Mastercard and Visa profit handsomely from thousands of transactions every second
Could this duopoly be disrupted by new technological and political tensions?
The two most popular international payment networks are Mastercard and Visa. With their systems, you can purchase coffee almost anywhere in the world by simply tapping your card, and two seconds later, you are on your way. Although it seems simple, a complicated worldwide relay is hidden behind that two-second transaction. The merchant's bank requests authorization, your bank verifies the funds, and fraud systems evaluate the risk.
Visa (NYSE: V) and Mastercard (NYSE: MA) are merely card logos to the majority of people. They actually stand for a global system that makes it possible for a payment to be made in Bangkok or Birmingham with equal ease. These two businesses have proven so challenging to disrupt because the infrastructure is so smooth that we never have to consider it.
Now, the question is whether this profitable duopoly, which has successfully repelled rivals for many years, is at last in danger. Critics have observed competing technologies for years, only to see Mastercard and Visa absorb the innovation and grow stronger. However, investors must think about whether the threats of today are essentially different from those of the past as we look to a future of autonomous machine commerce, digital currencies, and sovereign payment systems. Will new technologies only alter the way we make payments, or will they take the place of the unseen conduits that all transactions pass thru?
Why the duopoly between Visa and Mastercard is so strong.
One misconception is the first step in understanding why this duopoly has proven to be so resilient. The majority of cards are not issued by Mastercard or Visa, nor do they register merchants or make loans. All they do is offer the reliable communications network that connects banks, merchants, and cardholders.
An authorization request via Mastercard or Visa is sent by the merchant's bank upon payment. The network securely routes the request after identifying the correct issuing bank. Before accepting or rejecting the transaction, the bank verifies the card's validity, verifies the availability of funds or credit, and performs fraud checks.
A smartphone with an N26 debit Mastercard is held by the customer.
After that, the decision is sent back to the merchant via the network. Subsequently, Mastercard and Visa oversee settlement, guaranteeing accurate money transfers between the participating financial institutions.
The networks don't accept deposits, make loans, or assume the risk of a customer defaulting on a credit card. These obligations belong to the issuing banks. The rules, technology, and communications network that enable thousands of financial institutions to collaborate are merely provided by Mastercard and Visa.
Compared to companies like American Express, this model is very different. Amex is a single company that performs the functions of merchant acquirer, payments network, and card issuer. This allows it to have more control over the customer relationship, but it also means investing more money and taking on more risk. The fact that some smaller companies continue to reject American Express can also be explained by this integrated model. Its merchant fees have historically frequently been greater than those imposed on Visa and Mastercard transactions.
Visa and Mastercard went in the other direction. They established an asset-light model that could grow internationally without requiring the same balance sheet by delegating lending, underwriting, and merchant relationships to partner banks.
As more people join, the network grows in value. Customers can be connected to the system by any bank. It can be used by any merchant to take payments. Because of this structure, Mastercard and Visa have been able to expand into over 200 countries and territories without taking on many of the risks associated with traditional financial institutions.
Options are available. A successful premium franchise has been established by American Express. UnionPay is the leader in China. In Japan, JCB is powerful. In North America, Discover is a well-known brand. However, none have been able to match Mastercard and Visa's combination of asset-light economics, bank partnerships, and worldwide acceptance.
UnionPayand039;s flash payment APP in a metro carriage in Beijing.
In China, UnionPay is the industry leader.
Visa and Mastercard have the same standards.
Because of this role, Mastercard and Visa are now among the most valuable technology companies in the world, with combined valuations of more than £500 million. However, they had much simpler beginnings.
Consumer payments were dispersed during the 1950s and 1960s. While banks found it difficult to handle payments between various institutions, consumers frequently carried multiple store cards. The goal of Master Charge and Bank Americard, the forerunners of Mastercard and Visa, respectively, was to establish a standard that would enable various banks and retailers to use the same payment system.
For many years, the banks that utilized the networks ran them as cooperatives. When electronic payments were still in their infancy, this worked, but as the industry developed, it became challenging. The member banks fought for market share in lending and card issuance, making them rivals as well. Fees, governance, and access disputes became more frequent. Separating the infrastructure from the banks was the solution. In 2006 and 2008, Mastercard and Visa went public in New York after demutualization. They could concentrate on growing the network itself after being freed from conflicting shareholder interests. They transitioned from being mainly industry utilities to becoming technology firms, making significant investments in data analytics, cybersecurity, fraud detection, and global expansion.
Despite the fact that they are frequently discussed together, Mastercard and Visa are not the same companies. Mastercard has frequently positioned itself as the more global competitor, while Visa has historically maintained a larger share of the global payments volume, especially in the US. But there is a striking similarity between their investment cases. The long-term trend that benefits both is the move away from cash and toward digital payments. Neither must defeat the other in order to be successful. Both businesses have been able to compound alongside one another for decades due to the size of the global payments market.
Nowadays, people frequently misinterpret their role. It is not necessary to replace all domestic payment systems with Mastercard and Visa. Rather, they increasingly serve as the shared language that makes it possible for various systems to cooperate.
One helpful example is France. Many French payment cards bear the Mastercard or Visa logo in addition to the national Cartes Bancaires (CB) network's logo. The local CB network may handle the transaction when that card is used in France. If you use the same card overseas, the payment will probably go via the Mastercard or Visa network. Because the systems function so well together, the customer hardly ever notices the difference.
This clarifies why local payment networks don't always pose a threat. While nations can develop effective domestic payment systems, international trade is a far more difficult issue. Common technical standards, fraud prevention, dispute resolution procedures, and the confidence of millions of merchants and thousands of banks are all necessary for cross-border payments. Over 50 years have been spent by Mastercard and Visa establishing these relationships.
The UPI QR code in front of a Kolkata soft drink shop.
Global infrastructure is absent from India's UPI payment system.
They are not impervious as a result. Domestic programs like China's UnionPay, Brazil's Pix, and India's Unified Payments Interface (UPI) have shown that local providers and governments can create extremely effective alternatives for domestic payments. However, they also point out the areas in which Visa and Mastercard excel. The fact that they handle all payments is not an advantage. They continue to be the network that links various payment systems across national boundaries.
As new payment technologies emerge, this distinction will become increasingly important. The existence of other systems in addition to Mastercard and Visa is not the question. They already do. Instead, the question is what can take the place of their worldwide infrastructure.
The business strategy of Visa and Mastercard.
The business models of Mastercard and Visa are among the most appealing in the world economy. Every transaction does not have to earn them pounds. Only a portion of the value passing thru their networks needs to be captured by them.
A payment's economics are divided among multiple parties. A merchant must pay a fee known as the merchant service charge when it accepts a card payment. In exchange for supplying the card and assuming the risk of lending or fraud, the issuing bank receives a portion. Additionally, Mastercard and Visa get paid for running the network, handling transactions, and supplying the technology and regulations that enable the system to work.
Imagine it as a toll road. Even tho hundreds or thousands of pounds may be exchanged during a transaction, Mastercard and Visa only receive a tiny fee for facilitating the payment. However, the tolls generate a substantial and extremely lucrative revenue stream when multiplied over hundreds of billions of payments annually.
Keep in mind that after the network is established, processing more transactions comes at a very low cost, resulting in remarkable incremental margins. Revenues can increase far more quickly than operating expenses when payment volumes increase. Because of this, both businesses constantly produce some of the highest operating margins in the world's equity markets.
Everyone wants to stay in the Mastercard and Visa payment networks.
Mastercard and Visa's dominance rests on several reinforcing advantages: trusted brands, acceptance at millions of merchants, deep relationships with banks, vast amounts of transaction data, established operating rules and unrivalled global scale.
When combined, these produce a network effect that has taken decades to develop, which explains why so few businesses try to directly compete with them. Instead of taking the place of Mastercard and Visa, the majority of new payment companies opt to collaborate with them.
A typical financial technology company could develop a more appealing customer experience, offer lower fees, or improve the app. However, when a consumer uses Apple Pay or Google Pay by tapping their phone or card, the transaction frequently still depends on the underlying infrastructure of Mastercard and Visa. This is referred to as "riding the rails" in the payments industry.
Better technology alone would not be enough to create a competing system. To implement a completely new standard, a rival would have to convince millions of merchants, thousands of banks, and regulators worldwide. This is why it is so hard to attack Mastercard's and Visa's position. The system that surrounds the technologybanks, merchants, regulations, data, and trust that have built up over decadesis what gives them an advantage over the technology itself.
New technology that promises to render Mastercard and Visa obsolete appears every few years. None have worked so far. Without taking the place of the underlying networks, digital wallets like Apple Pay and PayPal enhanced the consumer experience.
Because they avoid traditional card networks, account-to-account payment systems and QR-code payments may be more affordable for businesses. They do, however, typically function best in specific markets. They address the cost issue, but not the difficulty of building a reliable worldwide network for cross-border payments.
Whether AI-driven commerce develops a completely new payments architecture is a longer-term unknown. The winners will require secure digital identities and reliable authorization systems if machines start carrying out transactions on behalf of customers and companies. It's unclear if that opens the door for a new rival or gives Mastercard and Visa a chance.
A traveler uses Apple Pay on her phone to make a payment.
Mastercard or Visa are still required for Apple Pay and Google Pay transactions.
The geopolitics of payments.
Still, the nature of the competitive threat may be changing in other ways. For decades, global payments operated under the assumption that financial networks would remain politically neutral. That assumption has weakened. The increasing use of financial sanctions and restrictions on cross-border payments has reminded governments that whoever controls critical financial infrastructure also holds significant influence.
The response has been a push towards greater financial independence. More countries have already been building their own domestic payment networks, such as Brazil's Pix and India's UPI, which allow consumers to transfer money directly between bank accounts, often at little or no cost. If more governments come to view payments as a matter of national security as well as cost and efficiency, they will have the ability to build domestic alternatives.
Mastercard and Visa still have a major advantage in international commerce, where global acceptance matters far more than simply moving money from one account to another. However, even if the expansion of domestic networks is unlikely to displace them from this role, they can gradually reduce payment volumes and hence revenues from national markets that have historically been an important source of activity.
Mastercard and Visa are adapting rather than resisting. Instead of insisting that every payment runs through their networks, they increasingly provide the layer of technology that allows different systems to operate securely. More broadly, both companies have long been expanding beyond their traditional business of moving payments from one bank to another.
Regulation has constrained traditional payment fees particularly interchange fees earned by banks, which are capped in many countries. Meanwhile, competition has encouraged financial institutions and merchants to demand more sophisticated services.
So Mastercard and Visa have focused on value-added services. They now provide technology that helps banks and businesses prevent fraud, verify identities, secure digital payments and analyse transactions. Just recently, Visa announced a new deal to buy BioCatch, a fraud intelligence firm, for £2.4 billion.
Logos of Visa and BioCatch are displayed on a smartphone.
Visa is to buy BioCatch, a fraud intelligence firm, for £2.4 billion.
This shift has strengthened an already attractive business model. In effect, the duopoly are moving from simply operating payment networks to providing the software that helps many different payment networks function, and keeping payments safe and reliable.
Mastercard and Visa's trust layer.
Whether this strategy is enough to offset future threats remains one of the biggest questions facing the industry. Mastercard and Visa have survived previous attempts to bypass them because most innovations have changed how we pay, not how payments are trusted and settled.
Sovereign payment systems, account-to-account transfers and blockchain-based settlement all represent more meaningful challenges. Yet history suggests that the duopoly are highly effective at adapting to new payment rails rather than being displaced by them.
Tomorrow morning, millions of people will buy a coffee with a tap of a card, phone or smartwatch without giving the process a second thought. Behind that simple action, a global network will verify their identity, assess fraud risk and connect two financial institutions in a fraction of a second.
That reliability has helped make Mastercard and Visa two of the world's most valuable companies. They are an essential part of the global economy. The technology that wins is often the technology people stop thinking about because it simply works, and that may be their greatest competitive advantage.
Their asset-light models, powerful network effects and trusted brands have produced two decades of exceptional returns for investors. There are still clear opportunities for growth as cash continues to decline, cross-border commerce expands and value-added services become a larger part of the business.
Still, none of that guarantees attractive investment returns from this level. The market already recognises their quality and values both companies accordingly (both are on a trailing price/earnings ratio of around 31 at time of writing). The real question is not whether these remain exceptional businesses, but whether future growth will be sufficient to justify the premium investors already pay for them. Disruption need not destroy the networks to disappoint shareholders. All it has to do is undermine the lofty expectations ingrained in current valuations.
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