The MasterCard Visa Duopoly

The global payments processing market is dominated by only two major players viz. MasterCard and Visa. Many experts find this perplexing.

How is it possible that in the era of global competition, there is a market niche which is completely dominated by two players only? What makes it even more interesting is the fact that these companies protect their market share vehemently.

For instance, the Indian government has launched a payment processing company called RuPay. Within a short span of five to six years, RuPay has become the largest issuer of debit cards in India by volume.

RuPay is about to beat either Visa or MasterCard to become the second largest issuer by value. This small scare in just one market caused MasterCard and Visa to complain to the American government. They are of the opinion that the Indian government is needlessly favoring RuPay which is creating a hostile environment for the other companies.

In this article, we will have a closer look at how MasterCard and Visa are able to hold on to their market share in this global market.

National Schemes

Firstly, it needs to be understood that RuPay is not really the first payment processor that is backed by a national government. There are many examples. For instance, JCB is supported by Japan, Alpha card is supported by the Russian government and Aurora is supported by Brazil.

Since so many countries are making efforts to break the Visa-MasterCard duopoly, there must be something wrong with it. The root cause of the problem is the high fee that these companies charge to process transactions.

Visa and MasterCard typically charge a percentage of the sales amount to the merchant. On the other hand, RuPay charges a nominal flat fee to the merchant.

The technology world is so developed now that it is possible to maintain payment processing networks at bare minimal costs. There is no reason for Visa and MasterCard to charge huge fees. They are just skimming the market. This is also the reason why they have complained to the American government. If national payment processors are allowed to flourish, over a longer time frame all merchants will migrate to their networks since it would be extremely cheap.

How Did MasterCard and Visa Achieve This Duopoly Status?

The Visa-MasterCard story can be better understood by focusing on the past.

• Network vs. Individual: It is important to realize that companies like MasterCard were formed by a union of American banks. Visa was owned by Bank of America before being spun off into a different entity.

  All the banks mentioned above constituted the entire American banking market. Hence every card issued in the American market was issued by either of the two entities. Since debit cards and credit cards were first issued in America, by default Visa and MasterCard had a head start over other companies.

  By the time any competition could come through, these companies had already gained a critical mass. These companies were always the big guys in the payment processing market.

  On the other hand, companies like American Express and Discover were the new players in the market. This is the case even today when other companies are still lagging behind this powerful duopoly which has made the best possible use of the first mover advantage.

• Contract Restrictions: For a long time, MasterCard and Visa were using restrictive contracts to their advantage. The banks and merchants were forced to deal with these companies since there were no viable options.

  In order to prevent the network of competitors from spreading any further, Visa and MasterCard were preventing banks from issuing the cards related to other networks. They were also preventing merchants from accepting these cards.

  American Express and Discover sued MasterCard and Visa over monopolistic practices. Finally, the also won and the duopoly had to stop its restrictive practice. However, these restrictive contracts were just a delaying tactic. While the lawsuit was going on, MasterCard and Visa further consolidated their position as the dominant players in the industry.

• Network Dynamics: Lastly, it needs to be understood that the payments processing market is a chicken and egg story. This means that if more merchants accept a certain type of card, more users want to use it. On the other hand, if more users use a certain type of card, merchants will be forced to accept it. However, what needs to happen first is not clearly known.

MasterCard and Visa have a high number of users as well as merchants and therefore are in a comfortable position. On the other hand, companies like American Express are trying to entice users by giving a lot of loyalty points. They are hoping that an increase in the number of users will force the merchants to accept the card. Also, companies like RuPay are forcing the merchants to accept the card by offering very little fee.

The bottom line is that the Visa-MasterCard duopoly is in serious threat in developing markets. If these companies do not reform their fee structures, they may not be the market leaders for very long.