Visa vs. Mastercard: An Overview
The world of electronic payments is largely dominated by four major players, namely Visa, Mastercard, American Express, and Discover. Out of these, Visa and Mastercard stand tall as the leading giants responsible for processing a significant share of global card payments. What sets Visa and Mastercard apart is their unique positioning – they do not directly issue cards or extend credit. Instead, they collaborate with financial institutions to offer a diverse range of products encompassing credit, debit, and prepaid cards.
**Key Takeaways**
- Visa and Mastercard are the two largest payment processing networks worldwide.
- Unlike Discover and American Express, Visa and Mastercard do not issue cards directly to consumers; instead, they work through member financial institutions.
- Member banks and credit unions are responsible for issuing Visa and Mastercard cards, either individually or through partnerships with airlines, hotels, or retail brands.
Recent data from the Federal Reserve’s 2020 Diary of Consumer Payment Choice survey reveal that in the U.S., 42% of individuals prefer using debit cards for bill payments, while 29% opt for credit cards. This indicates that a large majority, about 71%, have at least one of these types of cards. Many individuals hold multiple cards to leverage the various rewards, cash back opportunities, and promotional benefits offered by issuers.
Credit cards have been in the spotlight, with outstanding revolving credit balances nearing $1 trillion by the end of the first quarter of 2021. Debit cards, together with credit cards and other non-cash payment alternatives, accounted for a substantial number of transactions and value in 2018, based on the 2019 Federal Reserve Payments Study. As the fintech sector evolves, the market witnesses a surge in prepaid card offerings, with a notable $294.44 billion annual volume in 2020, a 38.1% increase from 2019, likely spurred by the 2020 economic downturn.
Investopedia / Catherine Song
Understanding Visa and Mastercard
Visa and Mastercard stand out as the sole network payment processors covering all segments of the payment market. While they exclusively operate as network processors, their operational approaches differ.
Both Visa and Mastercard are publicly traded entities. Visa, listed as V, boasts a market capitalization of $497.5 billion, closely followed by Mastercard, trading as MA, with a market cap of $359.8 billion as of May 18, 2021. These companies do not engage in card issuance or credit extension directly; instead, they offer an extensive range of co-branded solutions.
Visa and Mastercard share similar business models, wherein they route card issuance through partner member financial institutions like banks and credit unions. These institutions are then tasked with issuing cards to individuals and businesses, either in-house or in collaboration with various brands in the airline, hotel, or retail sectors.
Setting Terms and Conditions
The terms and conditions of payment cards, including fees, rewards, and features, are determined by the issuing financial institution (with retailers often partnering with third-party financial entities). For credit cards, the issuing bank handles underwriting, interest rates, and the development of rewards programs.
Additionally, card issuers may provide additional benefits such as identity theft protection, car rental insurance, and discounts on business purchases. While factors like interest rates, credit limits, and rewards programs are regulated by the issuing financial institution, Visa and Mastercard compete for co-branded partnerships and participate in formulating card conditions.
The card payment industry is intricate, involving merchants, merchant acquiring banks, issuer banking, network processing, and cardholders. Network processors, particularly Visa and Mastercard, enjoy the autonomy to structure their fees as they see fit. This flexibility in fee structuring and reporting stands as one of the major distinctions between these industry giants.
Visa Card Overview
In 2020, Visa reported a net revenue of $21.8 billion, with a notable payment volume of $8.8 trillion. Visa’s core product spectrum encompasses credit, debit, and prepaid cards along with business solutions and global ATM services. The company’s reportable segments include Service ($9.8 billion in 2020), Data Processing ($11.0 billion in 2020), International Transactions ($6.3 billion in 2020), and Other ($1.4 billion in 2020).
- Service ($9.8 billion in 2020)
- Data Processing ($11.0 billion in 2020)
- International Transactions ($6.3 billion in 2020)
- Other ($1.4 billion in 2020)
While both Visa and Mastercard generate the bulk of their revenue from service and data processing fees, they delineate these fees uniquely with individual fee structures. Service fees, which are based on card volume, are levied on the issuer.
Data processing fees, usually fixed per-transaction charges, are paid by the issuer, who in turn recovers them by charging merchants for each transaction. These fees cover the cost of transmitting transactional data across the network.
Visa is known for its three card levels: traditional, signature, and infinite, each offering standardized provisions for issuers.
Although Visa leads in transaction volume, purchase value, and card circulation, Visa and Mastercard boast near-identical global merchant acceptance rates.
Mastercard Overview
In 2020, Mastercard achieved a total net revenue of $15.3 billion, handling a payment volume of $6.3 trillion. Mastercard’s product lineup includes consumer credit, consumer debit, prepaid cards, and a business product division. The company reports a solitary business segment, Payment Solutions, segmented across geographical regions in the U.S. and other countries.
Similar to Visa, Mastercard derives the majority of its revenue from service and data processing fees, albeit with distinct categorizations. Service charges for Mastercard are negotiated as a percentage of the worldwide dollar volume, while data processing fees are termed as “switching fees,” fixed per-transaction costs charged to the issuer.
Mastercard offers three card levels: standard, world, and world elite.