The Weekend #154—How Visa took over the world

And what it means for the rest of us

Remember those ubiquitous AOL CDs you’d find in the mail in the 90s?

That distribution strategy was actually pioneered by the first credit card.

Back in the 1950s, Bank of America essentially mass mailed unsolicited working cards to tens of thousands of Fresno, California residents.

BofA soon expanded those airdrops to cities like San Francisco, Sacramento, and Los Angeles.

By the late 1950s, there were 2 million credit cards across California.

In order to keep up with the pace of expansion and also in response to competitive pressure from what would eventually become Mastercard, BofA created a licensing program and established a network of banks to support the product.

By the time credit card airdrops were banned in 1970, BoFa had already shipped 100 million credit cards to consumers.

That network of issuing banks would eventually take control of the program, spinning it off into its own company.

That company is Visa.

As a financial product, it was the right place at the right time and exactly what American consumers needed by consolidating all their payment and credit needs with a single card that was accepted everywhere.

The result is overwhelming success. Such is our collective reliance on Visa’s payment rails, the company generated $4.17 trillion in purchase volume in just the U.S. in 2020. (Mastercard is at $1.7 trillion.)

But that success comes at a cost for merchants and consumers.

For merchants, only wage costs surpass credit card fees. Those costs are passed onto everyone else, hitting poor Americans the hardest.

Here’s The Economist:

These fees are set by Mastercard and Visa, but collected by banks, which take a slice and use them to fund perks, such as insurance and air miles, to entice customers. For the right to use the card networks’ transaction-processing services, banks hand over enormous fees. The result is that consumers pay through the nose for their perks while remaining largely oblivious. According to a paper published last year by Joanna Stavins of the Federal Reserve Bank of Boston and colleagues, retailers raise prices at the tills by 1.4%, passing interchange costs on to households.

Poor Americans fare the worst. High fees are built into the price of goods, and prices are typically the same whether you pay with card or cash, which the poor are more likely to use. “The way to think about it is if you are not getting your points you are essentially funding everyone else’s,” says Brian Kelly, more commonly known as “the points guy”, who has forged an entire business out of encouraging people to use perks. Households with an annual income of less than $25,000 (roughly a quarter of the total number) on average get no net rewards, since any they do receive are entirely offset by fees. Households that bring in more than $135,000 a year recoup in points or perks around 0.6 percentage points of the interchange fees they pay.

For certain businesses already operating on razor sharp margins, those fees can mean life or death. Here’s CNBC:

“I know a lot of business owners and it saddens me because so many people have come to accept it as it is what it is,” Hub Convenience Stores CEO Jared Scheeler said. “These prices are so ridiculous. The amount we pay in swipe fees is so high that we have to do something about it, somebody has to do something about it.”

Swipe fees collected by Visa and Mastercard ballooned to $67.6 billion in 2019 from $25.6 billion in 2009, according to data from the National Retail Federation. The overall processing fees paid by U.S. merchants to accept all card payments jumped to $116.4 billion in 2019, up 88% since 2009.

“This is a central part of the problem with their dominance,” Merchants Payments Coalition executive committee member Doug Kantor said. “The exact way they were set up was to be this dominant price-setting entity and the fact that it’s gone on this long is a problem for everybody else in the economy.”

In considering a future beyond Visa, it’s worth looking at the Chinese market, which, because of its late development following the Communist Revolution, skipped credit cards altogether.

Instead, Chinese consumers rely on digital payments from providers like WeChat and AliPay, which are fiercely competitive. The result is fees of around 0.1 percent. Compare that to the U.S., where credit card fees can be as high as 3.5 percent.

Of course, there are also downsides to China’s top-down superapp approach. But developments in digital identity and compliant stablecoins potentially offer the best of both worlds by being faster, cheaper, and more accessible, while giving end users more control over their money and their data.

As The Economist points out, Visa certainly feels the heat:

For evidence that this poses a threat, look no further than Visa’s attempted purchase of Plaid. In 2020 the firm tried to buy the upstart for $5.3bn, only for the deal to be scuppered by antitrust regulators on the grounds that the transaction would have allowed Visa to eliminate a competitive threat. Ultimately, Visa gave up, but the attempt was nonetheless telling. The house of cards carefully constructed by the two payment giants is formidable and long-standing. But it is not indestructible.