Visa is making it convenient for the consumer, but at a price that is hidden to most consumers. From a strategic management perspective Visa's strategy is pretty good. I am talking about credit cards in this post, but I am not looking at the credit part, I am in effect treating the credit cards as debit cards.
Banks issue credit cards but buy transaction and payment services from credit card companies (e.g. Visa, MasterCard, Amex). The banks collect a merchant fee from the retailer (around 3%). In addition the banks might collect an international transaction fee (around 3%) as well as a yearly fee for the card.
There are thousands of issuing banks but only 4-5 credit card companies, out of which three totally dominate the world market. At all three vertical stages of the industry supply chain, the bargaining power lies with the supplying industries. The consumers pay 3-4% more for products. The retailers get nothing. The banks gets the largest portion because the credit card companies want to create a strong incentive for the banks to issue more cards. Finally, the credit card companies get a smaller portion, but they collect from thousands of banks.
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| Industry supply chain assuming all balances paid in full at the end of the month. If credit is used, an additional revenue source accrues to the banking industry. |
It is easy to see where the ultimate power lies. Mastercard's equity stock has returned 44% more than index per year for six years.Visa's equity stock has returned 16% more than index per year for five years. Here is the net income margin of the two companies:
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| MastercCard |
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| Visa |
The credit card companies have been very good at branding themselves. In effect they are nothing more than outsourced back-office systems for the banks. Normally such services are not branded to the consumer.
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