MasterCard 2008 Annual Report Download - page 27

In addition, we provide research, marketing support and financial assistance to our customers and their
marketing partners in connection with the launch and marketing of co-branded and affinity card programs.
Co-branded cards are payment cards bearing the logos or other insignia of an issuer and a marketing partner, such
as an airline or retail merchant. Affinity cards are similar to co-branded cards except that the issuer’s marketing
partner is typically a charity, educational or other non-profit organization.
Membership Standards
We establish and enforce rules and standards surrounding membership in MasterCard International and the
use and acceptance of cards carrying our brands.
Rulemaking and Enforcement
Membership in MasterCard International and its affiliates is generally open to banks and other regulated and
supervised financial institutions. Applicants for membership must generally meet specified membership
eligibility requirements.
In general, MasterCard grants licenses by territory to applicants able to perform all obligations required of
members. Licenses provide members with certain rights, including access to the network and usage of our
brands. Anti-money laundering due diligence reviews and customer risk management reviews are conducted on
all new members prior to admission, as well as on existing members. All applicants and members must meet the
requirements of MasterCard’s anti-money laundering program, and MasterCard can block authorization of
transactions and ultimately terminate membership for non-compliance with the program. As a condition of our
licenses, members agree to comply with our bylaws, policies, rules and operating regulations (the “Standards”).
MasterCard International and certain of its affiliates are the governing bodies that establish and enforce the
Standards, which relate to such matters as membership eligibility and financial soundness criteria; the standards,
design and features of cards and card programs; the use of MasterCard trademarks; merchant acquiring activities
(including acceptance standards applicable to merchants); and guaranteed settlement and member failures. To
help ensure that members conform to the Standards, we review card programs proposed by members.
Customer Risk Management
As a guarantor of certain card obligations of principal members, we are exposed to member credit risk
arising from the potential financial failure of any of our approximately 2,400 principal members of MasterCard,
Maestro and Cirrus, and approximately 3,200 affiliate debit licensees. Our estimated gross settlement risk
exposure for MasterCard-branded transactions, which is calculated using the average daily card charges made
during the quarter multiplied by the estimated number of days to settle, was approximately $24 billion as of
December 31, 2008. Principal members participate directly in MasterCard programs and are responsible for the
settlement and other activities of their sponsored affiliate members (approximately 21,300).
To minimize the contingent risk to MasterCard of a failure, we monitor the financial health, economic and
political operating environments of, and compliance with our rules and standards by, our principal members,
affiliate debit licensees and other entities to which we grant licenses. If the financial condition of a member or the
state of the economy in which it operates indicates that it may not be able to satisfy its obligations to us or other
MasterCard members or its payment obligations to MasterCard merchants, we may require the member to post
collateral, typically in the form of standby letters of credit and bank guarantees. As of December 31, 2008, we
had members who had posted approximately $2 billion in collateral held for settlement exposure for MasterCard-
branded transactions. If a member becomes unable or unwilling to meet its obligations to us or other members,
we are able to draw upon such member’s collateral, if provided, in order to minimize any potential loss to our
members or ourselves. In addition to obtaining collateral from members, in situations where a member is
potentially unable to meet its obligations to us or other members, we can block authorization and settlement of
transactions and ultimately terminate membership. However, to date MasterCard has never terminated a member
17