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MasterCard IPO Shifts Risk from Banks to Investors

By Martin H. Bosworth
ConsumerAffairs.com

May 29, 2006

Credit Card Fees • Visa, Mastercard Settle Suit With West Virginia • House Studies Credit Card Fees • Retailers Fret Over "Swipeless" Credit Cards • Visa Publishes Interchange Fees For Credit Cards • MasterCard Offers Concessions In Interchange Fee Battle • Merchants Testify Before Congress on Credit Card Price-Fixing • MasterCard IPO Shifts Risk from Banks to Investors • Thanksgiving: A Day Without Credit Cards? • Credit Card Companies Rocked By New Merchant Lawsuits • Merchants Sue Credit Card Issuers Seeking Lower Fees • Suit Challenges Credit Card Fees

When the world's number two credit card issuer debuted on the stock market on May 24, 2006 with an initial public offering (IPO) of $39 a share, and then swelled to $46 a share in second-day trading, analysts hailed MasterCard's move as the largest IPO of the year, and a sound triumph for one of the world's best-known brands.

But investors should think carefully before putting too much of their money into shares of MasterCard, as the company's move is designed primarily to respond to the series of lawsuits launched by merchants over the high "interchange fees" MasterCard and card-issuing banks charge to process plastic transactions.

By the company's own admission, the principal effects of the IPO will be to "redeem" shares of MasterCard held by the 1,400 member banks that issue its card, reducing their liability in the event that the merchant lawsuits are successful.

MasterCard plans to use $650 million of the funds raised by the IPO to add to its "war chest" in order to defend against the regulatory challenges from the lawsuits.

Investors who buy up shares of MasterCard hoping to turn a quick profit from the company's massive public profile may be left holding the bag. Analyst Howard Bernstein told Fortune magazine on May 17th that the cost of the merchant lawsuit litigation could exceed $1 billion dollars easily.

Merchants such as 30 Minute Photos' Mitch Goldstone, a lead plaintiff in the class-action lawsuits, claims that the high processing fees banks charge retailers to process card transactions wipe out almost any profit they can earn when consumers use plastic.

Goldstone noted that credit card companies and issuing banks reaped huge profits from the processing fees charged when drivers bought gas with credit and debit cards during 2005's holiday traveling seasons, a process expected to repeat itself this year.

"As gas prices double, seemingly, so are credit card merchant interchange fees - and then some," he said on his blog, WayTooHigh.com.

"As it costs upwards of sixty dollars to top off a car's tank, consumers are more inclined to pay with credit; they often don't otherwise have enough have cash as they did when it cost twenty or thirty dollars for gas. This means, the banks' windfall profiteering is accelerated and enhanced at the expense of drivers across the nation," Goldstone wrote.

The wave of merchant lawsuits isn't MasterCard's only worry. Bank of America is considering issuing its own credit card and acquiring or purchasing its own payment processing network, which would significantly cut into MasterCard's profits.

In February, Discover Financial, issuer of the Discover-branded credit cards, announced it was issuing its own debit card brand in order to further encroach on the turf long held by MasterCard and Visa.

Also, an increasing number of American cardholders are canceling their cards and closing their accounts, forcing MasterCard, Visa, and the banks that issue plastic to aggressively pursue foreign markets. That could make the merchant lawsuits even more devastating if they are victorious.

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