A Primer on Private Placements
When we think about investment banks, as well as the activities that they undertake, we tend to think about initial public offerings, debt syndication, and other such activities that are very visible to the public eye. However, the reality is that a lot of investments that are routed via investment banks are actually private placements. […]
Freely Falling Currencies
The freely floating currency system may have its advantages and disadvantages. However, it has fundamentally changed the way we look at currencies. In doing so, it has created one major obstacle. We now compare currencies with one another to check if they have gained or lost value. This way of measurement is bizarre to say […]
Types of Capital Rationing
As discussed in the previous article, capital rationing is a form of capital budgeting. In capital rationing we change the unlimited capital assumption of capital budgeting and we try to choose projects with the finite capital that we have on hand. This finite capital may be in the form of capital that the firm already […]
The Green Shoe Option in Investment Banking
In many cases, IPOs are thought of as being underpriced. This means that as soon as the IPO is listed in the market, investor demand appears, and as a result, the price of the newly listed shares goes up. This is the situation that the issuing company, as well as the investment banker, wants to […]
How Do Funds Transfer Systems Work
Domestic Funds Transfer It is common for individuals and entities to transfer funds to their friends, family, business partners, and associates. The way funds transfer works is opaque to the individual as he or she simply instructs the banks (or enables funds transfer when using online banking) and waits for confirmation from the other end […]
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.
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.
The Visa-MasterCard story can be better understood by focusing on the past.
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.
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.
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.
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