Why MasterCard Couldn’t Be Happier About Visa’s $15 Billion European Megadeal

by Alex Johnson 0

It may sound paradoxical, but Visa’s planned takeover of its former European subsidiary may end up being a blessing for Visa’s biggest competitor:

“A merger would likely mean Visa Europe charges significantly higher rates since its current fee structure is set by a not-for-profit organization of more than 3,000 banks, who are also its customers. And that would allow MasterCard to remain competitive while raising its own rates — and targeting a large roster of new customers. Visa CEO Charles Scharf hopes to conclude talks with Visa Europe, spun off in a 2007 reorganization before the parent company went public, by October.”

“It’s clearly a benefit for MasterCard because when you take a competitor that is not-for-profit and make it for-profit they will compete more rationally,” Robert Napoli, an equity analyst with William Blair, said in a phone interview. “Visa Europe’s revenue yields and the profitability yields are much lower than anywhere else in the world, and that’s because Visa Europe is under-pricing its product.”

That said, both companies are likely to face ongoing challenges in Europe:

“While a Visa merger would create an opportunity in Europe, generating more money in the region wouldn’t be without its challenges, Banga cautioned. European consumers tend to prefer debit cards to credit cards, he said, and that means lower yields for both companies.

Additionally, European card-issuers’ earnings are being curbed by heightened regulation and that may make them less willing to renegotiate agreements with payment processors like MasterCard, Banga said.”

Overview by Alex Johnson, Sr. Analyst, Credit Advisory Service, Mercator Advisory Group

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