What’s the point of Visa and Mastercard if it’s always from a bank? AmEx cards are produced and processed by them only and not any other processor, so why can’t banks make credit cards without Visa or Mastercard, or vice-versa?
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Banks can issue non-Visa/MC cards. There are Amex cards issued by other banks– Wells Fargo and Credit One both have an Amex card in their portfolios. Discover is the same way, the majority are issued by them, but other banks can use them for credit/debit networks. In fact, Discover’s ATM/debit network (Pulse) is pretty common, even for banks whose debit cards are Visa/MC branded.
EDIT: Also, Visa and MC both started out as bank exclusive card networks– Visa was originally BankAmericard, and MC was originally Master Charge and was run by Citi IIRC to compete with BofA. They started licensing it to other banks, and eventually that business got large enough that the card networks were spun off into independent companies.
Even Discover had a start somewhat like that–they originated in Sears’ store credit division. My grandmother who was a Discover customer from launch only was one because her Sears credit account got converted to Discover in the 80s.
Banks can but the problem is using them. Years ago every Gas Station brand had there own card. (Many still do). Card can only be used at that type of gas station. If the gas station you have a card for is closed for the day and you don’t have a card from the one around the corner you can’t charge gas.
Same with the banks. In the USA there are hundreds of different banks and if you travel to the next city over there might not be a branch of your bank. Each bank would have to sign up every merchant to accept their card and run their own system to process them. Easier and more efficient to have a couple of different processors and each bank does not have to have their own system.
A lot has to do with the history.
In the beginning people would buy things, and not always have enough money on hand to pay for those things. So the store would provide credit. They would keep a ledger of who bought what, and owned how much. Based on history and personal knowledge one man might have $40 of credit available and another might have $140. It was up to the merchant to decide.
Then cities became a thing, and merchants had multiple employees and multiple locations and rather than just trust all the managers, they created applications for those who wanted credit, and at first the owner reviewed the credit applications, but eventually he hired specialists to do this work.
Some merchants had really good credit departments and others had bad ones. Owners would hang out together at country clubs or social clubs and brag or complain about their credit departments. Eventually someone with a great credit department, and not so great product offered to run the credit department for another store. They both made alot of money and so other merchants signed on.
Then the banks saw all that money moving around and offered to do the accounting and financing for very cheap. Knowing that if they took over enough of these networks they would have a monopoly.
Unfortunately banks back then were limited in that they could only operate in one state at a time. But the really large retailers did not. So rather than tell the Manhattan based Macy’s customer that they needed a new account to shop at their Connecticut or New Jersey store, they created their own super credit network. A “Master Card” that would work with all the little regional cards. This legally could not be operated by a bank, because banks could only work in one state. They hired a lot of lawyers to make it legal to just the credit processing across state lines, but do the individual accounting from a state based bank.
source: my mother’s father was a store owner from 1935 to 1970. When i became employed by MBNA, my mother gave me a history lesson on how credit cards came to be.
Banks are where you keep your money. They are like the train station. You can load or unload the train with cash, but that doesn’t mean the cash went from Bank A to Bank B.
Visa/MC are the tracks. The train was already loaded (by the bank) and now the money (train) is on the track.
It tracels to the correct station (the bank) thanks to Visa and MasterCard, and then that bank unloads it again.
Visa and MasterCard move the money between the banks, the banks do everything else.
It should be pointed out there are 2 types of card from these providers. Credit and debit. Debit comes direct from your account and is usually feeless for the shop, hence why some places only accept debit card (atleast in Europe). Credit cards incur fee but your goods are usually insured by mastercard or visa. This includes if the shop goes bankrupt and then your device breaks. Contact mastercard and they deal with it. Same if the item is stolen from your door step. Tldr: buy things online with your credit card.
Visa and Mastercard are at their core technology companies. They don’t sell financial products like credit, etc. They sell a network that makes transactions work.
I used to work at visa, and to vastly oversimplify (it is eli5 after all) it’s basically like instant messaging for banks. The things that make them necessary are the little details that are hard to explain unfortunately (though handling security and verification is among those things)
Basically, Visa and Mastercard are credit card Networks (aka I.T. experts)
Banks are credit card issuers (aka lenders)
Bank CC issuers charge interest, decide who is eligible for a card (line of credit loan) and whether or not to approve the purchases on that credit (i.e. is this a legit purchase, does the cardholder have enough credit left to use, etc), and some other security tasks. They bill you for what you owe (collections). Visa and Mastercard don’t do any of that.
All of the above are the kinds of things banks normally do regarding ANY bank transaction. The banks do much the same when you cash a check, or let you write a check. Same stuff when you take out a loan on a car or a house.
Banks don’t want to be in the business of building or maintaining payment networks. Any money they tie up in such infrastructure is money they can’t loan out for a profit, which is the bank’s main business.
So banks hire a Credit Card Network company to do all that for them. Visa and Mastercard get a piece of the transaction as a fee.
Visa and Mastercard likewise don’t want to take on the credit risks of loaning people money, getting them to pay if they default, or deciding who is a good or bad risk for said credit. Banks are better at that.
In this way, the Banks & the Networks (Visa & Mastercard) stick to what they do best.
American Express and Discover are the exceptions. They do both the banking and they own and run the CC networks. Why? They feel they can profit by doing both.
Great explanation! And also IIRC banks all came together at some point to consolidate under Visa/Mastercard. Like initially it wasn’t a thing.
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