Graduation Year

2023

Date of Submission

4-2023

Document Type

Campus Only Senior Thesis

Degree Name

Bachelor of Arts

Department

Economics

Reader 1

Darren Filson

Abstract

In the face of the 2010 Fintech boom, the four major U.S. card networks - Visa, Mastercard, American Express, and Discover Financial Services - had to employ expansion strategies to adapt to the rapid changes within the Fintech payment industry. This thesis offers three contributions. First, I explain and categorize the approaches of these card networks from 2010 to 2022. Second, using event study methodology and the Fama-French Five-factor model, I estimate the effect of expansion-related press releases within the fintech payment industry on firm returns. Third, I estimate the impact that each firm’s announcements have on its three competitors’ abnormal returns.

The event study results indicate that card networks experienced three phases of adaptation in response to the growth of the Fintech payment industry, focusing on establishing partnerships and technological innovation. Visa, Mastercard, and American Express displayed economically small and statistically insignificant positive estimates of average daily abnormal returns (0.0144%, 0.29%, and 0.105% respectively), while Discover showed negative estimates (-0.006%). These results suggest a smoother integration within the industry for the first group of firms, while Discover faced challenges, possibly due to delayed digital payment adoption, restricted international presence, and heightened competition, leading to slower growth. Moreover, Visa's lower positive point estimate compared to Mastercard and Amex suggests that, as the market leader, the firm was more sensitive to competition and regulatory pressures. In Phase 1 (2010-2013), Visa and Amex displayed positive point estimates, while Mastercard and Discover had negative ones. While I cannot rule out randomness, factors such as legal and reputational challenges, regulatory scrutiny, and consumer data breaches may have contributed to these outcomes. For instance, the 2010 lawsuit settlement against card networks allowed merchants to offer discounts for cash transactions and more cost-effective brand alternatives, with Mastercard experiencing heightened repercussions due to uncertainties in its business model, impacting its revenue stream. Discover faced reputational damage and penalties after a lawsuit investigation in 2012 exposed the company for charging unlawful late fees and deceiving customers into settling old debts or purchasing additional services. In Phase 2 (2014-2018), Visa and Discover showed positive point estimates, while Mastercard and Amex had negative ones. These findings could be attributed to difficulties in retaining co-branded card partnerships, penetrating emerging markets, and adapting to technological advancements. In Phase 3 (2019-2022), all card networks demonstrated mostly negative CAR estimates, suggesting that the rapidly changing payment industry, increasing competition from fintech firms, and regulatory pressures negatively impacted these companies. Lastly, the study finds that announcements regarding expansion strategies by a firm in the Fintech payment space do not appear to affect the abnormal returns of competitor firms, irrespective of the strategy, phase of industry growth, or the firm issuing the press release.

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This thesis is restricted to the Claremont Colleges current faculty, students, and staff.

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