Why do most banks not make their own payment systems instead of relying on Visa and Mastercard like American Express does? Chase, BOA, and Citigroup are all much larger than AE.
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Well to be technical, what is today known as Visa was initially a product founded by Bank of America and then later spun off into its own thing.
But these days, one huge issue is that achieving global adoption for a new payments network would be a huge challenge.
A payment system isn’t as simple as what you might think.
1) You need to market this system to potential card holders. No one would adopt a system that didn’t have much use.
2) You need to market this system to all VENDORS. Every restaurant, supermarket, retail store, department store etc basically has an individual contract with the payment system. (ELI5) A store cannot simply put up a “VISA accepted here” logo. They have to sign up with VISA and agree to pay the company a percentage of their revenue.
3) This is a global system. So this is likely hundreds of millions of card holders and millions of vendors. No small undertaking for any bank. Plus, if it is an in-house system, the bank has to either operate a branch in every country or make agreements with some local banks to facilitate the payment system in every country. Financial transactions are highly regulated industries – a company cannot simply take or make payments in a country without first setting up a company that is registered to work there and comply to local regulations.
Basically, a new payment system would require years to build up a presence and tens of billions of capital and resources. On top of that likely billions more every year to maintain it.
Because it’ll take too much money to build the infrastructure now. And while it might seem like these companies have unlimited funds they do not. They have to allocate their money and see where it’s best used. It’s going to be cheaper to use VISA/mastercard and use your money elsewhere.
Visa and Mastercard aren’t simply brands that extend credit, but really massive networks. Think of every consumer with a card to use, every payment processing machine, every vendor that uses those machines, every bank that has an account for those vendors, every state and country who is regulating those banks. Its a huge and complex operation, which you can’t just reconstruct without years and years of work, an army of people, and building a lot of trust with a LOT of different kinds of organizations.
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