. Morgan Chase likewise was convinced to use MasterCard for 80 percent of the cards it issued.

MasterCard hoped it could persuade banks to use these data if they could see value (increased profit) in the process. Joseph Caro, MasterCard’s vice president of Internet technology services, said that “little percentages” can be very profitable to banks. In one case, a bank was requiring its merchants to verify the whole process by using the telephone to call in one transaction out of 50 for approval (rather than using a telecommunications method), while most banks were requiring only one transaction in 500. Because call-ins cost about $3 each, that bank could save $300,000 a year by switching over to the one in 500 method. Another bank was turning down one transaction out of five because so many call-ins were timing out. The bank was able to discover that most of the customers turned down were actually creditworthy. By changing its set up, the bank would be able to eliminate thousands of unnecessary lost transactions.

About 28,000 banks and financial service companies issue MasterCard credit cards. To draw these customers into using its credit card transaction data, MasterCard needed not only to make each bank’s data available to them, but it also needed to make available appropriate analytic software. MasterCard assigned 35 full-time developers to the task of identifying and creating software tools to accomplish this task. Drawing on Business Objects Web Intelligence software in 2001, these developers created and programmed 27 tools for the banks to use. (These tools are not free and they are not available to merchants.) One of MasterCard’s new tools, called the Business Performance Intelligence, is for operational reporting and includes a suite of 70 standard reports that banks can use to analyze their daily, weekly, or monthly transaction. The banks can then compare the results from one market (such as a United States state or region, or a

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single country) with that of another market. MasterCard also works with individual banks to create their own custom reports, enabling them to concentrate on their own issues and concern. Subscribing banks access the MasterCard business intelligence system via a secure extranet.

The developers also created Market Scope, which are applications that have the goal of helping banks and merchants work together to generate more purchases from the merchants if they are paid for by MasterCard. One example they give is to enable Wal-Mart stores to determine how many MasterCard holders spend $25 or more on sporting goods in January and February. Then, MasterCard’s vice president of systems development, Andrew Clyne, suggested that Wal-Mart could send these card-holders the right to obtain tickets to their closest major league baseball team based upon future sporting goods purchase above a certain dollar minimum. Iacobuzio said that such a strategy should appeal to state and regional banks. However, he believes it is likely that national and international banks would have already developed and are using their own analytical software. But even they would have a use for MasterCard’s software as a kind of benchmark against which to measure the effectiveness of their own systems.

Moreover, despite the increasing volume, the processing was much faster. As Caro said, “If we can do things faster, little percentages start moving in our direction”. Visa, however, is not sitting still, and is managing about 100 trillion terabytes of data for its clients. Until recently, it mainly supplied the data online or on disks to its bank customers, who used their own software and computers to analyze the data. Recently, Visa started to run analyses for the banks on its own computers. In May 2002, Visa also introduced a Web service called Resolve Online to help banks deal with disputed payments and is working on providing banks with online analytic tools. “If MasterCard is ahead of the game in any of this”, says Iacobuzio, Visa “will have it in six months”.

MasterCard’s new data storage site, which was opened in May 2002, is also in St. Louis, in a single 525,000-square – foot building. The complex, which was built on open land, cost MasterCard $135 million. The changeover to the new site happened over a weekend with almost no problem, despite the purchases of about $4 billion each day.

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Analyze MasterCard using the competitive forces and value chain models. Briefly summarize the problems that MasterCard was facing before 1998 that caused it to change its business strategy.

(15 Marks)

ANSWER:

Competitive Forces AnalysisMasterCard’s competitive forces analysis will be based on Porter’s Five Forces model which identifies and analyzes five competitive forces that shape every industry, and helps determine an industry's weaknesses and strengths. These forces are:

Competition in the

Industry

New Entrants

Power of Customers

Threat of Substitutes

Power of Suppliers

Figure 1. Porter's 5 Forces.

a) Competition in the IndustryThe traditional direct competitor has always been Visa which offers similar products and services to MasterCard. At present, MasterCard with 191 million card users, is second only to Visa with 323 million users (Sembower, 2016). Other competitors include American Express and Discover. The importance of this force is the number of competitors and their ability to threaten MasterCard. The credit card industry is intensely competitive and highly fragmented which makes it difficult for credit card companies to achieve profits. However, the intensity of

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competitive rivalry is the major determinant which drives MasterCard to establish very strong and sustainable competitive advantage through innovation.

b) Potential of New Entrants Into an IndustryThe credit card industry has been intense and saturated which makes it difficult for new companies to enter. A new entrant would cost a lot of time and money. However, there’s also other forms of non-credit card new entrants into the industry such as PayPal, Samsung Pay and Apple Pay. Despite of not having credit cards issued to users, their purpose is the same which is to provide an electronics cashless way of paying for products or services. These new entrants are dominated by industry giants and it is not easy for smaller companies to enter. This helps maintain MasterCard’s strong position in the industry, at least for the time being.

c) Power of SuppliersMasterCard product and services do not depend so much on its direct suppliers as MasterCard does not issue cards directly to consumers. It doesn’t have physical products that require materials to be manufactured. Credit card are issued by banks that are affiliated to MasterCard. However, for its support activities, MasterCard relies heavily on the supplies of equipment and software related to its management information system (MIS). These equipment and software must be top notch and state-of-the-art. The support activities are the backbone of MasterCard.

d) Power of CustomersAt the end of the day, the choice is left to customers whether to use credit cards, cash or some other forms of payment when they buy products or services. Customers may also choose to cancel their credit cards due to high interest rate or annual fees imposed on them. In a way, customers do have the power, but how strong they are to drive prices down can be a subject of another research. It is affected by how many buyers, or customers, a company has, how significant each customer is and how much it would cost a customer to switch from one company to another. The smaller and more powerful a client base, the more power it holds.

e) Threat of SubstitutesDoes MasterCard have a direct substitute? Yes, Visa is its direct substitute offering similar services. Other indirect substitutes can be debit cards issued by banks where customer can only pay if there’s money in the account. Another substitute is payment by cash. It used to be difficult to withdraw cash from banks. But today, ATM machines are everywhere. Some merchants accept ATM cards as a payment option. So under this force, MasterCard’s power is weakened as it is being threatened by other payment options that are easy and convenient.

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Value Chain Model AnalysisThe Value Chain Models looks at a company as basic set of chain activities that add a margin of value to its products or services. These activities are categorized under two activities known as primary and support activities.

MasterCard’s primary activity is to market credit cards to consumers for the purpose of electronics cashless purchasing of goods and services from merchants all over the world. While consumers are charged a certain percentage of interest for unpaid balance, MasterCard also profits from the annual fees. Credit cards are offered to consumers either through telemarketing, advertisements or by banks where consumers conduct their banking. These activities are critical to adding values to MasterCard’s set of chain activities.

The Support activities of MasterCard’s have always been the realization of the management information system and the leveraging of information technology where enormous amounts of customers data are processed, warehoused and analyzed. The support activities have been crucial in MasterCard’s business growth and profitability as they add values to its products and services. Another support activities is advertisements. For the past two decades, MasterCard has been successful with their “Priceless” campaign which has propelled MasterCard to a greater height in the creation of their brand awareness.

ProblemsAs for problems faced before 1998, MasterCard had been in number two spot since the beginning of their venture into the credit card business. MasterCard was also behind in credit card charge volume at 28.8% while Visa was over 50% in 1998. These are the two main reasons that drove MasterCard to change its business strategy to overtake Visa.

Question 2Describe the new business strategy MasterCard developed. What is the role of information systems in its new strategy?

(10 Marks)

ANSWER:

New Business StrategyDriven by their goal that is to overtake Visa by offering credit cards to more consumers through their banking partners, MasterCard has devised a new business strategy to achieve this goal. The new business strategy developed by MasterCard is to expand its capability to collect, store and process data of every customer transaction for three years. The strategy also includes ways

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MasterCard and its affiliated banks of analyzing and using the data to expand their credit card business. Visa has been their number one rival which overtaking them will position MasterCard as number one credit card company in the world.

Under this new strategy, MasterCard decided it needed a new computer center which is to be consolidated with its existing computer center in the suburbs of St. Louis, Missouri. Besides storing data on dollar amount, merchant, location, and card number, MasterCard also planned to add more data fields such as ZIP codes. However, due to the data privacy, demographic data is not included.

Role of Information SystemThe information system plays a very important role in the new business strategy. Its role can be broken down into the following areas:

a) Information Storage and AnalysisManually stored information and hard-copy formats, as it is true to almost every company in the world are no longer in existence. Through the adoption of information system, MasterCard can make use of sophisticated and comprehensive databases that can contain all imaginable pieces of data about customers, spending behavior as well as market trend. Information system stores, updates and even analyzes the information, which MasterCard can then use to pinpoint solutions to current and future problems. Furthermore, these systems can integrate data from various sources, inside and outside of the company, keeping it up to date with internal performance and external opportunities and threats.

b) Assist With Making DecisionsThe long-term success of MasterCard depends upon the adequacy of its strategic plans. An organization’s management team uses information systems to formulate strategic plans and make decisions for the organization's survival in the short term and long term. The business

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uses information systems to evaluate information from all sources, including information from external references such as Reuters or Bloomberg, which provide information on the general economy. This analysis of and comparison to market trends helps organizations analyze the adequacy and quality of their strategic decisions.

c) Assist With Business ProcessesThe information system helps MasterCard in developing a larger number of value added-system in the company. For example, it can integrate the information system employed by the banking sector to ensure that the output it produces complies with the requirements of the various management standards. Adoption of the information system simplifies business processes and removes unnecessary activities. It adds controls to employee processes, ensuring that only users with the applicable rights can perform certain tasks. Further, it eliminates repetitive tasks and increase accuracy, allowing employees to concentrate on more high-level functions. The information system also leads to better project planning and implementation through effective monitoring and comparison against established criteria.

d) SecurityIT security is the most important feature that the information system has to provide. When customer is paying by a credit card, it has to be carried out as secured as possible. For example, the new chip technology can prevent credit cards from being cloned. Data transfer over telecommunication lines or Wi-Fi should also be secured and cannot be intercepted.

Question 3What kind of decision-support systems did MasterCard develop? How are they related to its business strategy?

(10 Marks)

ANSWER:

A decision-support system (DSS) is a computerized information system used to support decision-making in an organization or a business. A DSS lets users sift through and analyze enormous piles of data and compile information that can be used to solve problems and make better decisions.

The benefits of decision support systems include more informed decision-making, timely problem solving and improved efficiency for dealing with problems with rapidly changing variables.

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In MasterCard case, the kind of decision-support system it has developed is Data-driven where it is targeted at managers, staff and also affiliates related to its products and services. It is used to query a database or data warehouse to seek specific answers for specific purposes. It is deployed via a main frame system, client/server link, or via the web. A manager may be able to find the spending habits and trends by querying deeper into the data warehouse.

For example, it can be determined which week of the month people spend more. This type of information is very useful especially for marketing managers. Having such information can help managers to launch their products promotion precisely at the right moment. This is very much related to the business strategy which is to expand their ability to collect massive piles of data on consumer spending, process it and subsequently make good decisions which will benefit MasterCard in terms of increasing their market share in the credit card industry.

Question 4Has MasterCard’s strategy been successful? Can MasterCard hold on to its strategic advantage? Explain your answer.

(15 Marks)

ANSWER:

If its sole objective is to overtake Visa to become number 1, then the strategy has not been successful. As of today, MasterCard is still behind Visa in network purchase volume (Figure 2).

Figure 2. Credit Card global market share. (Source: WalletHub)

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It gives us the sense of where MasterCard is compared to other credit cards companies. In terms of credit cards in circulation, MasterCard is also behind Visa in 2015 (Figure 3).

Figure 3. Market share based on circulation in 2015. (Source: WalletHub)

By looking at the 2 figures above, one might ask, “What strategic advantage does MasterCard have over Visa?” Developers at MasterCard may have developed innovative systems over the years such as Business Objects Web Intelligence, Business Performance Intelligence, Market Scope and Resolve Online but as what Ted Iacobuzio said, “If MasterCard is ahead of the game in any of this, Visa will have it in six months”. This is true until today where Visa has always been very competitive to stay at number one spot.

So, it is very difficult for MasterCard to hold on to its strategic advantage in this intensely competitive credit card industry.

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ReferencesGDRC. (2017). Types of Decision Support Systems (DSS). Retrieved 2 March, 2017, from https://www.gdrc.org/decision/dss-types.html

Investopedia. (2017). Porter's 5 Forces. Retrieved at 03 March, 2017, from http://www.investopedia.com/terms/p/porter.asp

Papadimitriou, O. (2016). Market Share by Credit Card Network. Retrieved at 03 March, 2017, from https://wallethub.com/edu/market-share-by-credit-card-network/25531/

Sembower, T. (2016). Credit Card Companies: 15 Largest Issuers (2017 List). Retrieved at 03 March, 2017, from http://www.cardrates.com/news/credit-card-companies/

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