visa vs mastercard success story. how it all started and what where the driving factors

Research plan: How Visa and Mastercard started and what drove their success

Visa and Mastercard are two of the best-known brands in the world, yet few people know how they came to be. Visa's founder Dee Hock made the point himself: he would hold up a Visa card, and every hand in the room went up, but almost no one could say who owns it or how it is governed. This explainer looks at how both networks started and which factors drove their growth.

The story begins in the 1960s. Visa traces back to BankAmericard, a general-purpose credit card introduced by Bank of America in 1958 and licensed to other banks beginning in 1966. Mastercard's roots lie in a rival network of banks, and it started in 1966 as a bank-owned entity to promote cards and transmit payments. The plan is to work through the origins of each network first, then the forces behind their expansion, and finally how the two compare today.

Goal: an explainer on the origins of Visa and Mastercard and the factors behind their growth. No sources are available yet, so this plan lists questions and source types to look for; it contains no facts.

The aim is an explainer that shows where Visa and Mastercard came from and why they grew into the dominant card networks. It covers the origins of each network, the forces behind their growth, and where the two stand today.

At this stage the section only sets the scope. It names the questions to answer and the kinds of sources to consult, and it states no findings of its own.

The story is also easy to get wrong. Visa's official corporate history, Paul Chutkow's "Visa: The Power of an Idea", is both a secondary and a primary source, because it reveals how the organization wants to be viewed by the public and its employees. Company accounts should therefore be checked against independent sources.

Step 1: Origins of Visa

Visa's predecessor was the BankAmericard, a general-purpose credit card that Bank of America introduced in 1958. By the mid 1960s the system had overcome its early difficulties and was generating increasing profits, but it was still restricted to California.

Licensing was the way out. Bank of America saw that consumers and commerce increasingly crossed state lines, so the card had to be accepted nationwide. Banking rules of the time barred it from opening branches in other states, so it chose to license the program to banks elsewhere. Licensing began in 1966. The outline's question of how the licence terms worked in detail is still open.

The licensing system soon ran into trouble. The 1960s credit card market was chaotic, with many bank-issued cards that were not always interoperable and suffered from high debt and fraud. At a 1969 meeting of banks in Sausalito, California, Dee Hock, a vice president at a licensee bank, persuaded other bankers to form a committee to improve the market. That led to the launch of National BankAmericard in 1970, with Hock as first CEO. The company was renamed VisaNet in 1973. The international membership organization was not officially formed until 1974.

Step 2: Origins of Mastercard

Mastercard's lineage runs through Interbank, the second of the two major national bankcard associations of the 1960s. Interbank is the organization that eventually became the one now known as MasterCard. Which group of banks formed it, and why, is not answered by the material gathered so far, and neither is how the interbank cooperation worked in the early years.

The brand went through several names. Mastercard traces its growth to the old MasterCharge, which built its network through a series of partnerships. It renamed itself MasterCard in 1979 and later rebranded as Mastercard, dropping the capital C. The reasons behind the 1979 change are not covered in the sources at hand and still need to be found.

One detail from the era shows how the early network grew at street level. A researcher noted that some merchants accepted the card as a personal favor to their bankers, who had given them their initial business loan.

Step 3: Driving factors

The business model rests on a division of roles. Issuers put cards in consumers' hands, and acquirers represent the merchants. One of the central principles of the bankcard systems is that all member organizations support both the issuing and the acquiring sides of the business. Licensing created interchange: once a cardholder's bank and a merchant's bank were different, they needed a way to settle. Acquiring banks mailed their drafts to the issuing bank for payment, less a discount fee, now called the interchange reimbursement fee. Today the card networks collect that fee but, according to MasterCard, do not keep any of it and pass it on to the issuing banks. Merchants have long complained about it, and critics say it is passed on to consumers. Network effects, in the sense of cardholders and merchants reinforcing each other, are not covered by the sources gathered so far.

Technology and governance mattered as well. As payment card systems became electronic in the 1970s and 1980s, banks increasingly outsourced their processing to third parties. Visa's structure was more decentralized and collaborative than that of most banks, with member banks sharing responsibility for issues such as fraud and credit risk. MasterCard later moved from bank ownership to public ownership. Its journey to independence began in 1998, when the government filed an antitrust suit against MasterCard and Visa, alleging that bank ownership stifled competition. Taking the company public raised nearly $2.5 billion at $39 a share. How each network expanded abroad is not yet documented.

Regulators have also shaped the business. In 2007 the European Commission found that MasterCard's interchange fees on cross-border transactions in the EEA restrict competition between banks, and the Court of Justice confirmed this in 2014. In 2009 MasterCard cut those fees to maximum weighted averages of 0.2% for debit and 0.3% for credit cards.

Step 4: Visa vs Mastercard today

The sources gathered so far offer only a partial picture of how the two networks compare. The most direct figure is market share: in 2008 The Nilson Report put Visa's share of global credit- and debit-card transactions at 68%, against MasterCard's 28%. That size gap matters, according to Fortune, because it gives Visa a bigger wallet to fund new programs and more leverage with banks.

Transaction volume exists only for Visa so far. In 2006, Visa cards were used to purchase $4.6 trillion worth of goods and services worldwide, an increase of 16 percent from the previous year. No comparable volume, revenue or profit figures for Mastercard from the same year are in hand, so the two networks cannot yet be set side by side on those measures.

On geography, the sources point to one difference. In 2008 MasterCard took in half its revenues outside the U.S., and Fortune expected that share to grow. No comparable regional breakdown for Visa is available yet. Explaining the differences in size and geography will need annual reports and payment statistics for a single year.

Step 5: Verification

Every date and name in the explainer should be confirmed in at least two independent sources. The need is concrete: the Mastercard rename is dated to 1979 in one article, and the Visa name changes and the 1974 formation of the international organization rest on a small set of accounts. Where only one source exists, the claim should be flagged rather than stated as settled.

Company histories need special care. Visa's official corporate history, Chutkow's book, counts as both a secondary and a primary source, because it reveals how the organization wants to be viewed by the public and its employees. Accounts by participants carry similar risks. Retrospective narration is problematic, but a source that differs from earlier ones can itself be revealing, since the difference may stem from justifications, rationalizations or a wish to suppress unpleasant memories.

One doctoral dissertation on Visa offers a useful benchmark for method. Its author found that informants' memories were notably consistent with each other and with the written record on "firsts", such as the first computerized authorization system, but became hazier on incremental changes like point of sale dial terminals. Exact dates and statistics should therefore come wherever possible from material created near the time of the events. A payments historian or economist is still to be found for an interview, to put the sources in context.

Step 6: Open decisions

Two decisions about the explainer's shape are still open. The first is structure. A chronological telling would follow the story from the 1960s card programs through the later changes in ownership and regulation, and it suits the origin question well. A factor-by-factor telling would take network effects, the fee model, technology, governance and regulation one at a time. That makes comparisons easier but pulls the founding stories apart.

The second is scope. The material gathered so far already points to rivals: one source says China UnionPay controls about 32% of the global credit card market, against Visa's 40% and Mastercard's 24%. The same source describes UnionPay as China's national card network, which has expanded to other countries. The shift to digital wallets is not yet covered by any gathered source. Including it would widen the piece beyond the two origin stories, so that choice should be made before more research is commissioned.