Incorporated: 1966
SIC: 6153 Short-Term Business Credit
MasterCard is one of the major credit cards used regularly by people in the United States, second only in name recognition and worldwide billings to Visa. By marketing itself to ordinary men and women, in contrast to Visa's efforts to capture an upper-income clientele, MasterCard is slowly chipping away at Visa's market share in both the United States and other areas around the globe.
In 1951, the Franklin National Bank (presently European American Bank) issued the first modern credit card, which was accepted by local merchants. Within a short period of time over 100 additional banks started issuing cards. Cardholders paid their bills upon receipt, and no fee or interest was charged. Merchants were charged a fee by the issuing bank for any transaction made on the card. Because these cards could only be used within a limited geographical region, customer volume was low and the banks' profits minimal.
The Bank of America, based in California, introduced BankAmericard (later Visa) in 1958, and soon developed an extensive network of licensee banks throughout the United States by licensing a single bank as its local affiliate in each major metropolitan area. Each of the licensee banks assumed the responsibility for enrolling cardmembers in their particular geographical area, as well as for reaching agreements with merchants to accept the card as payment for merchandise or services.
At approximately the same time, a group of American bankers who were not part of the BankAmericard association decided to organize their own network and accept one another's credit cards. On August 16, 1966, these bankers formed the Interbank Card Association (ICA) to organize, manage and oversee the functions associated with credit card payments, including authorization, clearing and settlement. ICA was the umbrella organization for Master Charge, whose name was later changed to MasterCard. In order to identify both merchants and Interbank Card Association members, the symbol "i" was created and placed on cards and at purchasing locations.
ICA was unlike BankAmericard in that the association was not dominated by one bank but rather governed by consensus among its member banks. Committees supported by an extensive staff were set up to operate and supervise the activities of the association. Besides establishing guidelines for card authorization, clearing and settlement, the Interbank Card Association assumed responsibility for marketing the card, in addition to providing security and legal representation to protect the association's trademark. ICA wasted no time in entering the international market by forming close ties to Banco Nacional de Mexico (Banamex) in Mexico in 1968, and with Eurocard International in continental Europe. During the same year, ICA added the first Japanese members to the association.
In 1973, ICA developed INAS, a centralized computer network designed to electronically link the acquiring member or merchant to the issuing member or financial institution. This computer network provided the issuer and merchant with the ability to communicate quickly and directly, and replaced the time-consuming telephone exchanges once required for authorizations. In 1974, ICA made the magnetic strip an international standard on all its cards in order to hasten authorization and reduce fraud. In 1975, a system called INET was introduced to provide an electronic exchange of transactions among its members, thus reducing the necessity of actually mailing charge slips by automating the entire transaction process. In 1979, ICA changed both the name and trademark of Master Charge to MasterCard in order to reflect the broadening of the association's services beyond the charge card itself. During the mid and late 1970s, Access Ltd. from the United Kingdom, Standard Chartered Bank of South Africa, and the first Australian member became part of the association.
All this apparent success notwithstanding, MasterCard's billings and number of cardholders began to decline with respect to another charge card system, Visa. The board of directors at ICA, dissatisfied with MasterCard's performance, pressured the president, John J. Reynolds, to implement some changes they believed were long overdue. But Reynolds response was viewed by many board members as less than satisfactory, and he was asked to resign his position.
In February of 1980 the ICA board of directors appointed Russell E. Hogg, a former executive at Macmillan Inc. with extensive experience at American Express Company's Card Division, as the new president. Taking his cue from the board of directors, Hogg immediately instituted sweeping changes within Interbank: he redrew the company's organization chart and created horizontal reporting lines, thereby encouraging communication among employees and eliminating the longstanding classic hierarchical structure to which Reynolds had adhered; he relocated several of the company's support divisions to St. Louis and placed them under new supervision; he completely eliminated all jobs dealing with increasing U.S. members since Hogg believed that the domestic credit card market was saturated; and he summarily fired eight of the highest level officers in the company.
Even with these changes, Hogg faced an uphill climb in his efforts to turn MasterCard into a frontrunner ready to compete with Visa. Despite the fact that a large majority of U.S. banks who issued credit cards already issued both Visa and MasterCard, Visa clearly had created an international identity for itself. Before changing its name to Visa in 1977, BankAmericard had been issued under approximately 20 names around the world. Yet by 1980, it had consolidated its image and identity under the Visa trademark. MasterCard, on the other hand, not only had difficulty convincing its U.S. members that the name change from Master Charge was beneficial, but also suffered from an identity which was fragmented by affiliates and a myriad number of joint ventures in both Europe and Asia.
Hogg's strategy was to concentrate on developing and expanding MasterCard's line of products and services. In 1981, the company introduced MasterCard Travelers Cheques and during the same year brought out the Gold MasterCard card, which was the first attempt by the company at market segmentation. In 1983, MasterCard started its Emergency Card Replacement program and also included a laser hologram on all its cards in order to combat user fraud. Keeping pace with Visa, especially its vast, state-of-the-art, highly sophisticated electronic communications network, was also not an easy task. In 1984, Hogg supervised the launching of Banknet, MasterCard's global packet-switching network that enables its international card acceptance locations to authorize transactions. At the same time, Hogg decided to incorporate INET into Banknet and adapt INAS on the system to more efficiently transmit authorizations from member to member. Like Visa, MasterCard also implemented an automated point-of-sale program to improve its authorization system worldwide.
Since affinity cards had been such a huge success in Japan, in 1985 the Card Program Development Group was formed and immediately introduced the MasterCard BusinessCard for the international market. There were now over 120 million MasterCard cardholders throughout the world. In 1986, a MasterCard office was opened in Hong Kong, the first in the Pacific Rim region, and one year later MasterCard arranged to become the first credit card issued in the People's Republic of China. During this time, the company opened a regional office for Latin America in Miami, and both cardholders and members were offered the full range of Banknet services at locations around the world.
In 1988, Hogg purchased Cirrus, the largest automated teller machine (ATM) network in the world, for $34 million. MasterCard also acquired a 15 percent interest in Eurocard International. Yet just at the time when the 20th million MasterCard card was issued in the Pacific Rim area, and the first MasterCard card was issued in the Soviet Union, the board of directors at Interbank began to show their displeasure with Hogg's aggressive management style. Representing over 28,000 member banks, the ICA board of 25 directors criticized Hogg for spending too much money on unsuccessful projects such as travel vouchers and "smart cards," and accused his management team of providing unreliable data on MasterCard's market share of charge-card billings. Disagreement and competing interests within the board of directors itself prompted Hogg suddenly to resign in July of 1988.
The board of directors decided to appoint Alex W. Hart as the new chief executive officer and president. A longtime executive vice president at First Interstate Bancorp., with extensive experience in credit card management, Hart began a program to solve some of MasterCard's management problems by establishing regional boards of directors in Europe, Asia, and South America. In 1989, Hart supervised the launching of the MasterCard ATM Network. MasterCard also handled a local settlement in Venezuela, the first time the company processed this function outside the United States mainland. At approximately the same time, the company offered the MasterCard Card Processing Service, which helped members outside the United States begin to issue cards and acquire programs quickly and inexpensively through the use of a microcomputer.
In 1990, the MasterCard ATM Network was combined with CIRRUS to create the MasterCard/CIRRUS ATM Network. This network provided cash access for cardholders of MasterCard at over 50,000 locations worldwide. In addition, Hart negotiated with organizers of the 1990 World Soccer Cup to become the official card for that event; his effort was well repaid since MasterCard was enormously successful in heightening brand recognition by capitalizing on the sporting event with the largest worldwide audience in 1990. At the same time MasterCom, developed two years earlier to send images of sales slips from one bank to another electronically, was implemented as a global service. Also during the same year, Banknet started to process currency transactions in India.
In 1991 MasterCard introduced Maestro, a worldwide debit system for cardholders of participating institutions including Eurocard International, Eurocheque International, and other ATM networks in the United States. Created in order to compete with Visa's Interlink system, both systems are highly sophisticated on-line, point-of-sale debit systems which process authorization, data accumulation, and debiting on an individual's bank account. Both Visa's and MasterCard's debit programs make use of a bank's proprietary debit card. Carrying either one or the other association's mark, the card can be used instead of cash and checks at locations where their mark is displayed. Ordinary retail transactions, such as day-to-day purchases at supermarkets, gas stations, and convenience stores, are the primary market for use of a debit transaction.
MasterCard processed its first Maestro debit transaction in August 1992. Interlink, on the other hand, surpassed 120 million transactions for holders of its debit card by the same time. By the beginning of 1993, Visa's Interlink debit program was far ahead of MasterCard's program: Interlink counted more than 16 million debit cardholders while MasterCard reported only 800,000. Both Visa and MasterCard recognize that banks will only need one debit brand and will not agree to using both, so competition is growing more and more intense between the two companies.
With its aggressive advertising campaign starting in 1991, MasterCard is determined to create a higher profile for itself and, in turn, a larger share of credit card billings around the world. Sponsorship of the World Cup in 1994 includes sponsoring 269 matches between 1991 and 1994, and this will certainly contribute to an increased recognition of MasterCard's name and services. Its foray into the credit card market for taxi cab fares is also helping it to become more competitive with Visa and American Express. Indeed, MasterCard is slowly but surely taking over some of Visa's market share.
Chief executive officer and president Alex Hart has revamped ICA's management structure and improved MasterCard's marketing strategy, advertising, program development, and electronic communications network in order for it to more readily compete with the other major credit cards such as Visa, American Express, Discover, Diners Club, and Carte Blanche. Yet the credit card market is saturated in the United States, and new cardholders will be more and more difficult to sign. Even though MasterCard has prepared well for the future, it will have to work diligently to overcome Visa's lead in credit card billings.
Further Reading
"How a New Chief Is Turning Interbank Inside Out," Business Week, July 14, 1980, pp. 109-111.
Miller, Frederic A., "Is MasterCard Mastering the Possibilities?," Business Week, October 10, 1988, p. 123.
— Thomas Derdak
