Managerial Economics: Summary of a Case Study of Visa and Master Card

Since the great recession, the general purpose card networks have shown tremendous growth contrary to the rest of the banking sector especially in the USA[1]. This is especially the prepaid cards which have served to make the unbanked and the underbanked consumers feel represented. The most used cards are MasterCard and Visa, the two largest general purpose card networks. They are responsible for over 75 percent of all purchases in which general purpose cards are used.[2] To make competition difficult for their competitors, MasterCard and Visa have engaged in a form of ownership known as duality. Their duality prohibits those banks that issue either Visa or MasterCard from issuing any other general purpose cards from their competitors. This paper intends to champion the thesis that the duality ownership of Visa and MasterCard, though it has helped to be more penetrative in their market and their services more available to their market, it has been obstructive to growth than in their market.

The duality of Visa and MasterCard began in 1970 after Worthen bank, one of Visa’s member banks sought to be a member of both Visa and MasterCard. Visa immediately adopted a by-law that prohibited its member banks from issuing any other cards.[3] To resolve the issue, Worthen bank went to court and sued Visa. While the case was awaiting hearing, the board of directors of both Visa and MasterCard voted to allow their member banks to issue cards from both MasterCard and Visa. They also jointly prohibited their member banks from issuing banks from any other competitor. Since member banks also acted as board members and got ownership rights from the companies, it turned out that board memberships of both companies were made up of the same people. This resulted to the current dual ownership.

The main competition in the general purpose cards sector comes from American Express and Discover networks. These two account for about 24 percent of all transactions that are made using general purpose cards in the USA. They also account for about 14 percent of cards that are issued per year. Visa and MasterCard command this market across the globe with membership in over 150 countries.[4] Visa and MasterCard have successfully commanded the market by using uncompetitive methods. They have discouraged other entrants from entering their market sector. These tactics have also made them immune to need for change and proper delivery.

New entrants have found joining this market very difficult. This is because of the high amount of funds that are required to make new cardholder and merchant bases. These are both important to the consumer, since, for a card to be useful, it needs to be acceptable at different points of sale. The aspect of the competition experienced between existing, and the entering companies is worrying and discouraging. The only entrant which joined the market was the Discover network which joined in 1985.

Both Visa and MasterCard have been able to maintain their dominance since they operate on a not-for-profit basis. They get their finances from fees and assessments that are charged on member banks. They also allow many financial institutions like ‘commercial banks, thrifts, credit unions, and Non-Bank to become members.[5] Member banks also get the right to issue card acceptance rights for their respective associations’ cards.

While the duality of their ownership has contributed a lot to their growth, Visa and MasterCard have, through their member banks, made decisions that restrain them from competing. One way this has occurred is by allowing them to offer their services side by side in the same banks. This has mostly affected the consumers or card users as the two companies have not had any need to make any improvements to their services to make them better. There is evidence to show that there was more innovativeness in the two companies before duality. This is because there were more banks that were willing to fund Visa and MasterCard separately so that they would give better services to beat each other.

At different points, each of the two companies have realized that duality was obstructing growth and tried to pull out. However, they have been met with so much opposition from their member banks that it has not been possible. The companies have even faced direct opposition when they tried to introduce new services to their members. First, the two companies have not accepted to name each other in their advertisements.[6] This would have had a positive impact on their growth. However, the opposition that is met necessitates the companies to pull back from the idea. Secondly, when MasterCard proposed to introduce smartcards into their industry, it met so much opposition from its board members, who were also Visa’s board members, that it withdrew the idea. These cards would have been advantageous over the cards that were being used. Thirdly, when Visa proposed to stop their member banks from issuing commercial cards for both companies, banks made so much opposition that Visa scaled back from issuing its own commercial card products. Finally, when Visa joined hands with Microsoft with an intention to make a system that would enable secure over-the-internet payments, they met so much opposition that they backtracked on the idea and withdrew it.[7] However, this system has now been accepted by both Visa and MasterCard.

Visa and MasterCard have also worked very hard to disadvantage competitors in the market. This has been done through a series of discriminatory rules to their member banks. First, they have prevented merchants from processing their transactions through the same terminals for its cards with those of other competitors. Terminals that were issued by Visa and MasterCard issuing banks only permitted both MasterCard and Visa cards to operate on them. This prevented merchants from accepting these cards as they would be required to have two terminals. When American Express and Discover offered their own terminals that processed transactions from all cards, Visa and MasterCard made regulations preventing member banks from giving card acceptance rights to merchants who were also accepting Discover and American Express cards. Eventually, due to the demand for merchants who accepted all cards, Visa and MasterCard eventually allowed member banks to link with merchants who accepting American Express and Discover cards.[8] They were, however, going to be just a link between the customers and their respective networks would have to process the transactions. They were, however, to have these rules revised to charge higher fees to Visa and MasterCard customers who used their cards at a terminal by American Express. MasterCard and Visa also allow their member banks to allow their cardholders to access advances using the Cirrus and Plus ATM systems.[9] These systems have also made the services of MasterCard and Visa card services more accessible to the cardholders unlike those of American Express and Discover which are much smaller, fewer and farther apart. The cash access networks of American Express and Discover are far fewer and harder to maintain. Finally, the fact that member banks are not allowed to issue cards from other networks has really obstructed their growth in the USA.

In countries where banks are allowed to issue cards from either American Express or Discover, the situation has been different. There has been more competition, and MasterCard and Visa have been known to introduce new products to compete in their markets. In countries that have competition in this aspect, they have been known to provide more merchant support, better services, more branding efforts and so much more. Duality has met a lot of oppositions in other regions and, therefore; there has been much improvement in the market.

In conclusion, the general purpose cards industry, chiefly with the two largest market holders (Visa and MasterCard), has been obstructed by the duality the two companies exercise. First, the two companies have inhibited each other’s growth through poor regulations.  The duality has also increased their competition, to other companies, as they have stood by each other thereby preventing the growth of other companies using anticompetitive practices. In countries where duality has not been embraced, growth by these companies has been registered. This shows that the duality has been a detrimental aspect rather than a developmental one. If these companies had embraced competition and given up duality, they would, not only deliver better services to their consumers, but also be able to get better and cheaper methods of serving their customers. It, therefore, goes that the duality should be done with and that the two companies should adopt a more competitive aspect, both in the United States and other regions. At one point, the two companies will need to strive to let go of each other and steer growth. The point beyond which they would lose their market share to their competitors has already been passed. 

Bibliography

“New Joint Ventures, Spending & Saving Insights, Service Agreements, Prestigious Recognitions, and Stock Price Updates – Research Report on Visa, MasterCard, American Express, Capital One, and Discover.” PR Newswire, 2013., Business Insights: Essentials.

“Visa, MasterCard and AmEx join Google Wallet competitor.” Computer News Middle East, 2011., Business Insights: Essentials.

Dieser A.,  2005. Antitrust Implications of the Credit Card Interchange Fee and International Survey. Loyola Consumer Law Review. (2005, January 1) 17451. Available from: Lexis nexis Academic: Law Reviews

Douglas, Danielle. “Judge approves MasterCard, Visa accord on merchant fees.” The Washington Post, 2013., Opposing Viewpoints in Context.

Zywicki, T. 2013 The Economics and Regulation of Network Branded Prepaid Cards. Available at http//:www.mercantus.org/publication/economics-and-regulation-network-branded-prepaid-cards/

---

[1] Zywicki, T. 2013 The Economics and Regulation of Network

Branded Prepaid Cards

[2] Douglas, Danielle. “Judge approves MasterCard, Visa accord on merchant fees.” The Washington Post, 2013.

[3] Douglas, Danielle, 2013.

[4] “Visa, MasterCard and AmEx join Google Wallet competitor.” Computer News Middle East, 2011.

[5] Zywicki, T. 2013 The Economics and Regulation of Network Branded Prepaid Cards

[6] Douglas, Danielle. “Judge approves MasterCard, Visa accord on merchant fees.” The Washington Post, 2013.

[7] “Visa, MasterCard and AmEx join Google Wallet competitor.” Computer News Middle East, 2011.

[8] “New Joint Ventures, Spending & Saving Insights, Service Agreements, Prestigious Recognitions, and Stock Price Updates – Research Report on Visa, MasterCard, American Express, Capital One, and Discover.” PR Newswire, 2013.

[9] Dieser A.,  2005. Antitrust Implications of the Credit Card Interchange Fee and International Survey. Loyola Consumer Law Review.