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Card & Payments Industry Overview


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Focuses on : Credit Card Industry / Transaction level operation of a credit card / US Market / Past and Future Market

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Card & Payments Industry Overview

  1. 1. Cards & Payments Industry Overview Industry Study: Cards & Payments What is a Credit Card A credit card is a system of payment named after the small plastic card issued to users of the system. A credit card is different from a debit card in that it does not remove money from the user's account after every transaction. In the case of credit cards, the issuer lends money to the consumer (or the user) to be paid to the merchant. It is also different from a charge card (though this name is sometimes used by the public to describe credit cards), which requires the balance to be paid in full each month. In contrast, a credit card allows the consumer to 'revolve' their balance, at the cost of having interest charged. Most credit cards are the same shape and size, as specified by the ISO 7810 standard. What's in a Credit Card? 1. Name. The full name of the account holder -- the person who is responsible for paying the credit bill each month. 2. Issuer. The name of the company that is granting the credit and their logo. Issuers are usually banks and other financial institutions. 3. Type of Card. VISA, MasterCard, Discover, etc. 4. Account Number. a. First Six - Identify the issuer. b. Next four - Region/branch of issuer. c. Next five - Your account number. d. Final number - Digit for security. 5. Customer Service Number. This number is available if you should have any questions about your account or past transactions. There is also a number for lost or stolen cards. Write it down. 6. Magnetic Strip. This strip stores important information about your account such as name, account number, PIN, expiration date, and credit limit. 7. Expiration Date. Merchants require this information if you're making a purchase by phone or the internet. It lists the date your card will expire in Month/Year. Most cards are valid for 1-3 years before they expire. 1 Ankit Gupta
  2. 2. Cards & Payments Industry Overview Parties involved in the space of Cards & Payments:  Cardholder: The owner of the card used to make a purchase; the consumer.   Card-issuing bank: The financial institution or other organization that issued the credit card to the cardholder. This bank bills the consumer for repayment and bears the risk that the card is used fraudulently. American Express and Discover were previously the only card-issuing banks for their respective brands, but as of 2007, this is no longer the case.   Merchant: The individual or business accepting credit card payments for products or services sold to the cardholder.   Acquiring bank: The financial institution accepting payment for the products or services on behalf of the merchant.   Independent sales organization: Resellers (to merchants) of the services of the acquiring bank.   Merchant account: This could refer to the acquiring bank or the independent sales organization, but in general is the organization that the merchant deals with.   Credit Card association: An association of card-issuing banks such as Visa, MasterCard, Discover, American Express, etc. that set transaction terms for merchants, card-issuing banks, and acquiring banks.   Transaction network: The system that implements the mechanics of the electronic transactions. May be operated by an independent company, and one company may operate multiple networks. Transaction processing networks include: Cardnet, Nabanco, Omaha, Paymentech, NDC Atlanta, Nova, Vital, Concord EFSnet, and VisaNet.[2]   Affinity partner: Some institutions lend their name to an issuer to attract customers that have a strong relationship with that institution, and get paid a fee or a percentage of the balance for each card issued using their name. Examples of typical affinity partners are sports teams, universities and charities.   The flow of information and money between these parties — always through the card associations — is known as the interchange. 2 Ankit Gupta
  3. 3. Cards & Payments Industry Overview Today’s Cards & Payment world “Processors” PPI Paymentech Issuing Bank Acquiring Bank Vital Cardholder Internet Merchant Bank Global Payments Bank Card Card Card Presente Presente Presente Computer Dial-Up or d d d Frame Relay Authorized Authorized Authorized Or Or Or Telephone Satellite Declined Declined Declined When an authorization is Depository Bank received, funds are settled Terminal and deposited into the Merchant Bank merchant’s DDA account Cellular within 48-72 Hours PDA PCCharge PayMover VeriSign ICVerify 3 Ankit Gupta
  4. 4. Cards & Payments Industry Overview How does a Credit Card Work? 1. Cardholder Purchases. When you purchase something with a credit card (MasterCard in this example), the merchant first checks to see if the amount you've charged will be approved -- to make sure you haven't exceeded your credit limit. They do this by sliding your card through an electronic device that is connected to an approval network. Once accepted, you're given a printed receipt to sign. Both you and the merchant each keep a copy of the receipt. 2. Merchant. The merchant deposits the credit card receipt with their bank (acquirers), which credits their account in the amount, charged. 3. Acquirer Bank The bank then sends this transaction electronically to MasterCard. 4. MasterCard. MasterCard continues the transaction by crediting the bank and then charging the issuer of the card. 5. Card Issuer. The issuer of the card completes the transaction cycle by sending a bill to the card holder for the purchase amount. Hopefully, the card holder pays the bill in full thus avoiding any interest or finance charges.  4 Ankit Gupta
  5. 5. Cards & Payments Industry Overview How does online credit card processing work Credit card payment is the most common way of transaction, yet when it comes to understanding how credit card processing works most of us are quite confused. When a retail store cashier swipes your credit card through credit card terminal, the following process takes place: credit card and payment details are sent electronically to merchant’s acquiring bank, which contacts credit card issuing bank; in case transaction is approved, funds are deposited on the merchant’s account. Online credit card processing in ecommerce adheres to the same processing steps, except the physical credit card terminal that swipes your card in a retail store is substituted by payment gateway (Authorize.Net, 2checkout, CHASE Paymentech, etc.) – a service that processes online payments in a secure way. 5 Ankit Gupta
  6. 6. Cards & Payments Industry Overview Payment Processing Settlement Process: 6 Ankit Gupta
  7. 7. Cards & Payments Industry Overview US CREDIT CARDS INDUSTRY This report analyzes the U.S. market for commercial credit cards, dividing the market into its principal categories: 1. Purchasing cards 2. Corporate travel & entertainment cards 3. Small business cards 4. Fleet cards 5. Payroll/Prepaid cards and 6. Healthcare cards The commercial credit card market continues to excite card issuers because its potential, particularly among smaller companies, is virtually untapped. Despite the massive efforts of Visa, MasterCard and American Express (and to a dramatically lesser extent, Discover and Diners Club), at the end of 2005, card issuers had captured only two percent of the $16.2 trillion commercial consumption expenditure market. Companies, small, midsized and large, continue to rely overwhelmingly on cash, checks and Automated Clearing House (ACH) for their remittances. Companies have increasingly turned to commercial cards to replace more traditional labor intensive and inefficient paper payment procedures. As with the consumer market, segmentation is pervasive, with issuers competing to provide businesses with more custom tailored functions and payment services. Even as product-differentiation intensifies, there has been a simultaneous emphasis on one-card programs among issuers courting companies, mainly in the middle-market, with diverse functional payment needs. This fluidity among card categories and functions is likely to make one-cards the choice for companies looking to centralize spend control and to maximize processing efficiency. Cards by Type: Definitions • Purchasing cards – cards positioned in the market place to facilitate the acquisition of goods and services for a company. Corporate and purchasing cards are designed and marketed to mid- sized and larger businesses (generally, firms with more than $10 million to $20 million in revenues). The main draw of purchasing cards (Pcards) is their ability to increase payment efficiency and lower vendor remittance costs. Among the 1,200 companies surveyed in Visa’s 2005 Purchasing Card Benchmarking Survey, purchasing card use by corporations generated total overall transaction savings of more than $28 billion per year and reduced procurement cycle time by 68% on average. Purchasing cards were first launched as payment products for low-cost goods and services, principally maintenance, repair and operations (MRO) and office supplies, but they are increasingly being called upon for higher ticket spending (amounts over $10,000.) 7 Ankit Gupta
  8. 8. Cards & Payments Industry Overview • Corporate Travel and Entertainment cards – generally positioned for the wallets of executives and sales people who travel frequently and who spend significantly on dining out. Corporate travel and entertainment (T&E) cards like American Express and Diners Club were the first credit cards offered to businesses for expenses related to dining and travel. Traditionally, T&E cards were issued to employees who paid their monthly invoices and were later reimbursed by the company. With the move to epayment systems, T&E bills are increasingly processed centrally and paid by the employee’s company directly. Corporate travel, which experienced dramatic declines immediately after 9/11, has climbed back to pre-9/11 levels, largely helped by a rebounding global economy. In 2005, for example, both MasterCard and Visa and their bank issuers experienced a significant lift in corporate travel spend. T&E volumes rose by more than 20% for MasterCard and 9% for Visa. (Business Travel News, 5/30/2006) • Small Business cards – sold as rebate or rewards cards to smaller businesses, usually with sales of under $5 to $10 million. Small-business cards offer owners the ability to separate business from personal spending, while enjoying the flexible billing, fast payment and reimbursement turnarounds, and online account management provided by other card types. They are typically offered to companies with 100 employees or fewer generating annual sales of less than $10 million. Card associations/companies first differentiated their products in the small-business market by competing to provide the fastest turnaround time for crediting purchasing points in their rewards programs in order to ensure customer loyalty. Currently, points operate as only part of the overall package offered to small business owners. Issuers are providing sophisticated data reporting tools and adding card points and discounts linked with participating merchants in order to build program recognition and to drive card usage. Visa, MasterCard, and American Express have all added allied merchant card points to their rewards programs. This strategy gives issuers a reward platform from which they can customize their own offerings. This facilitates new customer segmentation, measurement and prospect modeling and provides access to their partners' customer databases. (Cards&Payments, December 2005) It also creates greater buy-in from merchants, whose revenue from co-branding or alliance efforts offsets the cost of increased interchange fees through heavier card use. Segmentation by industry vertical is also a key component of the drive to capture more of the small business market. MasterCard is pilot-testing cards for four segments – contractors, professionals, healthcare providers, and real estate – and has already introduced a product for employees of companies without mandated corporate card programs. American Express is focusing on the medical and construction industries. 8 Ankit Gupta
  9. 9. Cards & Payments Industry Overview • Fleet cards – tailored to the specific needs of commercial truck fleet owners and drivers. Fleet cards are used for the repairs, maintenance and refueling of business vehicles. When the card is used at fuel retailers, it captures data that enables issuers to offer company fleet managers detailed reports in order to track expenses and better manage employee spending. Like other card types, fleet/fuel cards also offer discounts, such as fuel at wholesale prices, and reward points at participating suppliers. Fleet cards can also function as general purchasing cards. • Payroll/Prepaid cards – offered by employers to employees and either loaded with a most recent salary or with employee incentive rewards. Within this category, an employee may receive access to wages at an ATM, at retail or through the Internet or receive a small dollar card usable at Starbuck's or similar vendors. • Payroll Cards - Payroll cards allow workers to electronically access their paychecks. Money is held in an employee’s bank account and employees withdraw it at ATMs or spend it by using the card at retailers. Employees do not have to rely on check cashing venues or their own banking accounts. Payroll card accounts are usually held as a single account in the name of an employer and hold the payroll funds for individual workers using the payroll card. Some payroll card programs establish a separate account for each employee. In some cases, employers load medical benefits onto these same cards, and government agencies rely on payroll cards to capture child support payments. (The Boston Globe, February 15, 2004) Prepaid Cards Prepaid cards are an extraordinarily cost-effective way for companies to eliminate having cash on their premises, since firms have to pay extra insurance to have that vulnerable currency around. For example, Dutch airline KLM developed a prepaid product to replace paper vouchers or checks that were issued to people whose flights were delayed or cancelled. MasterCard is working on a similar program with Austrian Airlines. While card vendors of open prepaid cards (which run on the Visa, MasterCard, AmEx, etc. networks) have been offering customizable cards for years, Visa and MasterCard are only recently throwing their clout into this market. Rather than just allowing companies to sell their products, Visa and MasterCard are reclaiming their brand leadership and are selling their own products, thereby relegating the vendors in the acquisition channel to the co-branded, rather than lead role. Just in time for Christmas 2006, MasterCard, working with KeyBank, introduced a customizable prepaid gift card for businesses to distribute to employees or vendors. Each card is imprinted with the buyer’s logo and includes a personal message to its 9 Ankit Gupta
  10. 10. Cards & Payments Industry Overview recipient, such as “congratulations,” “happy holidays” or “here’s to a successful new year.” The cards can be loaded with dollar values ranging from $10 to $500 and MasterCard is assessing how to market this prepaid product in conjunction with other bank partners. Noting the growing popularity of prepaid cards as gifts, Bruno Perreault, group head of global small business and mid-sized enterprises at MasterCard Worldwide, said businesses are drawn to the product and "we've even had some very large companies find us through a search engine and buy hundreds of cards." (Marketing Daily, December 14, 2006) Health Care Cards - this category includes cards for Health Savings Accounts, Flexible Spending Accounts and Health Reimbursement Accounts and are also offered by employers and loaded with a stored value amount. With these products, the card value represents the dollars the employee has set aside for medical expenses and they can be used at doctors' offices, hospitals or pharmacies. Cards linked to health savings and flexible spending accounts are gaining in popularity as employees turn to plastic to manage their out-of-pocket expenses. Employees use the cards to tap stored funds, which were put aside by employers and/or employees specifically to pay for healthcare and other expenses. There are three main types of accounts: health reimbursement accounts (HRAs), flexible spending accounts (FSAs) and health savings accounts (HSAs). According to the U.S. Department of the Treasury, HSAs numbered 3.2 million in January 2006, up from 400,000 in September 2004. The Treasury Department also reported that the number could increase to 45 million accounts by 2010. In just two years, the Inside Consumer-Directed Care (ICDC) newsletter (through a survey of HSA administrators and custodians) found that Americans had opened more than 820,000 accounts and were opening approximately 60,000 each month. The survey found that the average balance held in HSA accounts was $1,181. By 2010, BearingPoint expects HSA, FSA and HRA accounts to hold collective assets of $60 billion. (Cards&Payments, November 2006) 10 Ankit Gupta
  11. 11. Cards & Payments Industry Overview THE MARKET SIZE AND POTENTIAL OF COMMERCIAL CREDIT CARDS Market Projection: U.S. Commercial Card Spending to Reach $1.2 Trillion in 2010 By 2010, U.S. corporate spending is expected to rise to $18 trillion, making the potential for the commercial credit card market enormous, in a current environment where credit cards only capture about 2% of those dollars. In 2004, Packaged Facts sized commercial cards as a $495 billion market. With the introduction of new products (payroll and healthcare cards) and an ambitious focus on migrating small business purchases to plastic products, we see the commercial card market growing 144%, from our 2004 estimate, to $1.2 trillion by 2010. Commercial Cards, By Segment (Historical and Forecast) Notes: The Corporate segment is mid- and large-sized corporations only--corporate cards for small businesses are in the Small Business segment. T&E cards are captured in the corporate segment. Fleet cards are in the Purchasing segment. Source: Packaged Facts Financial Insights projects that the commercial credit card market will remain highly competitive over the next several years. Visa, which edged out American Express as the top brand in 2004, is expected to gain even greater dominance by 2009, capturing 48% of the market by that year. MasterCard will also increase its share of transaction volume at American Express’s expense, owning 26% of the market in 2009. American Express will make up 24% of the market in 2009. 11 Ankit Gupta
  12. 12. Cards & Payments Industry Overview MasterCard and Visa Gain a Bit at AmEx’s expense Both MasterCard and Visa will continue to achieve significant gains through improved card functions and features and the growing acceptance of commercial credit cards as payment tools. U.S. Commercial Credit and Debit Card Spending Share by Brand, 2004 (%) Corporate America to Increase Use of Credit Cards Source: Packaged Facts U.S. Commercial Credit and Debit Card Spending Share by Brand, 2010 (%) Source: Packaged Facts 12 Ankit Gupta
  13. 13. Cards & Payments Industry Overview Some industry analysts have foreseen a contraction in market share owned by American Express over the next several years, but Packaged Facts estimates American Express will continue to hold its own in the marketplace. While AmEx has been distracted by its anti-trust lawsuit against Visa and MasterCard and its efforts to line up bank issuing partners, it will refocus its efforts on branding, advertising and growth during 2007 and 2008. We see American Express owning about 30% of the commercial card transaction pie by 2010. Also, with its brand clout among Asian-American cardholders, AmEx is uniquely positioned among the card issuers to leverage that brand loyalty as it bolsters its presence in the emerging Asian card issuing landscape. Corporate America to Increase Use of Credit Cards A study by Visa USA reinforces the idea that corporate America will increase its use of commercial credit cards in the future. The survey found that 63% of 400 financial executives and cash managers intend to use cards more often, while about 53% reported that they currently use cards, a jump from 41%, according to a similar survey conducted in 2005. Greater use of cards marks a shift from reliance on paper transactions, with 40% of respondents saying that checks made up more than half of their corporate payments this year, versus 66% last year. (Cardline, October 18, 2006) Visa commercial cards in circulation totaled 26.8 million in 2005, up 16.5% from 23 million in 2004. Commercial card sales rose 23.7% to $142.3 billion in 2005 from $115 billion in 2004. In November 2006, Visa USA reported that through the third quarter of 2006, small business purchase dollar volume on its business cards was growing at a 21% annual rate, while total commercial spending on its business cards was increasing 23%. Visa noted that its "VISA Business" products experienced growth of 24.1% year-over-year, driven by the increased use of credit and debit cards by small businesses for integrated reporting, cash flow management and rewards. Significant Obstacles Loom to Greater Commercial Card Acceptance Even with more pronounced card usage, commercial cards still lag as the primary payment method and make up a small share of total commercial spending. Significant obstacles to increasing the use of epayments remain, including data integration challenges, and continued preference for checks as the main payment method in the B2B environment. Market Potential by Card Type Among the specialized products in the commercial credit card universe, usage is up smartly. After several years of flat performance, T&E usage is once again experiencing a lift, thanks to an uptick in business travel and higher hotel and airline fees. The most dynamic card segment is the small business credit card market, where card associations are positioning themselves as the GoTo resource for companies regardless of their size. 13 Ankit Gupta
  14. 14. Cards & Payments Industry Overview Payroll cards have also made strides, providing an attractive alternative to traditional wage remittance instruments (like checks), particularly for the unbanked. Cards associated with healthcare accounts are also gaining momentum as companies increasingly embrace these consumer funded accounts as the trend toward consumer-driven health plans continues. Purchasing Cards: Purchasing card use continues to grow at impressive rates. The RPMG 2005 Purchasing Card Benchmarking Survey Report found that annual purchasing card spend in North America grew from an estimated $80 billion to $110 billion between 2003 and 2005, and is expected to increase by about 11% per year over the next five years, reaching $185 billion in 2010. The survey also found conspicuous growth on all performance indicators: • 22% increase in organizational monthly spend • 78% increase in monthly spend per card • 33% increase in monthly transaction per card • 35% increase in spend per transaction Fortune 500 companies led the way in p-card use, reporting 34% growth from 2003-2005, with government and nonprofits increasing their spend by 15%. The Aberdeen Group, a Boston-based consulting and research firm, reported that purchasing card expenditures grew at a compounded annual rate of approximately 21% from 2000 to 2005. Transactional volumes grew 15% per year during the same time period. The Aberdeen Group’s findings come from their report, “The Purchasing Card Benchmark Report - Best Tactics to Increase Program Growth,” released in March 2005. P-cards still represent only a small fraction of total corporate transactions, however. According to Visa’s Commercial Consumption Expenditure Index, purchasing cards comprise just 2% of B2B spending in the United States. (Supply & Demand Chain Executive, February/March 2006) Fleet Cards With fleet cards poised to migrate fleet owners from cash to plastic, Wright Express and U.S. Bank Voyager, which together own 90% of the fleet card market, are positioned to grow at an annual compound rate of 16% through 2010. Both Wright Express and Voyager are developing and marketing private-label fleet card programs to gasoline brands and retailers. For private-label issuers, including oil companies, such as Marathon Oil and ExxonMobil, and convenience store chains, such as Wawa, the cards allow the chains to target local businesses with one to 25 company vehicles. Private-label cards, like those offered by Wright Express, Voyager, AutoGas and Comdata, offer marketers a host of amenities such as increased store traffic and brand recognition. 14 Ankit Gupta
  15. 15. Cards & Payments Industry Overview Corporate Travel & Entertainment Cards T&E cards enjoy significant market penetration in the United States. Of the $193 billion that corporations spend on travel each year, roughly $120 billion is captured on T&E cards, according to the Visa 2004 Corporate Travel Card Benchmark Survey. Spending on travel cards by business and government in North America is currently about $120 billion per year and expected to grow at an annual rate of about 8% over the next five years, according to the study. Market for Travel and Entertainment Cards Source: Visa 2004 Corporate Travel Card Benchmark Survey projections Rising air, hotel and car rental prices have help revive T&E expenditure after several years of flat performance. According to American Express Business Travel, corporate domestic and international travel spending should continue to grow about 4.5% and 4.6% respectively. American Express's corporate T&E volume jumped 10% from 2003 to 2005, inching the dominant commercial payment provider back above 2000 levels. The growth in T&E charge card spending comes on the heels of comparable growth in 2003, which followed two years of flat volumes. American Express, during its annual earnings call for 2006, said cards in force and spending per card grew in 2004. "On the corporate card side, a brand new relationship that no one has owned is very unusual because these are big, sophisticated companies," Webb said. "It's more a question of winning market share or further penetrating your existing relationships. Even within the big companies that manage T&E very well, there's often an opportunity to get greater compliance or get a new division." 15 Ankit Gupta
  16. 16. Cards & Payments Industry Overview Spend on Corporate T&E Cards in US 2004 Source: Palmer-Gupta Study Payroll/Prepaid Cards Payroll cards, which give employees immediate access to their wages, have suddenly caught fire as their attractiveness both to employers and to employees has become clearer. Research from Boston-based consultant Aite Group estimates that “open loop” (cards with an all purpose payment brand such as Visa, MasterCard or American Express) payroll card use is expected to grow to $27.1 billion in spending by 2009, from just $2.7 billion in 2004, with a compound annual growth rate of 59% during that time. (“Use of Payroll Cards Grows,”Detroit Free Press, July 13, 2006) Payroll Card Growth Prospects ($ in billions) Source: Aite Group LLC 16 Ankit Gupta
  17. 17. Cards & Payments Industry Overview Growth in the payroll segment is expected to take place at an astonishing compound annual growth rate of nearly 105% from 812,500 cards in 2004 to 14.2 million cards in 2008, according to Credit Research Foundation survey. The payroll card market’s dynamism is fueled by a flurry of activities, including acquisitions of major industry players, the expanded use of “open-loop” prepaid cards and the attractiveness of cards beyond their original target users – the unbanked – to those employees with banking relationships. Recent Mergers & Acquisitions in the Prepaid Sector *Subsidiary of bank-holding company Marshall & Ilsley Corp. Source: Aite Group LLC, Digital Transactions The Potential Market for Prepaid Cards Prepaid corporate cards will be a significant player in the commercial market going forward. These cards have been around in the B2C space but not in the B2B except in the form of payroll cards. Packaged Facts anticipates usage to increase not only for payroll but for employee reimbursement as well as gifts to vendors. In fact, Visa USA sees a nearly $1 trillion opportunity in just four applications for prepaid cards, according to Stephen Diamond, Visa Vice President of Prepaid Products. Speaking at Prepaid Media’s 2006 Prepaid Card Expo in Orlando, FL, Diamond said Visa sizes the potential market for travel cards at $500 billion, gift cards at $200 billion, cards for teenagers at $160 billion, and corporate rebate and incentive cards at $125 billion. Source: Visa data, 2005 17 Ankit Gupta
  18. 18. Cards & Payments Industry Overview Small Business Cards Small business cards represent a huge potential market for issuers. Only 10% of small business spending is through small-business cards and only 35% of small businesses use such cards, according to Sastry Rachakonda, Director of the Discover Business Card. (Business Week Online, June 2006) Still an emerging category, the small-business credit card market has grown more than 20% since 2002, with its payment volume growing at twice the rate of consumer credit cards, according to a report from Mercator Advisory Group. Small business cardholders spent $364 billion on the cards in 2005. Health Cards (Health Reimbursement, Health Savings and Flexible Spending Account Cards) Created by Congress in 2003, HSAs are a new product and Packaged Facts estimates card usage for these accounts will grow to reach $60 billion by 2010. The percentage of transactions made by debit credit cards withdrawing from FSAs, HSAs and HRAs has increased significantly from 2003 to 2005. According to WageWorks, a San Mateo, CA-based firm, the proportion of debit card transactions increased from 46% in 2003 to 76% in 2005. The proportion of dollars spent through card transactions grew from 38% to 71% during the same period. (Employee Benefit News, October 2006) According to the U.S. Department of the Treasury, HSAs numbered 3.2 million in January 2006, up from 400,000 in September 2004. The Treasury Department also reported that the number could explode to 45 million accounts by 2010. One Card The corporate one card market is projected to explode, outpacing the purchasing card in use in the next three years. According to a national study by RPMG Research, by 2006 more than 60% of corporate card users planned to use “one card” solutions versus traditional purchasing cards, up from 46% in 2003. 18 Ankit Gupta
  19. 19. Cards & Payments Industry Overview ADVERTISING & MARKETING Marketing Strategies Advertising Expenditures of Major Card Companies The card industry's top 20 advertisers paid a combined $2.1 billion to get their messages across in 2005, with American Express accounting for roughly one-fourth of the total, according to TNS Media Services, a United Kingdom-based company that tracks U.S. media spending. In 2005 the top 20 advertisers spent a combined $2 billion on advertising. AmEx Spent More than Half a Billion on Advertising in 2005 Citing TNS's data, Cards&Payments reported in its April 2006 issue that AmEx spent $519.8 million on advertising in 2005, up 63.5% from $318 million in 2004. Members of Visa and MasterCard were cleared to issue American Express cards in late 2004, when the U.S. Supreme Court upheld lower-court rulings that lifted association policies preventing them from doing so. That litigation and the subsequent decisions by some banks to issue AmEx cards was the most important factor in the AmEx spending increase, contends Tom Britz, senior principal at Thomas Marketing Group. Filling out the top five ad spenders in 2005 were Visa USA, $329 million, down 3.3% from $340.4 million in 2004; MasterCard, $322.8 million, down 9.8% from $326 million; Capital One, $317 million, down 8.7% from $347.1; and Citigroup, $314.8 million, down 24% from $411.7 million. In July 2006, Advertising Age published its annual list of U.S. "mega-brands" as defined by total measured advertising expenditures in 2005. The biggest financial brands were American Express and Citigroup, tied at number 14 in the mega-brands ranking, each spending $590 million on advertising in 2005. Seventeen other financial services brands made Advertising Age’s list of the top 200 advertisers. 19 Ankit Gupta
  20. 20. Cards & Payments Industry Overview Financial Services Companies in Advertising Age’s Top 200 Advertisers ($ in millions) Source: Advertising Age, July 2006 Brand Strategies of Largest Card Companies Sports Sponsorships Sport sponsorships are a dynamic channel that financial services companies use to gain an edge with customers and against competitors. The big credit card companies are particularly fierce in their sponsorship competitiveness and in 2006, that battle became quite public. MasterCard’s 2006 World Cup television advertising ran in 39 countries. One ad, “Fever,” featured fans cheering in scenes filmed in 30 different countries. Without dialogue, the commercial is not language dependent and so works in any market. While MasterCard has sponsored the World Cup since 1990 and has spent millions on marketing and advertising during the event, on top of the estimated $35 million it spends for its World Cup sponsorship rights each year, that relationship almost suddenly ended. Much to MasterCard’s dismay, that sponsorship relationship was almost handed over to Visa by the Federation Internationale de Football Association (FIFA). MasterCard promptly sued the FIFA in New York U.S. District Court, contending that the FIFA had violated the terms of its arrangement by drafting an agreement with MasterCard and then signing a contract with Visa. The court agreed with MasterCard, ruling that for MasterCard, World Cup sponsorship was priceless. (BBC News, December 12, 2006) 20 Ankit Gupta
  21. 21. Cards & Payments Industry Overview Visa Sponsorships Visa is at the forefront of corporate sponsorships with its support of the Olympics (about $20 million a year, according to IEG, Inc.) Visa is also an active partner of the National Football League, the Rugby World Cup and the Paralympics. According to IEG, Inc., Visa spending on sponsorships was almost $125 million in 2006. American Express Sponsorships Among the large card companies, American Express trails both Visa and MasterCard as a sponsor of events in the United States, spending almost $40 million on sponsorships in 2006. AmEx supports the U.S. Open and provides more than $31 million to grant recipients in three major program areas: Economic Independence, Cultural Heritage and Community Service. Contests and Sweepstakes – Involving the Customer MasterCard Contest Card issuing companies are tremendously interested in integrating the Internet and its interactive features into their marketing initiatives. By involving their own customers in the development of their marketing campaigns, companies like MasterCard hope to involve customers in the life of their products and to not only capture share-of-wallet, but capture share-of-mind-and-heart. In March 2006, MasterCard asked its customers to wear the hat of advertising copywriter in the next evolution of its "Priceless" campaign, which names a product or service, along with its corresponding price. Small Business Sweepstakes from MasterCard In September 2006, MasterCard launched a sweepstakes offering small businesses an opportunity to win $50,000. MasterCard dovetailed its “Build Your Business” sweepstakes with its proprietary research showing that 55% of U.S. small-business owners said that $50,000 would have a significant impact on their business. Visa Savings for Business Contest and Small Business Makeover Contest At the end of 2006, Visa ran a “Visa Savings for Business” contest for its small-business cardholders. The company included an insert with a unique PIN number in each of its year-end Visa Business card statements and cardholders checked a website to see if they had won a prize. AmEx Takes a Philanthropic Direction Melding a traditional contest with its philanthropic direction, the American Express small business arm, OPEN, and Count Me In, a nonprofit organization that works with entrepreneurs, formed the Make Mine a Million Business Program to push one million female business owners past the million-dollar revenue mark by 2010. 21 Ankit Gupta
  22. 22. Cards & Payments Industry Overview THE COMPETITIVE LANDSCAPE The commercial credit card market will remain highly competitive over the next several years. Visa, which has caught up with American Express as a leading brand in this segment, will continue to gain market share through 2010. However, American Express is by no means down for the count. And neither is MasterCard. American Express will continue to grow its roster of bank network partners, which will give banks an opportunity to stress the rewards, services, fees and benefits of AmEx. While Visa and MasterCard have plotted American Express’s extinction for years, the appearance of a bank-issuing platform for AmEx has revived and invigorated the brand. MasterCard has been rejuvenated by its successful IPO and by winning its World Cup sponsorship suit against Visa, and much to Visa’s annoyance, both MasterCard and American Express stand poised to capitalize on their significant gains through improved card functions and features and the growing acceptance of commercial credit cards as payment tools. And watch out for Discover Card, which, in the summer of 2006, launched an innovative business product called the Discover Business Card. U.S. Commercial Credit and Debit Card Spending Share by Brand, 2004 and 2010 Source: Packaged Facts Top U.S. Commercial Card Issuers — 2005 Source: Packaged Facts 22 Ankit Gupta
  23. 23. Cards & Payments Industry Overview PAYMENTS INDUSTRY Value and Volume of U.S. Transactions, 2001, by Payment Type Source: Celent Communications website MasterCard, like Visa, is seeing heightened and increasingly robust competition from both American Express and Discover, which are now being offered by banks that for years had only been allowed to offer VISA and MasterCard. Citing 2002 Celent Communications research, MasterCard says that more than $31 trillion worth of transactions occur in the U.S. B2B market but that only one percent of those transactions are initiated with commercial payment cards. According to Steve Orfei, Senior Vice President of e-Commerce and e-B2B, MasterCard International, “A core belief at MasterCard is that the adoption of electronic B2B payment systems is largely dependent upon the automation of the broader financial supply chain, from invoicing through payment settlement to reconciliation.” (“MasterCard e-B2B Solutions: The Choice Strategy for Seizing a $30 Trillion Opportunity,” 2003) 23 Ankit Gupta
  24. 24. Cards & Payments Industry Overview The Changing Landscape: Industry Transformation 24 Ankit Gupta
  25. 25. Cards & Payments Industry Overview The New Laws of the Payments Jungle  Payments profitability has begun declining with the electronification of payments  There are new competitors, and new laws of survival  To succeed, new partnerships will be necessary to create new levels of value  This will require a paradigm shift for the industry  Those who adapt quickly will rule Changing Drivers Past Competitors Emerging Competition Banks New Business New Models/New Globalizatio Rules Technology n Thrift Savings & Loans 25 Ankit Gupta
  26. 26. Cards & Payments Industry Overview Payments Volume Migration Billion 140 CAGR (04-09) 120 Electronic Payments 100 12% Checks Converted 80 Non-Cash Payments Trends 2000 – 2009 Checks Paid 60 40 22% 20 -6% 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Source: “The Payments Map: Guide to the U.S. Payments Business,” September 2006, Global Concepts/McKinsey & Co. Consumer Payments Migration 100% 90% 80% 70% Other paper Other electronic 60% Checks Share Value Consumer Payment Usage Total 50% Cash of $ Debit card 40% Credit card 30% 20% 10% 0% 1990 1995 2000 2005 2010 Source: “Insight into Corporate Payment Trends: the VICOR Corporate Payment Progress Index,” October 2006, Celent, LLC 26 Ankit Gupta
  27. 27. Cards & Payments Industry Overview Corporate Payments Migration Payments Revenues & Growth; 2005 & 2009 (Billions) 27 Ankit Gupta
  28. 28. Cards & Payments Industry Overview The Old Payments Jungle  Primarily paper-based  Geography mattered – branches close to the customer  Float was big business  Corporations absorbed majority of risk  Solid payment processes – check, ACH, card, wire  Fragmented governance and payments infrastructure  Few competitors – banks, thrifts, savings & loans Few Years from Now: A New, More Complex Jungle  Primarily electronic payments with straight-through processing  Payments are a commodity  Float is negligible  Customer & bank risk has been greatly reduced  Payments convergence enables greater efficiency  Significant consolidation of players, enabling new efficiencies and leveraging of payment information to improve corporate earnings  Strategic sourcing has increased value/quality/cost efficiencies New Competitors: - Banks - Core Processors - ERP Providers - Non-Bank Financial Services Providers - Major Technology Providers - Retailers Financial Insights 2007 - North American Commercial Payments Study Results  “Payments are converging into a new type of transaction model – one that…features an adaptive framework to seize market opportunities by adding value around payments and other corporate banking services that use payments.”  “88.1% of (corporate) respondents envisioned their company becoming more dependent on their bank over the next two years…corporations see banks as crucial partners.” Competing in the New Jungle of Payments World:  Straight through processing  Payments electronification at earliest point  Payments convergence  Increased visibility and access to payment information for both financial services providers and their clients 28 Ankit Gupta
  29. 29. Cards & Payments Industry Overview  Industry collaboration  Partnerships – among banks, corporations, technology vendors and outsourcers – will create new levels of value Evolution of the New Jungle  PNC – Healthcare  JP Morgan Chase – Insurance  Bank of America – Remittance  Certegy, Global Payments – Casinos  HSBC – Payment Services for NAFTA Firms  Mysis Healthcare - Acquired Payerpath  Commerce Bank/BancTec – Claims Processing  U.S. Bank/InstaMed - Healthcare payments  Wachovia Treasury Services/Payformance -PaySpan Health Service  Bank of New York/ Mellon - Claims and payments processing  Fiserv – CheckFree Acquisition A Report: The World Payments Report 2007 reveals that 58% of banks already plan to, or are, outsourcing all or part of their payments activities in the next five years. Sixty-eight percent plan to offshore this activity as well. Other key findings of the World Payments Report 2007 are: • Cash remains the predominant payment instrument in Europe, and there are still no clear initiatives to replace cash in order to reduce the cost of cash to society. • Europe needs an “any card at any terminal” solution. The card market is growing at over 10% per year and will remain the leading non-cash payment instrument. Banks should consider forming a new European debit card scheme to replace existing national schemes. • The Payments Institutions created under the Payment Services Directive are unlikely to present a serious competitive threat for banks until 2011. • The top 10 banks in the 2012 European market will each process approximately five billion transactions per year. • Banks are repositioning their business models and turning to open architectures to enhance product offerings, outsource/insource payments and provide integrated services to their clients. 29 Ankit Gupta