MasterCard Inc. Thursday fired what analysts say is the next shot in the payments industry’s battle to gain ground in the burgeoning e-commerce market with its planned $520 million purchase of DataCash Group PLC.
Whether it puts MasterCard ahead of rival Visa Inc., which last month closed a much larger, similar acquisition, remains to be seen (see story). But industry watchers say there’s enough room in the online world for major players to win market share.
“You’re talking about trillions of dollars in play over the next 10 years,” says Leonard DeProspo, a research associate with Janney Montgomery Scott LLC in Philadelphia.
In discussing the deal’s benefits during a conference call Thursday morning, the Purchase, N.Y., card payment network’s executives talked up DataCash’s fraud prevention capabilities as well as its established relationships with merchants in western Europe.
“We felt that an acquisition of this nature allowed for a quicker European market entry rather than retooling our existing MiGS gateway,” Gary Flood, MasterCard’s president of global products and solutions, said, referring to the MasterCard Internet Gateway Service that operates in 25 countries in the Asia Pacific region. The gateway, established in 1999, connects merchants to acquirer banks for processing e-commerce, mobile, telephone and other transactions.
Flood said DataCash’s connection to merchants through their acquirer relationships would also “accelerate” the acceptance of MasterCard’s Maestro card brand for Internet purchases. Those connections also make it relatively easy to deliver new products and services, such as mobile payments, cardholder authentication services and e-wallet applications, to existing customers “with only minimal integration challenges.”
MasterCard’s existing network and global presence also “allows for the expansion and adoption of DataCash beyond western Europe,” he added.
While executives downplayed connections between Visa’s $2 billion acquisition of CyberSource Corp., which operates an e-commerce gateway and provides transaction fraud services, analysts see MasterCard’s announcement as its answer to its San Francisco rival’s deal.
“It does seem to be a pretty sizeable game of chess,” DeProspo says. “I think that Visa had a pretty strong strike with CyberSource and this is sort of MasterCard’s response.”
In terms of size, Visa seems to have secured a much larger piece of the pie with its acquisition, he adds.
DataCash, a London company, processed more than 240 million transactions for more than 1,400 merchants and generated $58 million in revenue in 2009, according to MasterCard.
CyberSource counted about 295,000 customers, processed about 2.5 billion transactions and generated $265 million in revenue in 2009, according to company filings.
Despite the difference, there is still plenty of room for both Visa and MasterCard to better establish themselves in the e-commerce market, which “has a lot of open runway ahead of it,” DeProspo says.
“Even though this seems like a chess match back and forth, at the end of the day they’re both getting into a very growthy part of commerce,” he says.
Ajay Banga, MasterCard’s president and chief executive, said during the conference call that he still sees plenty of opportunities in the broader e-commerce sector and in the United States more specifically.
“I don’t think the U.S. is in a stage of e-commerce development where all opportunities for people are saturated in any form whatsoever,” he said, adding that online transactions comprise a “relatively small portion” total U.S. retail sales.
Banga also dismissed the idea that MasterCard’s acquisition, which it expects to complete by the end of October pending certain closing requirements, was a reaction to Visa’s CyberSource deal.
“I think that the really important thing here is not who’s reacting to what,” Banga said. “I really firmly believe the e-commerce business is in early stage of development.”
Both MasterCard and Visa’s acquisitions could help the payments networks develop a mobile payments system, which consultant Philip Philliou views as a natural extension of the types of products and services DataCash and CyberSource provide.
“I think for both companies it’s going to serve as a launching pad for mobile commerce activities,” says Philliou, a managing partner with Philliou Selwanes Partners LLC in New York.
“The mobile device is going to become very significant and meaningful in the commerce environment,” he says. “It’s all about the drive to mobile. If this DataCash acquisition helps MasterCard grab a foothold in a mobile environment that will better position them against PayPal and any other alternative payment provider for that matter.”
He adds that the mobile commerce space is a land grab from both a consumer customer acquisition perspective as well as merchant acquisition perspective.
“If I’m the guy enabling the merchant to do business in a mobile environment, I’m going to have a lot of leeway and influence into what payment types are accepted,” Philliou says.
MasterCard’s current focus with DataCash is on expanding e-commerce capabilities but “there is no doubt that as we go along this will be helpful in terms of a mobile payment gateway,” Banga said.
MasterCard’s acquisition, and Visa’s acquisition for that matter, also could help the companies cushion the potential impact they may feel from the debit interchange provision included in the Dodd-Frank financial reform law.
The provision, which gives the Federal Reserve Board to set “reasonable and proportional” interchange fees for debit card transactions, allows fraud mitigation costs to be taken into consideration when determining rates.
While Visa and MasterCard do not collect interchange fees, it gives the card brands more incentive to provide strong fraud prevention services, says James Van Dyke, the president and founder of Javelin Strategy and Research in Pleasanton, Calif.
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