MasterCard's keys to survival

One thing McWilton has been urging MasterCard to do is come up with innovations that serve affluent customers, the creditworthy borrowers that banks tell him they are desperate to embrace after the debacles in subprime lending. That has led MasterCard to develop a new version of its World-brand card, called World Elite, and MasterCard Black - a not too subtle strike at American Express's Centurion card - which both offer superior service and rich rewards packages for banks to purchase on behalf of their customers. A program called Easy Savings allows banks to put specific merchant discounts on their cards to steer customers toward bigger-ticket purchases.

MasterCard also likes affluent cardholders because they tend to travel and generate cross-border fees and currency-conversion fees - add-ons that irritate travelers but make up a quarter of MasterCard's revenues and rank as the fastest-growing component. A California court decision in 2003 forced MasterCard and Visa to be clearer about such fees but didn't require them to lower them.

While MasterCard would be unlikely to mention it in its marketing materials, one big service it's providing to banks now is fighting against a potentially huge regulatory change taking shape in Congress. For decades merchants have complained about so-called interchange fees, estimated at an average of 1.6% of any sale, that they pay through their banks to credit-card-issuing banks. MasterCard and Visa, which collect the fee, don't keep any of it for themselves, but do pass it on to the issuing banks.

The fee, according to MasterCard, Visa, and their banks, compensates lenders for their risk and the cost of the rewards programs that encourage people to use their cards. But the political appeal of taking on the credit card industry is strong. Critics charge that the fees are too high and are passed on to consumers as a kind of inflation, though MasterCard's legal team has commissioned studies to rebut the argument.

In a windowless basement room at MasterCard's headquarters, another phase of the company's new world is on display: contactless payment devices. Ranging from cards to key fobs to mobile phones, they can simply be waved - at a distance of no more than an inch and a half - in front of a terminal. You might already have this technology in your wallet: If your MasterCard-brand card has a symbol that looks like four parentheses on the back, it's contactless.

"Advanced payments," as contactless devices are called, are still just a sliver of the electronic market. One reason is consumers' lack of familiarity with them; another is concern about fraud. "Educating consumers and increasing their confidence in security are the two biggest hurdles issuers and merchants must overcome before contactless cards can reach the 100 million mark in circulation," writes Tower Group analyst Dennis Moroney in a recent report.

Still, MasterCard is energized over the potential of finding entirely new ways for people to use credit and debit in their daily lives. "Once you own the factory," says Wendy Murdock, chief product officer, "you've got to find ways to pump more through it." Retailer acceptance of contactless cards is relatively small - only 80,000 merchants take them, says a study by market research firm Financial Insight. But those that do are high profile, including chains like McDonald's and Rite Aid.

Contactless is best suited for speed-conscious transactions. So far, MasterCard's PayPass brand has gotten out in front of Visa, with 37 million contactless cards in the market globally, vs. roughly ten million for Visa's payWave cards. MasterCard has signed up Coca-Cola (KO, Fortune 500) to offer PayPass at vending machines, which are slowly rolling out in the U.S. With bank customer Citi, MasterCard has been promoting a trial run on the New York City subway's Lexington Avenue line.

"These days our ideal customer takes the subway to the airport at J.F.K. and flies to Tokyo," says McWilton. Someday advertisements might have a contactless spot that transfers a merchant discount to your card.

The potentially giant revolution in payment is with mobile phones. Phones can be used to make online purchases, or as contactless devices themselves, a technology MasterCard is trying out in Korea and Canada.

"Mobile is a monster opportunity," says Art Kranzley, the company's head of advanced payments. Its biggest potential is to replace person-to-person cash swaps with phone-to-phone money transfers. MasterCard is developing standards for such transfers with the same group that created the GSM protocol used by most global cellphone users.

At the same time, however, competitors like Visa and First Data, the giant transaction processor, are racing to develop similar technologies. First Data created a contactless phone with Sprint (S, Fortune 500) that works on the BART trains in the San Francisco Bay Area. Visa says it's already ahead in mobile devices, thanks to its deal with T-Mobile's new Google Android phone, which will have a mobile-payments program.

"I don't know if anyone will have a unique technology," says David Robertson, publisher of The Nilson Report. "I think once someone finds a winner, everyone else will jump on."

For MasterCard the central promise of its business is that huge untapped sea of transactions in the nonelectronic world. It doesn't necessarily have to beat Visa or AmEx to make more money. It needs to beat cash, check - and frugality itself.

MasterCard already takes in half its revenues outside the U.S., and the portion is sure to grow. There, the growth of the card market has a much longer way to go. The average American has eight cards, the average Briton five. In Germany and Japan it's two.

Developing countries are even more promising; MasterCard's size disadvantage matters even less in such places - there are no banks to deal with, since much of the population doesn't use a bank. "It's in those markets where the leader in mobile or other technology will get ahead," says Eric Grower, an independent industry consultant.

Credit card penetration is near zero in India and China. Just as cellphones bypassed landlines, it's envisioned that such markets will also go straight to mobile banking and person-to-person payment, skipping cards altogether. There may be a word that sums up such a lucrative prospect for a company like MasterCard: priceless.  

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