save to del.icio.us Americans are used to piles of credit-card solicitations arriving in the mail every week.
But now investors are facing a similar array of choices in the stock market. One by one, the big brand names printed on those credit cards are going public. MasterCard (MA) held one of the most successful initial public offerings of 2006: The stock has more than tripled in price since its debut in May, 2006.
That got other card companies thinking about following suit. On July 2, Discover Financial Services (DFS) was spun off by its previous owner, Morgan Stanley (MS). In the next several months, Visa is considering an IPO of its own.
While MasterCard's IPO was a resounding success, so far Discover is getting poor reviews from investors. The shares fell 3.5% on their first day of public trading, July 2, and fell another 7% the rest of the week.
This may be because Discover is smaller, held in fewer wallets, and accepted by fewer merchants than rivals MasterCard, Visa, and American Express (AXP). Many think of it as the ugly duckling of the industry, says Michael Kon, an analyst at Morningstar (MORN). (Kon, by the way, is pretty bullish on Discover, saying it has a strong brand name, loyal customers, and a good debit-card network, and notes Discover may be an acquisition target.
) But the different receptions are better explained by a look at the firms' business models. As Moshe Katri of Cowen Co. puts it, MasterCard is not a credit-card company.
True, MasterCard and Visa logos appear on credit cards. But indebted consumers pay off their credit-card balances, not to MasterCard or Visa, but to the banks and other financial institutions that issued the cards in the first place. (These are the same lenders that still own much of MasterCard and all of Visa.
) Instead, Visa and MasterCard run the networks that allow purchases to be made with the cards. They collect a fee on every transaction, but never see the interest or finance charges customers pay each month. Discover and American Express run their own networks, too, but they also issue cards, send out bills, and charge customers interest on their unpaid balances.
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