Review of international payment systems Visa and Mastercard
Having a bank card in your wallet is not that surprising anymore, but just over 60 years ago, it really was. Today, we are even seeking alternatives to the bank cards like electronic wallets and other contactless payment methods.
Visa (founded in 1958) and Mastercard (founded in 1966) introduced cashless payments and have become almost synonymous with bank cards. Globally, we even forget sometimes that not the only these card brands exist in the world. The popularity of Visa and Mastercard plastic cards began in the USA, and today these cards are accepted in over 200 countries. You can confidently say that with a Visa or Mastercard, you can pay almost anywhere in the world.
So, let’s get to the basics, and review the pillars of payment processing — Visa and Mastercard. Perhaps this article should have been the first in our blog, but better late than never. Enjoy your read!
Card payment systems
To understand initial functions and nature of Visa and Mastercard business, let's start from the beginning and define the role of a card payment system in finance.
A bank card is a key to a current account that allows you to make payments in retail networks offline, as well as online on websites, instantly, without disclosing the account details or accessing it directly. Plastic card has its own number and security layers, which allows it to be identified as belonging to current account and to conduct transactions.
Since the card is only a mean of accessing the money on account and is not the account itself, an infrastructure is needed to process payments. This system creates card acquiring —process of debiting funds from the card through interaction of banks, financial institutions, and of course Visa/Mastercard.
Interestingly, both Visa and Mastercard started as non-profit companies, but today they are among the most profitable corporations in the world. This is because both payment systems earn from commission fees, they charge from almost all participants in the financial market who use their services. Besides issuing cards, payment systems maintain technical infrastructures, process data, and handle international payments. Banks and payment providers that want to collaborate with Visa and Mastercard sign special agreements committing to follow the payment systems' rules and pay commissions.
The role of these payment systems is much more significant and broader than just issuing plastic cards under their brand. For example, Mastercard's tokenization technologies are currently being used to develop new payment solutions, and Visa Direct serves as the foundation for the wallet on the X platform — X Money Account, created by Elon Musk within the former Twitter. Companies are also actively involved in cryptocurrency developments, exploring options for fast settlements, providing anti-fraud solutions, and moderating the activities of all merchants who accept their cards.
Monopoly of Visa and Mastercard payment systems
Despite their active operation and undeniable benefits, the current position of Visa and Mastercard payment systems concerns some countries, including European Union and even United States. Their market penetration is so strong and their involvement in all processes so integral that both payment systems have essentially created a monopoly, preventing competitors from entering the payment services market. We’ve heard the rumors that Apple even received some form of compensation for not competing with them, and the matter went to court.
One might wonder why having such strong payment providers is a bad thing if they offer excellent service, satisfy everyone, and meet the needs of almost entire world. However, a closer look reveals the standard negative sides of any monopoly. Monopolists dictate terms to other market participants who depend on them, leaving them no choice but to agree, even if the terms are unfavorable and could harm their businesses.
Visa and Mastercard have been repeatedly caught raising commission fees unjustifiably, forcing merchants to pay more for acquiring services. Since every market participant naturally aims to make profit, higher costs lead to higher retail prices for the customer (the merchant in this case). European Commission's antitrust court has already addressed this situation, forcing both payment systems to fix some of their fees at previous levels for the next few years. However, how the situation will unfold remain to be seen.
Due to the widespread use of bank cards globally, most merchants are obliged to integrate card acquiring into their websites to accept payments from customers in their preferred way. Today, card acquiring is one of the most expensive payment methods, not only in high-risk businesses but also in other industries. This has led to increased attention to developing alternative payment methods, such as open banking. Open banking technology does not depend on Visa and Mastercard or other payment systems, and its cost is significantly lower. Reducing the cost of payment processing is a top priority for the entire financial ecosystem, as it allows to offer more advantageous services to businesses. In some business models, payment processing can account for 20% of total business expenses, which is a significant figure. Breaking even with other overheads becomes an even more challenging task, and many brands, even in iGaming, struggle to achieve this successfully.
Conclusion
In summary, bank cards have come a long way: from an innovation to outdated payment method in less than a century. Carrying plastic in your wallet today is considered old-fashioned and not tech-savvy. But what's next? Will Visa and Mastercard meet their partners halfway, or will they focus on developing their own new APM technologies?
The role of card payment system is still indispensable, and it is unlikely that everything will change overnight, leading to a completely new financial system in the world. Therefore, you have to consider not only the integration of Visa and Mastercard processing but also proper management of these processes to maximize benefits. For merchants, key to positive interaction with payment methods is payment approval ratio. Achieving this in card processing is more challenging than in banking payment methods because, as we have mentioned, the process involves too many parties and numerous factors. At Monoup, we specialize in approval ratio issues, and if you see room for improvement in this area, feel free to request a consultation. We will find the best way to help you.
