MasterCard 2009 Annual Report Download - page 28

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 3,500 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 $26.4 billion as of
December 31, 2009. Principal members participate directly in MasterCard programs and are responsible for the
settlement and other activities of their sponsored affiliate members (approximately 20,400).
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, bank guarantees or secured cash accounts. As of
December 31, 2009, we had members who had posted approximately $2.8 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. Additionally, and to further preserve payment
system integrity, MasterCard reserves the right to terminate a member if, for example, the member fails or
refuses to make payments in the ordinary course of business, or if a liquidating agent, conservator or receiver is
appointed for the member. In addition to these measures, we have also established a $2.5 billion committed credit
facility (which, by its terms, will decrease to $2.0 billion in April 2010 for the final year of the facility) for
liquidity protection in the event of member settlement failure. See “Risk Factors—Business Risks—As a
guarantor of certain obligations of principal member and affiliate debit licensees, we are exposed to risk of loss
or illiquidity if any of our customers default on their MasterCard, Cirrus or Maestro settlement obligations” in
Part I, Item 1A. See also “Risk Factors—Business Risks—Unprecedented global economic events in financial
markets around the world have directly and adversely affected, and may continue to affect, many of our
customers, merchants that accept our brands and cardholders who use our brands, which could result in a material
and adverse impact on our prospects, growth, profitability, revenue and overall business” in Part I, Item 1A.
Payment System Integrity
The integrity of our payment system can be affected by fraudulent activity and illegal uses of our system.
Fraud is most often committed in connection with lost, stolen or counterfeit cards or stolen account information,
often resulting from security breaches of third party systems that inappropriately store cardholder account data.
See “Risk Factors—Business Risks—Account data breaches involving card data stored by us or third parties
could adversely affect our reputation and revenue” in Part I, Item 1A. Fraud is also more likely to occur in
transactions where the card is not present, such as electronic commerce, mail order and telephone order
transactions. Security and cardholder authentication for these remote channels are particularly critical issues
facing our customers and merchants who engage in these forms of commerce, where a signed cardholder sales
receipt or the presence of the card or merchant agent is unavailable.
We monitor areas of risk exposure and enforce our rules and standards to combat fraudulent activity. We
also operate several compliance programs to ensure that the integrity of our payment system is maintained by our
customers and their agents. Key compliance programs include merchant audits (for high fraud, excessive
chargebacks and processing of illegal transactions) and security compliance (including our Site Data Protection
Program, which assists customers and merchants in protecting commercial sites from hacker intrusions and
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