Mastercard’s IPO 20 Years Later

Mastercard’s 11,000% return in its first twenty years being public is the byproduct of a deliberate survival maneuver to escape a cage of its own making.

Mastercard in the 2000s was a private bank-owned cooperative navigating multi-billion dollar lawsuits and anti-trust Supreme Court rulings. The structure and lawsuits threatened to sink the company and its member banks with billions in fees, fines, and settlements.

Mastercard restructured and went public on May 25, 2006, in part to distance the banks from liability. This decision also allowed the company to escape from bank control and rule-by-committee. This finally freed it to become the tech-forward financial services company we know today.

To understand what Mastercard is today and where it’s going next, you have to understand why it was formed, how it was nearly trapped by its own growth, and how it engineered the escape.

Mastercard exists because Visa moved first. The company that would become Mastercard was conceived in 1966 following a report showing just how profitable the BankAmericard (now Visa) program had been since 1961.

There was little chance of any one bank finding a way to catch up, so a group of leading banks formed the Interbank Card Association (ICA). ICA was a consortium that pooled capital, technology, marketing, and admin resources explicitly to compete with BankAmericard.

In 1969, the ICA unveiled Master Charge and the now iconic overlapping orange and yellow circles. By 1979, ICA had rebranded to “MasterCard1 International”, three years after BankAmericard rebranded to Visa. The name change came just as the card industry was taking off in the 1980s and 1990s.2

MasterCard acquired the Cirrus ATM network in 1985 and launched Maestro, the world’s first online point-of-sale debit network, in 1991, both years ahead of Visa. However, they were structurally unable to capitalize on the lead.

The top-down organization meant that member banks needed to reach consensus on every decision. This bottlenecked every bold move for MasterCard and stifled implementation and commercialization, giving Visa a window to close the gap.

However, Visa wasn’t the only competitor MasterCard faced.

Competing networks, particularly American Express and the newly launched Discover, sought to disrupt Visa and MasterCard’s duopoly. These challenger brands offered premium rewards that Mastercard and Visa's open-loop structure couldn't match. Discover — backed by Sears and its retail footprint —was so successful that it captured 6% of the card market in the US in just four years.

MasterCard and Visa members countered by flooding the market with cheaper cards to undercut the challenger networks. Discover and American Express responded with creative cobrands and licensing agreements with banks. So, the giants used exclusivity clauses in their contracts to limit their member banks from working with any challenger network. This response triggered the Department of Justice and set the dominoes that led to MasterCard’s 2006 IPO.

Both Visa and MasterCard were member owned and governed by issuing banks. In many cases, banks were part of both networks. The dual ownership might have passed scrutiny if the networks had applied their exclusivity rules consistently. However, blocking Discover and Amex while allowing banks to belong to both Visa and Mastercard simultaneously was the contradiction the DOJ couldn't ignore.

The Department of Justice filed a suit against the networks in 1998, claiming that (1) the exclusivity clauses were anticompetitive and (2) the “duality” in ownership discouraged the giants from competing with one another. After three years in court, a federal judge ruled that the exclusivity rules violated antitrust laws but allowed the dual governance structure to remain.

Visa and MasterCard then started the years long appeals process.

In 1996, Wal-Mart and a 5 million other merchants joined together to claim push back against the “Honor All Cards” rule. MasterCard established the rule to ensure that any card — debit, credit, premium, etc. — bearing their orange and yellow circles would be accepted, regardless of fee.

This was supposed to be a win for the cardholders and issuing banks, but it prevented merchants from only accepting low-fee cards or rejecting premium, high-reward cards that carry significantly higher swipe fees.

Wal-Mart and the other merchants claimed that they had been forced to pay artificially higher transaction costs. In 2003, just as the case was set to head to trial, MasterCard reached an estimated $1 billion settlement while Visa agreed to pay more than $3 billion. The settlement also ended the practice of bundling credit and debit acceptance. On top of that, both networks agreed to temporarily lower debit card processing fees by 33%.3

While the merchant lawsuit was nearing settlement, MasterCard saw its appeals to the DOJ suit lose in District Court, 2nd Circuit , and finally the U.S. Supreme Court denied review on October 4, 2004. The Court’s ruling resulted in the repeal of the exclusionary rules on anticompetitive grounds, effectively permitting banks to issue cards on competitor networks like American Express and Discover.

Within weeks, both challenger networks had filed suits against MasterCard and its largest member banks. According to internal documents released as part of a 2009 lawsuit, the network faced legal and operational (i.e., lost revenue) exposure of up $200 billion. The consortium ownership structure exposed owner-banks to increasingly larger risks. The time had finally come to remove the liability.

In 1997, Robert W. Selander was appointed CEO of MasterCard International. While leading the company through its legal challenges, MasterCard merged with Europay International in 2002. This deal transformed MasterCard from a consortium membership association into a private share corporation. This change saw member banks become shareholders and MasterCard become a for-profit company — the first step to prepare for public trading.

According to a BCG strategy review released as part of the 2009 merchant lawsuit, member banks sought to limit risk by dismantling the consortium, relinquishing their voting power, and transferring liability to public markets. In December 2005, just months after another class action merchant lawsuit was filed4, member banks voted 95% in favor of an initial public offering (IPO).

The 2006 S-1 filing called it a “modernization” step and laid out the new ownership structure. 49% of the business would belong to public Class A shares with voting rights. Member banks were given 41% Class B shares which were non-voting, but could be converted to Class A over the following four years. The remaining 10% was given to the MasterCard Foundation to further dilute bank influence and project independence.

Hiding underneath this was a clever way to keep Mastercard under control of the banks. The owners still wanted to protect highly lucrative interchange fee revenues which fund card programs.

Had the networks floated 100% of the voting stock, a massive retailer (or consortium of merchants) could have bought a controlling stake and slashed interchange fees to near zero. In fact, an internal Citigroup email during the restructuring process, uncovered in the 2009 lawsuit, explicitly asked: “What happens if Wal-Mart or Microsoft want to buy it?”.

To solve this, they engineered a few distinct traps:

1. They imposed a strict 15% cap on beneficial ownership of voting stock to prevent any single entity from gaining control.

2. They created a single Class M share exclusively for the member banks.

The 15% cap could be outmaneuvered, but the Class M share and its veto power over major corporate decisions, such as the sale of the company, a merger, or any decision to exit the “core payments business” was the failsafe.

The banks were being paid to relinquish financial control, but maintained nominal control. However, survival and urgency were still seen as the driving factors. The market knew this, so the IPO was priced at a discount — $39 per share instead of the proposed $43. Everything was set to go in February 2006, but Selander’s prostate cancer diagnosis and surgery delayed the IPO to May.5

On May 25, 2006, MasterCard began trading on the New York Stock Exchange at $39, closing at $46, an 18% gain. The IPO raised $2.39 billion for the company and was one of the largest IPOs at the time. The company retained approx. $650 million, while using the rest to redeem Class B shares over the following 4 years, allowing the 1,400 member banks to unwind their stakes.

By the end of 2006, MasterCard’s stock was up 153%. It doubled again in 2007. Visa saw all of this and followed in 2008, raising +$19 billion using Mastercard’s blueprint (without the discount). Both companies and their former member banks used the IPO cash to ride out the 2008 Global Financial Crisis and its aftermath.

Selander stepped down in 2010 after 13 years of radical transformation to make way for Ajay Banga. Banga had an equally transformative vision for the now public MasterCard. He declared MasterCard was a technology company and stating that “innovation is our focus—period.”

The cage of consortium decision-making and hedging was gone. Banga and MasterCard could now say and be what they actually were — a technology juggernaut with billions in free cash flow. To reflect this change and reduce focus on cards, Banga and team changed the branding to Mastercard in 2016.

Despite being the perpetual runner up to Visa, the “Priceless” card company has always been an innovator in technology. They consistently beat Visa by years in ATM, eCommerce, and contactless technology.

This is why Mastercard declares it’s “a technology company in the global payments industry.” Visa, by contrast, is “one of the world’s leaders in digital payments.” The new identity was put on full display as the company has invested in vertical integration (fraud, issuing) and horizontal diversification (A2A, open banking, crypto).6

The Mastercard IPO opened the door for Mastercard to evolve from a utility cooperative to a modern technology company. They were now free to compete with a wider range of fintechs and even their former member banks. They have done this through vertical integration and processor displacement in a “Quiet Takeover” of the payments industry.

Pre-IPO Mastercard could never have competed with its own members — many of whom held stakes in processors like TSYS, Vantiv, and Worldpay. Post-IPO, they were unshackled. The network no longer had owner banks to please and manage, only shareholders and earning growth.

The consortium was the cage that protected smaller banks from BankAmericard, later Visa, dominance. Eventually, they outgrew the cage and faced being suffocated by litigation. The IPO was the key to its escape and survival. What came next was a quiet evolution and takeover of the payments industry.

Mastercard’s recent $1.8 billion acquisition of BVNK, a leader in blockchain and crypto payments, echos the lessons learned. It unlocks the stablecoin settlement and payment rails. Industry pundits argue that this move will keep Mastercard relevant as commerce evolves while crypto apologists claim it will kill the need for traditional banks or cards altogether. After 40 years being caged and 20 years of freedom, Mastercard has finally found its voice.

I’m finally taking Steve Klebe’s advice to “go build something.” If you work at a bank or loyalty platform, shoot an email to team@getwishbone.io