Global Payment Industry Analysis
This essay will focus on the global cards payments industry where Visa and MasterCard operate.
VISA and MasterCard belong to the non-cash business of the global payments industry, an economic sector that is strongly affected by technology and innovation due to the fundamental shift from paper based payments (cash/checks) towards paper-less payments (credit cards, mobile payments, etc).
This shift is considered almost irreversible as consumers appreciate more and more the convenience, practicality and security of the electronic money. Similarly for corporations the use of paper-less money brings uncontestable benefits in terms of ...view middle of the document...
Although the origins of the credit card sector date back to the early 1800’s, it is in the second half of the past century that the first cards started to appear in the USA. These charge cards were operating as short term preauthorized lines of credit for top customers, allowing them to purchase goods and services from affiliated merchants, thus enhancing repeated business and loyalty.
The success of the charge cards immediately attracted, as one would expect, the interest of large financial institutions, such as Bank of America, who spotted the possibility to extend their business beyond traditional credit products by introducing the first credit cards. However, at least initially, the diffusion of these new products was hampered by the US regulation which limited substantially banking activity beyond their state borders.
Nonetheless in those years Bank of America managed to expand its business by both setting up a dedicated company for the management of credit card business (BankAmerica Card, currently known as VISA) and licensing the use of the credit card brand to other banks thus overcoming national restrictions.
The successes of Diners Club and BankAmerica Card spurred competition and attracted other companies in the market arena, namely MasterCard and American Express, which are at present still the most active participant in the industry.
The Business model
Broadly speaking the global payments industry includes the following forms of payment:
• Paper-based payments— i.e. cash, checks, travel cheques, money orders, government checks, etc.;
• card-based payments— i.e. charge cards, debit cards, credit cards, prepaid cards, private label cards, etc.;
• Mobile payments— i.e. payments made using mobile phones, internet, contactless readers such as NFC, etc; and
• Other electronic payments— i.e. wire transfers, electronic transfers, automated clearing house payments, etc.
Moreover Cards can be divided as follows:
• pay now cards, i.e. debit cards, with automatic debit to a checking or other account with accessible funds;
• pay later cards, such as credit cards, which may allow the cardholder to pay the full balance within a specified period of time; and
• pay before cards, such as prepaid cards, which need to be pre-funded in order to be used.
Primary general purpose card brands include Visa, MasterCard, American Express, Discover/Diners Club, JCB (in Japan) and Unionpay (in China).
VISA and MasterCard are by far the largest retail electronic payment networks in the world as visible from the pictures and table below.
Source: The Nilson Report | Source: The Nilson Report |
Source: VISA Annual Report 2011 |
Network Payment Models
The business model of Visa/MasterCard is substantially different from the one of independent financial services companies such as American Express. The main difference lies in the way the payment transaction is managed. More specifically...