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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
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
existing players
x
Strategy Comparison Report of MasterCard worldwide and Visa inc.
Figure 1: Strategic Groups Analysis
Market share
High
Low
Low Medium High
Service diversification
Visa Inc.
MasterCard Worldwide
American Express
Discover Card
Strategy Comparison Report of MasterCard worldwide and Visa inc.
Figure 2: MasterCard worldwide summary Financials
Source: http://0-www.ibisworld.com.catalog.lib.cmich.edu/industryus/default.aspx?indid=1303
Strategy Comparison Report of MasterCard worldwide and Visa inc.
Figure 3: Visa Inc summary Financials
Source: http://0-www.ibisworld.com.catalog.lib.cmich.edu/industryus/default.aspx?indid=1303