Current Situation of Credit Card Business

The previous (current) financial crisis has severe effects on the business of companies in the credit card business. For a long time, the credit card business has been regarded as one of the most profitable businesses in the financial services industry. MasterCard was one of the most successful companies with its business model differing in one important point from its competitors. Most of the companies in the credit card business issue their cards on their own (including market leader American Express), whereas MasterCard and its main competitor VISA operate through a franchise system which allows its partners (banks) to issue cards of MasterCard. The company is therefore not a direct business partner of cardholders but with the banks which have the right to issue its cards. MasterCard itself states that it is more a franchisor than an issuer of cards. It is therefore not directly exposed to the possibility of defaulting borrowers.

The last 10 to 15 years saw rapid growth rates of revenues of credit card companies. Aggressive advertising which was intended to outline the advantages of payment with credit cards against traditional payment forms like cash and check (especially in the USA) led to big rises in revenues and processed transactions. MasterCard increased the number of its total transactions from $ 18.7 billion in 2007 to almost $ 21 billion in 2008, which represents a rise of 10.56%. The increasing importance of this payment method was furthermore supported by the increasing number of outlets worldwide which accept credit cards. Recent security improvements in order to prohibit card fraud are another advantage of this payment form.

There are four companies in the credit card business whose cards are supposed to be accepted globally. We will focus on these four companies in this report, as there are admittedly numerous other credit card companies but none of them are of that worldwide importance. MasterCard and VISA are the only two companies which are not direct issuer of cards but franchisors which allow their customers (issuing banks) to issue their cards and use their processing utilities. American Express which is the market leader by revenues and Diners Club are sole issuers of their cards. The competition in this industry is very intense. It is often stated that these companies make most of their strategic decisions and steps at one time. A typical example is the launch of a new security system on credit cards which prohibits misuse of cards. This new system was first introduced by VISA with MasterCard inventing a very similar system only short time afterwards. MasterCard and VISA are also on pretty much the same level when it comes down to acceptance of their cards. Whereas VISA has more outlets accepting its cards in the USA, MasterCard has a little advantage in the European and Eurasian market. American Express is the number one in the USA but lacks acceptance in Europe and Asia.

Credit card companies usually generate their profits through fees that issuing banks (in case of MasterCard and VISA) or merchants which accept the cards (in case of American Express and Diners Club) are paying to offer this form of payment. These fees are usually called “interchange fees” and have been under heavy criticism and scrutiny by various financial regulating institutions. The European Commission for example has reviewed MasterCard’s and VISA’s interchange fees several times, as forbidden agreements on pre-set fees are assumed. Credit card companies have been under scrutiny because of their fees for the last several years and all of the big four have already been sentenced to pay damages because of their practice of prohibition of competition through predetermined fees. MasterCard for example has accounted almost $ 2.5 billion for litigation settlements in its Annual Report for the year 2008. This huge amount shows the importance and severance of juridical decisions which are directed to punish anticompetitive behavior.

Despite these drawbacks, credit card companies have been extremely profitable and successful throughout the last recent years. The business model of these companies and surveys of researchers which indicate that payment by credit and debit cards (which are also offered by all of the big four companies) will gain market share from payment by check or cash, lead to the assumption that the established companies in this industry will enjoy a successful future. The negative effects of the financial crisis are of course a severe problem but the long term prospects still seem to be very promising. Especially the growth rates in transitional economies like the BRIC countries (Brazil, Russia, India and China) seem to be very promising. Expansion to these regions is absolutely vital to stay competitive as market growth in the USA and Europe is at a relatively low level.


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