Digital transformation knowing with Visa and Master Card ..1

 

Introduction 

In the 21st century, almost everyone carries a credit card. And there is no secret truth that Visa and MasterCard are representative credit card companies all over the globe. As compared to other credit card companies, Visa and Master Card companies have different business structures. Their financial service is extended, on a global scale, for international payment services to other credit card companies.

And it won't be an exaggeration to say that these two companies hold a position close to a monopoly in the international market because they account for 80% of the global payment.

How Credit Cards Originated?

Are you curious to know how credit cards came into existence? What is the current status of Visa and MasterCard? How is the digital transformation taking place in the credit card industry? Let's get our answers.

In the 19th century, to think of doing financial transactions with the help of a card was mere procrastination or imagination. But now, in this 21st century, it is a naked reality. Doing financial transactions via card and carrying a card is like a super usual thing.

 

For the very first time, the terminology "Credit Card" was used in a science fiction novel named "Looking Backward". It was written and published by a novelist named Edward Bellamy in 1887. This book narrates a fictional story where Julian West, the protagonist, falls asleep in 1887 and wakes up one fine day in 2000. He then encountered unprecedented situations and was amazed. He gets to know that the year he is living in is 2000. The protagonist was going through shocks. Whilst he also experienced a queer form of payment method used by the people of that time. He witnessed people using Credit Cards for monetary transactions.

The origin of credit cards occurred before 2000. But actively, they were used in the year 2000. The first credit card was invented in 1950 by American businessman Frank McNamara. On one fine day, Frank McNamara invites people who have been helping him a lot in different cores to have had dinner with his friends at a New York restaurant, but right after he finished eating, he checked out the bill, only then did "he" realize that he was out of cash. He contacted his family and paid for the dinner. McNamara went home and recalled the dizzying moment of this time and wondered if it would be convenient for people to pay without experiencing difficulties even if they had little or no cash.

Then, he devised a solution to this problem. He signed an agreement to resolve this problem with Major's Kevin Grill, a restaurant where he faced the trouble of running out of cash. And they launched a credit card. It makes Major's Kevin Grill the first restaurant to use a credit card, and McNamara and Ralph Schneider become the first people to dine with a credit card.

The name of the early credit card was the "Diners Club Card", where the word 'dine' means having a meal, and the word 'club' represents colleagues or membership. After that, McNamara and Schneider decided to gather members of the Diners Club in earnest and signed a franchise agreement with other restaurants in New York. The early credit cards had the name "Diners Club card" printed on cardboard, which was making it difficult to verify the identity of the sole owner.

 

So, they started issuing Diners Club cards with an annual fee of $5 to verify acquaintances and relatives.

The 14 restaurants in New York were taken on board. The advantage of being able to dine without cash immediately spread by word of mouth, and the number of members increased to more than 20,000 within one year, and the Diners Club card became a huge success. After that, the banking industry recognized the success of the Diners Club card and entered the credit card business, and this is how the era of full-scale credit cards came.

In 1958, the United States' bank name Bank of America (BoA) launched its first revolving credit card, BankAmericard (similar to the concept of payments in instalments). That later became the birthplace of the Visa card. As the payment network gradually expanded throughout the United States, it went out internationally in the 1970s and was then renamed "VISA Card". VISA is an abbreviation of 'Visa International Service Association', and you can think of it as a company that wants to issue visas that guarantee global financial services. The rival banks other than Bank of America consolidated to form the Interbank Card Association (ICA) and created a credit card called Master Charge. Later on, Master Charge Card changed its name to Master Card in 1979 and developed to establish a worldwide payment network in the same way as Visa Card used to do. Visa and Mastercard's market share were 46% and 35%, respectively, as of 2019, accounting for more than 80% of the total market.

 

Both Visa and MasterCard are used in more than 200 countries, and their number of merchants is almost at a similar level with 40 million points and the number of ATMs with 2 million points. The companies maintained a high market share and commission-based business, so the net profit margin has been increasing every year and currently, it is close to 50%.

The nexus of credit cards is widespread around the globe. Due to the coronavirus, the increase in online payments is increasing earnings per share of Visa and MasterCard per year. At this point, Visa and Mastercard may be glorified as businesses that have the goose that lays golden eggs. However, these two companies face a crisis that they cannot survive unless they change.

Like distributors using Visa and MasterCard have announced that they will exclude them from these payment methods due to high fees.

In November 2021, the largest e-commerce company Amazon has announced that it would no longer use Visa cards issued in the UK as a payment method from 2022 onwards. The underlying reason for doing this is, the number of payments is increasing with the increased product prices and the activation of online commerce along with inflation is falling the profitability of retailers.

Moreover, an alternative payment method is emerging that retailers can use. A representative example is the advancement of fintech companies, and mobile payments such as Alipay, WeChat Pay, Kakao Pay, and Naver Pay that were created in each country. The prime advantage of such mobile pay is convenience.

In this system of making payment via credit card, there is an acquirer, an acquisition processor, a network company, an issuance processor, and a card issuer. On the other hand, in the case of mobile payments, the money is withdrawn from the consumer's account instantly after the payment is processed. And then the money is transferred directly to the seller's account. This simple process has the advantage of the ease of making payments. But its prime advantage also includes low fees and the simple steps of payment.

In the case of Visa and Mastercard, the fee is close to 2%: whereas fintech services such as Alipay and We2Chat Pay a 0.3% fee. So, we can see that the fee charged by Visa and Mastercard is almost 6 times higher.

As such, checks and regulations on the global payment networks of Visa and Mastercard are increasing. Furthermore, various fintech companies have made a breakthrough, leading to pressure on the fee side, and facing a new crisis.