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The Almighty Buck

Can the Visa-Mastercard Duopoly Be Broken? (economist.com) 160

Posted by BeauHD from the house-of-cards dept.
An anonymous reader quotes a report from The Economist: America is home to the heftiest interchange fees of any major economy -- costs are an order of magnitude greater than in Europe and China. That largely benefits two firms: Visa and Mastercard, which facilitate more than three-quarters of the country's credit-card transactions. Doing so has made them two of the most profitable companies in the world, with net margins last year of 51% and 46% respectively. Rank every firm (excluding real-estate-investment trusts) in the s&p 500 index by their average net-profit margins last year, five years ago and a decade ago, and only four appear in the top 20 every time. Two are financial-information firms, Intercontinental Exchange and the cme Group. The others are Mastercard and Visa. At first glance their position appears insurmountable. Already dominant, in recent years the firms have been boosted by a covid-induced rise in online shopping. American consumers used credit or debit cards for 45% of their transactions in 2016; by 2021, that had reached 57%. The migration from cash is "a significant and long-running tailwind," says Craig Vosburg of Mastercard. Yet two threats loom. The first comes from Washington, where legislators hope to smash the duo's grip on payments. The second is virtual. Payments have been transformed in Brazil, China and Indonesia by cheap, convenient app-based options from tech giants like Mercado Pago, Ant Group, Tencent and Grab. After a long wait, new entrants now look like they could shake up America's market.

[...] On July 28th Richard Durbin, the same Democratic senator who regulated debit interchange a decade ago, introduced the Credit Card Competition Act (ccc). It does not propose a cap on interchange, as the debit rule does, since costs for credit cards are more variable than for debit cards, making it harder to find the right level. Instead, the ccc would attempt to spur competition by breaking the links between card networks and banks. At present, when a bank issues a credit card every transaction on it is processed by the card network the bank stipulates, meaning the bank is guaranteed the interchange fee the network sets. If the ccc becomes law it will force banks to offer merchants the choice of at least two different card networks. Crucially, these choices could not be the two biggest -- at least one smaller network would have to be offered. They could compete for business by offering lower interchange rates, and merchants would presumably jump at the offer.

Two factors help the bill's chances. It is sponsored by Mr Durbin, the second-most senior Democrat in the Senate, and it is bipartisan, co-sponsored by Roger Marshall, a Republican from Kansas. The ccc's best chance is probably as an amendment to another bigger piece of legislation, which is how debit-card regulation passed in 2010. Even if the effort fails, or fails to work as intended, a potentially bigger threat to the giants looms. So far new entrants to the payments market have benefited Visa and Mastercard, by making it easier for consumers to use their cards online. But as the new fintechs have gained clout, their decisions about the sorts of payments they offer could influence how much money travels along the card networks. Stripe, a large payments-infrastructure firm, says it is working to provide merchants with payment methods that will lower their costs. Current options include a box for customers to enter card details, but also Klarna, a "buy-now-pay-later" provider through which customers can pay for purchases using bank transfers, thus avoiding the card networks. It could soon include things like FedNow, a real-time bank-transfer system being built by the Fed, which is due to be launched next year. In time, it could even include central-bank digital currencies or cryptocurrencies.

Competitors might make little headway if the perks for sticking with credit cards are sufficiently juicy. But merchants can offer their own incentives. When your correspondent recently went to purchase a pair of linen trousers from Everlane, an online retailer, she was encouraged to pay using Catch, a fintech app. The app linked to her bank account via another payment startup called Plaid. As a thank you for avoiding the card networks, Everlane offered a shop credit worth 5% of the transaction value. Catch has signed up a handful of fashionable, millennial brands including Pacsun, another clothing retailer, and Farmacy, a skincare firm. For evidence that this poses a threat, look no further than Visa's attempted purchase of Plaid. In 2020 the firm tried to buy the upstart for $5.3bn, only for the deal to be scuppered by antitrust regulators on the grounds that the transaction would have allowed Visa to eliminate a competitive threat. Ultimately, Visa gave up, but the attempt was nonetheless telling. The house of cards carefully constructed by the two payment giants is formidable and long-standing. But it is not indestructible.
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Can the Visa-Mastercard Duopoly Be Broken? More

Can the Visa-Mastercard Duopoly Be Broken?

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  • - Coke and Pepsi
    - McDonald's and Burger King
    - Miller Lite and Bud Light
    - "Team Red" and "Team Blue"

  • WTF -- all these paywalled articles lately (Score:5, Insightful)

    by blahbooboo ( 839709 ) on Friday August 19, 2022 @09:25AM (#62803365)
    Slashdot "editors", please stop linking to articles that are paywalled. Its contributing to the slow death of this community...
    • It's not just slashdot, you'll find the same wherever you go. I guess giving away the store wasn't working out.

    • Slashdot "editors", please stop linking to articles that are paywalled.

      It's actually a clever test - one that you just failed. A True Slashdotter never reads the articles.

    • Re: (Score:2)

      by shanen ( 462549 )

      Why was it modded as Funny? Seems to be a sad truth.

  • Regulation (Score:4, Insightful)

    by danbob999 ( 2490674 ) on Friday August 19, 2022 @09:26AM (#62803377)

    What we need is regulations. We need to:

    1. cap the maximum fee that can be charged to merchants (0.5% would seem fair, but even 1% would be a good start)
    2. Forbid clauses in contracts between Visa/Mastercard and ther merchants preventing the merchants from adding a surcharge when paying with a credit card to cover the fees.

    The result would be a net win for the public.

    • 2. Forbid clauses in contracts between Visa/Mastercard and ther merchants preventing the merchants from adding a surcharge when paying with a credit card to cover the fees.

      The result would be a net win for the public.

      Vendors can (and often do) offer discounts for cash. It's legal, and Visa/MC can do nothing about it.

    • Re:Regulation (Score:5, Informative)

      by jsonn ( 792303 ) on Friday August 19, 2022 @09:51AM (#62803443)
      Many merchants in the European Union only started to accept credit cards after the interchange fee caps were introduced in 2015. Those caps are 0.2% for debit cards and 0.3% for credit cards, with an optional flat fee for small transactions.
      • Curious in Europe, with these caps, do cards still offer rewards? I think my visa gives 1% cash back on all retail and 3% on travel. How can a CC pay out as a reward more than it charges?

        • Curious in Europe, with these caps, do cards still offer rewards? I think my visa gives 1% cash back on all retail and 3% on travel. How can a CC pay out as a reward more than it charges?

          Yes they do. Obviously things vary around Europe but my card gives 1% cash back up to a certain amount.Obviously it's not much.

          Keep in mind they're still making a ton of money on interest, so I don't think that's a big issue for them.

          • But if your cc gives back 1 on .3% transaction fee, they lose .7% every time you make a charge. I know they make most of their money from interest, but it still seems unsustainable to lose .7% on trillions of euro's/dollars a year. Break even on the loyalty cost seems like the minimum the merchant fee can be. So around 1%.

    • "A card, eh? If you buy it with cash, you can have a 2% discount or this free knickknack!"

  • The costs are higher because we use credit cards (Score:5, Informative)

    by rsilvergun ( 571051 ) on Friday August 19, 2022 @09:32AM (#62803389)
    mostly because we living paycheck to paycheck due to much lower real wages. Our expensive housing, transportation, higher education and health care systems mean that even though we make more money on paper we live worse. I remember talking to an immigrant years ago that was surprised we didn't all drive Mercedes and own mansions. He didn't understand what "rent-seeking" was or how it drains your finances.

    Credit cards cost more all around because they're not debiting cash you have (since you probably don't have it for the reasons above), it's a loan. A zero interest loan if you pay it off in 30 days, but still a loan. That means it comes with all the risks and expenses of a loan for everyone involved.

    This isn't to say they don't have their uses. Shopping online or even in person for something a little iffy (like having blinds installed where the quality of the work can vary to an insane degree) having it be a loan is nice, since US law means credit cards aren't treated like cash (again, it's a loan) and you can dispute any charges since you're borrowing money for the purchase. I also don't like the idea of my bank account being out on the Internet.

    • mostly because we living paycheck to paycheck

      I realize lots of people have that issue, but it's not universally true. My wife and I could pay "cash" for everything, but instead we pay for almost everything with our credit card - however we pay off the balance in full before the due date each month. That lets us collect 1.5% back on those purchases without paying any interest to the credit card company.

      • Re: (Score:2)

        by Zarhan ( 415465 )

        There are two basic categories for credit card customers. The ones like you and your wife, who pay off balance each month. You do not create profit for the card issuers.

        The ones that are really creating the profit are the ones that pay monthly minimum and accrue interest forever.

        I have three credit cards, and pay them all off each month. One is for my personal expenses, one is for shared family expenses, third is a spare from another bank in case there's ever a problem with their systems.

    • Maybe in that loans increase demand, which in turn increases prices. But the total cost of the loan you can get with your credit card is less than the total cost of handling physical cash for most transactions.

  • Incentive enough on its own (Score:5, Insightful)

    by jenningsthecat ( 1525947 ) on Friday August 19, 2022 @09:34AM (#62803393)

    TFS mentions that "merchants can offer their own incentives". That's nice, but to be honest I would actually pay a bit more and/or give up the perqs offered by Visa and MC just for a chance to give the business to somebody else. It's nice to have a chance to not feed the hand that bites so many people.

    Longer term, I'd like our economy to not be driven by the transactional friction that allows banks, and companies like Visa and MC, to benefit so hugely from what is effectively "waste heat". There are huge inefficiencies in the money handling business, and many of its richest beneficiaries do almost nothing productive at all - they are essentially parasites. The world needs fewer parasites.

  • MasterCard has already gone whining to the US govt over these two systems.

    They have both started seeing traction in other countries than India. Just a matter of time before the duopoly will be broken.

  • I had a period in which I used credit cards a lot, but these days, with world wide useable bank debit cards, paypal and other apps and Bicoin/lightning I very rarely feel the need to use a credit card. Perhaps it's because I'm European, but there seems to be plenty of competition.

    • Re: (Score:2)

      by skam240 ( 789197 )

      Unless I'm being oblivious and have missed new developments in the US for pretty much any physical store it's cash or card and at some more expensive retailers (like say major electronics stores) they'll take bank checks as well and that's about it.

      It's been a good bit since I've been over that way, are there really meaningful numbers of retailers that take paypal or bitcoin? It didnt seem that way when I was on that continent last but I think that's getting close to a decade ago now and obviously things ch

    • I don't feel the need, but the EU banned online shops from charging a surcharge ... and the credit card offers bennies, so why not?

      US is using the law to remove credit cards from their dominant position, the EU is giving them a new space to get a dominant position on a silver platter (in exchange for a lot of revolving door jobs presumably).

  • The government owns the currency system, at least overall. At at a low level, it owns the mechanism of non-electronic currency.

    However, for electronic payments, whether, visa, mastercard, PayPal or Apple Pay, the government stays out.

    This naturally leads to several competing "Toll" payment systems. 2% here, 3% there.
    That is fine, but at least the government should offer some electronic currency as an alternative.

    Perhaps skipping credit/debit cards would be appropriate at this point, and going directly go c

  • Or American Express... or Discover? This has been tried before. (Yes, I know Diners Club was the first). As a small merchant, the fees associated with American Express make it not worth the hassle. Now that merchants can pass on the credit card fees to the customer, there's even less reason to use an AMEX card. But that should tell you something. If a new card wants to make a dent, it needs to a) be accepted everywhere and b) the fee has to be significantly less than their competitors. It's about 3%

    • At least to me in the past couple decades since most merchant now use a 3rd party transaction provider most everyone takes AMEX and Discover where it used to be a common joke that sores wouldn't take Discover and AMEX was only accepted at the higher end places so it was "exclusive" (I still ask places if they take AMEX out of habit and it's been years since I had a place say they don't).

      I think now it's more a duopoly enforced on the bank side rather than the merchant side. My Costco store credit c

    • Or American Express... or Discover?

      I was thinking this as well. There are already smaller competitors, but I think there's an important thing that neither the summary nor the comments section addresses: the debit cards issued by banks.

      Every bank and credit union I've ever had an account at, or seen a card from in my years of retail, were issued by either Visa or Mastercard. I've never once seen a Capital One Discover card. That's going to give Visa/MC a massive boost in their wallet share.

      American Express has always been more of a niche play

  • high interest rates make big money (Score:5, Informative)

    by Klaxton ( 609696 ) on Friday August 19, 2022 @10:45AM (#62803617)

    The transaction fees vary depending on the merchant category code (riskier businesses will have higher fees), what benefits come with the card, and how the card is processed. A card that is physically swiped at a store is probably more secure than an online transaction where the merchant doesn't see the actual card.

    I looked up some typical charges;
    Visa: 1.4-2.5%
    Mastercard: 1.5-2.6%
    Discover: 1.55-2.5%
    American Express: 2.3-3.5%

    Yes the processing fees are an indirect tax and a drag on the economy, but the real money comes from interest rates on unpaid credit card bills that keep rolling over month after month. It has a very wide range, from 10% - 36% depending on credit rating, but wow that's a pretty good return on investment.

    • And their consistent 50% net margins refute the idea that those high rates are just covering the risk of defaults.

  • Visa/mastercard meet lightning.

  • Provide better protection for ACH fraud first (Score:3)

    by aaarrrgggh ( 9205 ) on Friday August 19, 2022 @10:51AM (#62803641)

    The main reason the scammy fintech apps are useless is there is no way in hell I am giving them bank account details. I don't trust them. I even have bank accounts dedicated to marginally scammy ACH transfers, but it gets hard to manage (to reduce risk) with more than two providers per account, and managing multiple accounts for this is a mess.

    If you want competition for Visa and Mastercard, figure out a better way to manage ACH transfer risk. Let consumers treat it like a credit card or something, such that they can approve individual transaction and not be out cash for months while an investigation goes through. Figure out a better replacement for checks while you are at it. Other countries have managed to pull it off, why are we so slow?

  • Interesting to me that I haven't seen anyone shilling for a bitcoin solution in this thread yet.

    Anyway, Is Europe so flush with competition that the "market" is working there or is it just that they regulated it better. I think I know the answer and it should be a kick in the ass for the anti-regulation crowd.

    • The EU's regulated. A lot of consumer services here are faster, more fully featured, cheaper, & more reliable than in north America. We're socialists.

      • Re: (Score:2)

        by dargaud ( 518470 )
        People in Europe use what you'd call debit cards. I don't know ANYONE who uses those 0-interest rate credit cards you use in the US. And we don't have credit reports here. Banks need to KNOW us before they'll give a loan.
  • It's a small debit & credit card transaction processing company that charges transaction fees just a little bit higher than Visa or Master Card. It has become very popular among retail banks in a very short space of time despite very low actual usage by their customers. It's called Master Visa which may be a trademark infringement but strangely neither Visa nor Master Card are pursuing legal action against it.

  • Mastercard and Visa are a duopoly and there are some outliers.

    If a third competitor appears, either Visa or Mastercard will remain big and the other will become and outlier.

    Lowes/Home Depot ...... the rest like true value and farm and tractor supply

    Wal-Mart and Target

    Then there is Dick's sporting goods and other outliars like small specialty stores (think running or cycling)

  • Much of the success in credit card processing and transactions for Visa and MC can be traced to the companies making massive profits off consumer debt. Nearly everyone in the US spending beyond their means is what heats up the US economy despite the bad fundamentals throughout nearly every US based industry. Start messing with Visa-MC at your own peril, the system is a house of [credit] cards.

    • Much of the success in credit card processing and transactions for Visa and MC can be traced to the companies making massive profits off consumer debt. Nearly everyone in the US spending beyond their means is what heats up the US economy despite the bad fundamentals throughout nearly every US based industry. Start messing with Visa-MC at your own peril, the system is a house of [credit] cards.

      They are simply rent seekers in a nation of rent seeking.

  • there are tons of alternatives to mastercard / visa duopoly:
    Apple Card, Google Pay, Cash App, Venmo, Zelle...

  • There is significant comeback if the vendor fails to deliver what you have paid for. Thus when the airline I was booked on for a trip went out of business, the credit card company gave me a refund. This will also apply with things like an AirBnB catastrophe, though to be fair AirBnB has coughed up when things went bad for me. So it's worth using a credit card rather than a debit card given the choice.

  • here in Europe Visa and Mastercard dominate the market even more, no one uses American Express, Diners Club, Apple Card or whatever - but still, their fees seem so be an order of magnitude“ smaller than in the US. But they still seem to make quite a profit over here, even with higher taxes on top of it all. I wonder how that came to be.

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