In a world regulatory framework designed to maximize competition among firms, it is a wonder that any company earns outsized profits. However, some industries are suited to allow a handful of companies to dominate without fear of new entrants breaking up the party.
Global card payment processing companies, like Visa Inc (NYSE:V), Mastercard Inc (NYSE:MA), and Discover Financial Services (NYSE:DFS), are one group that enjoys this advantage.
Barriers to entry
Each of the three companies has a global network that would be expensive and time-consuming to replicate. The networks are composed of countless financial institutions, merchants, and cardholders. Visa Inc (NYSE:V)’s logo appears on 63% of all credit cards in the world, while Mastercard Inc (NYSE:MA)’s share is 31%. Discover Financial Services (NYSE:DFS) is quite a bit smaller than the other two.
Each of the three benefits from the tendency of consumers and merchants to use trusted names with large user bases. Trusted brands are important for emerging economies, where fraud is more rampant than in developed economies.
But the real barrier to entry is in the Catch-22 where merchants want a wide customer base and customers want wide merchant acceptance. Visa Inc (NYSE:V), Mastercard Inc (NYSE:MA), and Discover Financial Services (NYSE:DFS) have each made it past the invisible tipping point where the merchant networks are large enough to attract customers and the customer networks are large enough to attract merchants. The difficulty of overcoming this paradox is why Visa Inc (NYSE:V), Mastercard Inc (NYSE:MA), and Discover Financial Services (NYSE:DFS) will be able to earn high and stable profits for years to come.
Differences among the three
Despite enjoying the benefits of oligopoly, each of the three companies is different in important ways. For instance, Visa does not lend to cardholders; it is simply a fee-based business model. This shields the company from the deterioration of consumer credit profiles that occurs with every major economic slowdown.
Mastercard Inc (NYSE:MA) is similar to Visa Inc (NYSE:V), except that its market share is significantly smaller by comparison. In addition, MasterCard and Visa’s enormous lead in the market opens them up to periodic antitrust lawsuits that pose billions in potential liabilities. However, it is unlikely that any governmental action will break up the cabal any time soon.
Of the three, Discover Financial Services (NYSE:DFS) is the odd one out. The company is primarily a credit card issuer — and is a distant second to American Express Company (NYSE:AXP) in this market. But the company also operates a global payment processing division that includes its Pulse network.