Credit card payment networks face stiff competition on many fronts
Most stock investors make one common mistake, which is buying yesterday’s winners. If a company is facing an unfavorable change due to the competitive dynamics, then paying a full price for such a company would be a money-losing proposition. So, it is important to always stay ahead of these changes in the dynamics of the industry. There seems to be one such change, which could have a negative impact and affect some of the major networks such as American Express, MasterCard, and Visa.
Payments are facilitated by card networks either by connecting cardholders as well as merchants directly or via financial institutions. The entire open-loop structure normally consists of the card issuing authority such as a bank, networks, and the merchants. The issuer will issue cards to their customers with the particular network visible on the card. Merchants are provided terminals by the acquirer and these terminals have the ability to read cards and also provide connectivity to the systems that are connected to the networks. The role of the network is to lend its brand name to the issuing authorities and to provide connectivity between issuers and acquirers, by helping in moving transaction information between the two to help the payments go through. The largest open-loop networks in the world are operated by MasterCard and Visa.
In a closed-loop structure a single company usually issues cards to the cardholders and provides connectivity to merchants via its network. It also acquires and processes all the transactions when the cards are used by the cardholders. There are several companies that operate closed-loop networks, but Discover Financial and American Express are the biggest players. However, in the recent years, Discover and Amex seem to have opened up their networks to merchant acquirers and issuers. Now, they too have a value chain that is similar to MasterCard and Visa.
Scale is a very crucial component for success in the card network business. In order to achieve it, it is important to reach out to a maximum number of cardholders and merchants as possible, by sending over sales executives to all the merchants in the United States and directly offering cards, or by making use of third parties that already work as distribution agents and provide financial service to cardholders and merchants. The distribution agents are banks in the payment space. MasterCard and Visa used banks to distribute their cards, while Discover and American Express distributed their cards directly. Hence, MasterCard and Visa scaled greater heights when compared to Discover and Amex.
