Two Charts That Explain How Mastercard And Visa Have Become Future-Proof

Originally published on Forbes

Disruption is everywhere, and that includes the world of finance. 2020 was a year for fintech innovation, and Covid-19 was the accelerant. When people shop at home, electronic payments take off. When people stop visiting banks, they manage their finances online.

Square and PayPal are the obvious winners here. But incumbents like Mastercard and Visa are also faring well. Both incumbents are making their earnings announcements this week.

At IMD’s Center For Future Readiness, we have been tracking how ready financial institutions are for a changing future. Here’s a glimpse into our latest 2021 ranking of selected players.

We’ve only used hard market data to calculate the overall composite score. The data we used is publicly available and has objective rules. We’ve avoided soft data, such as polls or surveys. We measure fundamental drivers that fuel innovation, including the health of a company’s current business, the diversity of its workforce, its governance structure, the investments it has made against its competitors, and its speed of new product launches.

An obvious question: How did Mastercard and Visa prosper when the “plastic card” has been deemed irrelevant in the age of Apple Pay and Google Wallet? This brings us to the idea of “frenemies.” That is, if you can’t beat your disruptors, let them join you.

Mastercard and Visa were quick to realize they can’t outrun other fintech upstarts or tech giants. Instead, they must partner with their rivals. Make your own infrastructure useful to your enemies so when they prosper, you do too.

That’s why Mastercard and Visa are working with PayPal, Apple, Google to create new market opportunities. As I’ve argued here, they make such collaboration easy by investing in a wide range of application programming interfaces (APIs). And they make sure these APIs are both secure and easily accessible. This way, tech giants like Apple and cryptocurrency exchanges like Coinbase can both find valuable partners in Mastercard and Visa.

But you can have another type of analysis. As a second step, my research team downloaded every annual report available in the last 10 years, together with all the transcripts of investors’ earning calls. These were all fed to an algorithm. We wanted to see how companies write about themselves and how CEOs and CFOs defend themselves against tough questions from Wall Street analysts.

Specifically, we want to look at how digitally obsessed these companies are and to what extent executives describe ideas and concepts related to digital technologies in public.

Of course, just because a company talks a lot about digital technology doesn’t mean it’s meaningfully bringing digital innovations into the marketplace. If a company spreads its investments everywhere and doesn’t focus on a few targeted areas, its money and resources get wasted. Without making tough choices, a team ends up making a millimeter of progress in a million directions.

So, we added a second dimension. We want to see how focused and committed these companies are. Are they merely open-minded and exploring everything? Or are they committed to exploiting a few chosen areas to their full potential and rigorously monitoring their progress?

Here’s how it looks when we combine this exploit–explore spectrum with digital technology on a two-by-two grid. The figures below are the rankings from the first chart.

Here are the takeaways: In finance, you have to be digital to win. There will be no banks going forward—just tech companies that happen to lend you money or process your payments.

Second, preparing for the future means striking a balance between exploring new areas and exploiting existing opportunities. Keeping an open mind is important in the early phases of innovation. But to win in the digital realm these days, you can’t keep running prototypes and taking on new pilot projects forever. Success requires the targeted allocation of resources, and that demands a strong focus to scale up early successes that have already been validated. It demands the rigorous tracking of new progress. You need commitment.

In short, an organization must align itself with a single viewpoint about the future.

Stay healthy,

This article is first published in Forbes and co-authored with Angelo Boutalikakis, a research associate at the LEAP Readiness Project, and Jialu Shan a Research Fellow at The Global Center for Digital Business Transformation.