By buying the back-office prepaid card operations of Travelex Holdings Ltd., MasterCard Inc. would greatly expand in the global prepaid market–both in terms of geography and the company's role.
Travelex is one of the world's top distributors of cards loaded with foreign currency. The London company would continue to sell them in 20 countries, but MasterCard would take over such functions as card design and production, customer service (in 12 languages), and regulatory compliance. Currently, MasterCard participates in the prepaid business as a network and a processor, but not as a program manager.
The company plans to use the technology and skills it acquires to bring prepaid cards for cross-border travel to new markets. "It's a difficult capability to build," said Laura Kelly, MasterCard's senior vice president of global prepaid solutions. "For many of our partners this is a perfect solution to get them to market much faster."
The $458 million deal, announced Thursday, is expected to close in the first half of 2011 (see story).
MasterCard, of Purchase, N.Y., was quick to stress that it had no intention of competing with other prepaid program managers — or, for that matter, its issuing customers. "We do not plan to direct-issue, and we do not plan to enter the U.S. market in some areas where we would compete with our partners," Kelly said.
But Gwenn Bezard, a co-founder and research director at Aite Group in Boston, saw that as an eventual possibility.
"Given the price tag, I'd be shocked if the acquisition is merely about adding technology to support its existing issuers and program managers," he said. "It's a significant, albeit not unexpected, shift in a direction as it will likely compete with existing customers and partners in the segment."
Regardless of MasterCard's exact role, getting bigger in prepaid travel is a wise move, Bezard said. "Given the business model of the card networks, where a huge chunk of the revenues comes from cross-border transactions, it makes a lot of sense for them to position themselves in … the travel segment."
In addition to selling travel cards to consumers, Travelex also supplies them to corporations, mostly in the maritime and airline industries, and would continue to do so after the deal closes.
Matthew Lanford, the senior business leader and head of prepaid for MasterCard in Europe, said in an interview at the Cartes & Identification conference in Paris that his company could apply some of its existing technology services to expand the cross-border products that banks and program managers offer. Those services include inControl, which issuing banks can offer cardholders to set limits on their spending, and PayPass, MasterCard's technology for contactless payments.
Ajay Banga, MasterCard's chief executive, said in a conference call that "Travelex is much stronger in the world outside of the U.S., and they have a very strong brand, a very strong operating system."
MasterCard and Travelex have both demonstrated their ability to innovate in prepaid overseas. MasterCard has developed a card that can be loaded with multiple currencies, each stored in a separate account. A single card can be used to make purchases with euros in Germany and yen in Japan, for example. Commonwealth Bank of Australia began issuing the card last year and several banks in Europe are testing it now.
Last week Travelex said it had begun issuing prepaid cards with the EMV Integrated Circuit Card Specification at its 180 U.S. retail sites. It plans to distribute them with its roughly 2,000 retail banking partners — such as U.S. Bancorp and HSBC Holdings PLC — in early 2011. EMV cards are commonly used outside the U.S. to improve security. Though Travelex is not the first provider of EMV cards in the U.S. — United Nations Federal Credit Union issues them to members — Travelex's product is the most broadly available.
Travelex and MasterCard both said the EMV card will remain available after the acquisition. "[But] don't take it out of context," Banga said. "It's not something that made the decision for us."
Across the world, the prepaid market is expected to reach $840 billion by 2017, according to a study this year by Boston Consulting Group that MasterCard commissioned.
Andrew Johnson contributed to this story.