From virtually the moment the first bank credit card was issued in 1951, Visa USA Inc. and MasterCard International Inc. have dominated the card business -- and the billions of dollars in interest charges and fees that accrue each year from the nation's addiction to plastic. Diners Club, Discover, and American Express (AXP ) have all tried to break the two titans' grip on the card game -- but with only middling success. That could soon change, thanks to a little-noticed move in December by the Justice Dept. to drop its early opposition and bless First Data Corp.'s (FDC ) $6.8 billion deal for Memphis-based Concord EFS Inc. (CE ).
IT'S ALL ABOUT FEES
While the merger between the two relatively low-profile payment-processing companies got scant attention outside banking circles, industry experts believe First Data now can make inroads where those other rivals couldn't. The reason: First Data's ownership of vast electronic- payment networks will provide it with a flow of fees the other rivals to MasterCard and Visa never had. With the merger, First Data will soon help process more than 37% of all credit-card transactions, and 82% of all money transfers via its Western Union (FDC ) subsidiary. And, thanks to its imminent control of the 70 million debit and ATM cards issued by banks that use Concord's Star network, it will handle nearly half of the booming activity in debit cards, which should surpass credit cards in number of transactions in 2004.
In the near term, the merger will boost First Data's $7.6 billion in revenues by $2 billion -- mostly by charging fees for running the networks retailers tap into when customers pay via credit or debit card. Potentially more important, analysts believe the merger positions the Denver-based company as an alternative for merchants and banks who have long chafed under Visa and MasterCard's onerous restrictions and high fees -- particularly on debit transactions. Wal-Mart Stores Inc. (WMT ) recently said it would no longer accept MasterCard's signature-based debit card as of February. Instead, it will nudge customers toward PIN-based debit cards -- a market that Concord dominates. Other retailers could follow. "I think in the future you're going to see more retailers push for customers to use PIN-based credit cards for security reasons," says Steve Knopik, president of Beall's Inc., a 479-store chain of department stores based in Bradenton, Fla.
Over time, industry watchers expect First Data to take the next step and offer banks its own credit cards. These cards would be co-branded with the banks, as Visa and MasterCard do today, but First Data could give the banks a bigger cut of each transaction fee than they now get from Visa and MasterCard. Banks, in turn, would probably try to win over consumers to the new cards by charging them lower fees or interest rates. The merger "makes First Data the 800-pound gorilla of the payments business," says Avivah Litan, research director for financial services at market researcher Gartner Inc. "Banks and retailers would now have a way to bypass Visa and MasterCard and keep more of the money for themselves."
First Data officials dismiss any plans of launching a frontal assault on Visa or MasterCard. But they readily agree that the explosive growth in debit cards is changing the game. By being first to market with emerging technologies -- such as the biometric cards now in development that use thumbprints for security -- First Data believes it can grab a bigger share of the payments pie. "We're at the cusp of a tremendous amount of change," says Scott Betts, president of merchants services for First Data.
MasterCard execs aren't talking, but Visa officials remain confident that merchants and banks will find it hard to walk away from its popularity with consumers and its ubiquitous presence around the world. "We've got a global payments structure and a strong brand that's trusted by consumers and that continues to facilitate the introduction of new products," says Visa Senior Vice-President Albert Coscia.
First Data would have to spend considerable time and money if it hoped to match that. But if more retailers follow Wal-Mart's lead, Visa and MasterCard could find there's a sharp new dealer in the card game.
By Dean Foust in Atlanta