Case Study of Mastercard: Going Upscale

Check, cash, or credit card? How many times have you heard that question and replied “credit card” without even thinking about it? When you do think about it, however, credit cards are a relatively new phenomenon. Yet when it comes time to pay, it seems we’re more likely to use the credit card (and to have several of them) than checks or cash. Indeed, some writers have even suggested that, in the not so distant future, we will all operate with “plastic money” all the time.

MasterCard had its beginnings in 1966, when a group of banks joined together to form the Interbank Card Association (ICA). The ICA was founded by an association of banks rather than by a single dominant bank. Member committees ran the association by establishing rules for authorization, clearing, and settlement as well as marketing, security, and legal matters. In 1968, ICA went “global” by forming an association with Banco Nacional in Mexico and later with eurocard in Europe. Since then, MasterCard has expanded around the world—even into the communist world of the 1980s when it entered the people’s republic of china in 1987 and Russia in 1988. By 1993, china was the second largest country in terms of MasterCard sales volume. Today, MasterCard is affiliated with more than 23,000 financial institutions around the world and has nearly 370 million credit and debit cards in use . These cards are accepted at more than 13 million locations worldwide. Gross dollar volume in 1995 was almost $500 billion. At present, MasterCard offers several global products, including maestro (the world’s first truly online debit program) and cirrus (the world’s largest ATM network). Wherever you are, you can use your MasterCard to pay for goods and services, obtain cash, or debit your checking account directly.

MasterCard faces fierce competition from systems such as Visa and American Express, so selling 370 million credit cards requires a lot of ingenuity in finding prospects. To keep ahead of the competition, MasterCard constantly seeks new segments and fashions new product offerings. One segment that MasterCard has targeted with a vengeance is the health care market. To be successful in this market, MasterCard must convince doctors, dentists, and other medical practitioners to accept credit cards. For decades, medical practitioners have complained of difficulties in collecting payments for their services. Few doctors actually want to initiate legal proceedings against non-payers, so credit cards should have a strong value for them. With such cards, the credit card company takes care of collections. Of course, the doctor must pay transaction fees, but these may well be less than the costs associated with fee collections. There are other reasons why medical practitioners might be interested in accepting credit cards. Many doctors demand immediate payment, which can be difficult for patients when cash flow is tight. In such situations, credit cards are a useful option. A survey by MasterCard found that many would-be patients postpone both routine and emergency visits to the doctor because of financial problems. Most medical practitioners realize, however, that early detection of problems will likely lead to faster and perhaps less expensive “cures.” So, the failure of patients to come to the doctor when symptoms first strike often makes the doctor’s job more difficult later on. Finally, MasterCard might be especially attractive to medicare patients needing a medical procedure not covered by medicare—the patient can still receive treatment even if it means spreading payments out over time. For the patient, MasterCard offers more than just a payment mechanism. It also provides a free health care guide and planning kit, which enables consumers to track previous medical expenditures and plan for future ones. MasterCard offers lots of health-related tips, and its website links cardholders to different types of health care associations. MasterCard holders also receive coupons with savings of up to 60 percent on health and fitness products such as Nordictrack, Jenny Craig, Pearle vision, Xenejenex health videos, and Solgar vitamins and herbs. In addition, MasterCard has ties with services such as smokenders, the nutrition action healthletter, the American running & fitness association, and the American Medical Association.

One of the newest MasterCard health products is a joint offering with Mellon Bank Corporation. These two companies provide a package of depository, payment, and processing services for Medical Savings Accounts (MSAS). Included in the package is a MasterCard MasterMoney debit card that allows holders to pay for msa-related medical expenses. Msas are health plans that combine money-saving, higher-deductible healthcare polices and tax-deferred savings accounts for the self-employed or for people working for companies with 50 or fewer employees. In an msa system, employers buy high-deductible health insurance policies coupled with tax-deferred medical savings accounts. Employees make pre-tax contributions to their accounts, which can then be used through the MasterMoney debit card to pay for medical care. Such plans enable employees of participating companies to pay healthcare providers directly for services, quickly and easily.

Another market that MasterCard targets is the sports enthusiast. To reach sports markets worldwide, MasterCard has sponsored world cup soccer. One of its newest ventures is the Jordan grand prix formula one team sponsorship. MasterCard sponsors the b&h Jordan mugen-honda formula one team worldwide, and announced expansion of this sponsorship in January 1998. “expansion of the jordan grand prix formula one team racing sponsorship provides MasterCard with all the key elements of a successful program: a global sport with a year-round calendar of races and events, a high-performance, competitive team, famous personalities, and countless loyal and
passionate fans,” says Mava Heffler, Senior Vice President of Global Promotions and Sponsorships for MasterCard. She continues, “sports sponsorships are among the most powerful tools MasterCard has to effectively build our brand and our business.” MasterCard can tap into the vast emotional affinity that racing fans have for formula one through Jordan MasterCard, Jordan team licensed merchandise, and cardholder promotions such as the opportunity to drive a Jordan car. There’s another reason why MasterCard wants to expand its sports sponsorships to formula one racing. Whereas stock-car racing is the darling of the masses of the u.s. Population, formula one racing attracts many well-heeled fans. After decades of building volume by attracting millions of credit-hungry consumers, MasterCard decided recently to go after a different target—the affluent. Although providing credit to the rich might seem like a contradiction (you might think that the affluent don’t need credit), the affluent are actually a good target for a credit card company. One of the major benefits of a credit card system is the ability to pay when cash and check would be unacceptable or difficult. The rich need this benefit as much as others—perhaps more. Traditionally, however, you might think of a credit card system as making money from people who incur high interest charges on outstanding balances carried from month to month. So, how could MasterCard improve its revenues by catering to the wealthy, who pay their credit card bills on time? The answer is the 1 to 2 percent interchange fee that credit card companies receive on each transaction made by these big spenders. According to Michael Auriemma, a credit card consultant, the average card user charges $3,000 a year, resulting in interchange fees of $42. Assuming 80 percent of card users carry a balance, averaging $1,800 each, he estimates that a customer paying 16 percent interest would accrue $230 in annual interest charges. By contrast, a wealthy card user may charge $20,000 a year, meaning that, even without interest charges, the bank will earn $280 in interchange fees, in addition to annual fees paid for the cards.

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