MasterCard's Focus on Data? Priceless

Daniel Acker | Bloomberg | Getty Images

When it comes to plastic money, I always thought Visa was Coca-Cola and MasterCard was Pepsico.

That is, Visa stuck to its knitting and dominated the niche, while MasterCard went into a bunch of other businesses and trailed like a puppy after a bigger dog.

Maybe my prejudice came down to regionalism. Coca-Cola is based in Atlanta, where I now live, and MasterCard, like Pepsico, is based in Purchase, N.Y., outside New York City.

It's also possible that in this case I was wrong.

While the two stocks have marked each other closely since Visa did its IPO in 2008, it was MasterCard that came up with the idea of going public first, in 2006. If you got into that deal at $39 a share, the IPO price, you are a very happy camper — the shares are up more than 1,000 percent and now trade at $523.

I think the difference between MasterCard and Visa these days comes down to offense vs. defense. The battlefield on which they play is data. The way they see data makes the difference.

Visa focuses on the business of processing transactions. They define the industry's security procedures, which they take very seriously and enforce rigorously.

MasterCard is focused more on what transaction data means, and how it can be used to create more transactions. It quietly launched an online mall called MasterCard Marketplace in 2010 based on NextJump's reward program technology. By connecting member banks' reward programs to the marketplace, MasterCard builds shopper dossiers on customers. The more you use it to get free stuff, the more it learns about for what you're willing to pay.

Free stuff is the new way to build profit into credit cards. With cards taking a discount of 2 to 5 percent to process a transaction for merchants, plus interest and fees from the customer, there's plenty of money to create a reward program that makes sure that money keeps flowing in. Credit cards have replaced the old Green Stamps from when I was a kid, with data making them much more valuable to merchants than before.

Rather than just offer "reward points" based on purchase volume, MasterCard lets merchants award "WOWpoints" of anywhere from 1 to 5 percent of the purchase price, giving them more control over the process. Off this data it also offers "overwhelming offers," a sort of Groupon with national merchants aimed at building store and brand loyalty.

The company's latest move is MasterPass, a digital wallet that can hold rival credit cards, even Visa numbers. It's a short-cut for online payments and it integrates with Near Field technology so phones can just be pressed against readers to move money around.

This is a simple evolution from PayPass, introduced last year. You may have seen it as an add-on to some merchant terminals, its logo looking like a radio wave.

As with the Marketplace, which went to market with banks, MasterPass also goes to market through third parties, in this case merchants. Lots of different kinds of companies can offer their own digital wallets through the program, and gain some control of the resulting data.

Data is the key point here. Not just payment data but preference data, and data that can increase loyalty to a bank or a merchant. It's a lot cheaper for a store to turn an occasional shopper into a regular with escalating discounts than it is for them to advertise for new customers.

Whatever MasterCard is doing right, it's been discovered by the smart money. The stock sports an earnings multiple near 24 — Google territory — drawing one dollar in three to the bottom line. It is, quite literally, a license to make money.

The question occurs, of course, that in this world of ever-changing money, with Google launching a wallet and start-ups like Square, can MasterCard keep its mojo going? They say follow the money, but here in the 21st century the better idea is to follow the data.

By Contributor Dana Blankenhorn

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At the time of publication, Dana Blankenhorn had positions in Coca-Cola and Google stock.