MasterCard and the Coming of the Credit Card
Charge cards had been around for a while at this point, cards issued by merchants to be used in their places of business, and charge accounts themselves had been around for much longer than that. So the card did make managing these charge accounts more convenient, but their use was still pretty restricted.
Some banks saw an opportunity here to come up with cards to be used at many merchants, and also to allow the banks or other financial institutions to issue revolving credit to cardholders, where borrowed funds could be paid back over a number of years if one wished, the same way a line of credit operates.
Charge cards benefited from their helping merchants increase their sales, and if people could pay a little later, they would often buy sooner, and sometimes would also buy more. Banks on the other hand make their money primarily from lending, and while some of their clients had lines of credit, marketing a successful credit card would make borrowing money from them much more convenient and accessible.
Bank of America in California was the first bank to successfully market a general purpose credit card, with their BankAmericard, and soon other banks wanted to get in on the action and license the card for their own use.
BankAmericard ended up growing from this single credit card held by a single bank in a single state to what we now know as Visa. With credit cards, there is certainly strength in numbers, and as the number of financial institutions involved grew, the acceptance of the card grew as well, and enough momentum was created that Visa has maintained its number one position all these years.
Bank of America was only initially interested in partnering up with banks outside of the California market though, and U.S. laws at the time did not permit them to offer credit cards to people in other states anyway, and banks outside California were eager to get in on the credit card craze themselves. This ended up expanding internationally as well, and soon this card, or licensed versions of it, were showing up in many other countries as well.
Several of Bank of America’s competitors in California did not want to be left out of all of this, so they teamed up to form an association to market their own credit card, in competition with BankAmericard.
So Wells Fargo, along with the United California Bank, the Crocker National Bank, and the Bank of California, teamed up with the Marine Midland Bank of New York, now HSBC USA, to form the Interbank Card Association. The card that they offered was called Master Charge, which later became known as MasterCard.
As was the case with the BankAmericard, Master Charge got its start in California and expanded outward, although BankAmericard got a good head start on them and they are still looking to catch up even today. Still though, their card ended up being fabulously successful, as more and more banks joined their association and began to offer Master Charge cards.
A little after Master Charge got off the ground, First National City Bank, now Citibank, introduced a card of their own, called the Everything Card, to provide an alternative to BankAmericard and Master Charge, but ended up joining forces with Master Charge shortly afterward, which greatly expanded Master Charge on the East Coast of the U.S.
Around this time, Master Charge also expanded internationally, keeping up with BankAmericard, by forming alliances with European payment processors. This expansion continued until Master Charge, or MasterCard as it’s known today, became widely accepted worldwide, the pinnacle of achievement for a credit card brand.
What MasterCard Does
Many people have major credit cards these days, and may just think of a brand of card like MasterCard as just being a brand, a marketing strategy for instance, but MasterCard brings a lot more than that to the table.
Banks do not have a natural affinity for one another and to a large degree, interbank payments still provide a lot of challenges, even with today’s networks and technology. It’s not that there’s really any situations anymore where you can’t make interbranch payments, but they can be pretty tedious, and especially take a lot of time, like for instance with a wire transfer.
Banks don’t just send your money from one bank to another, like many people think, and no money actually changes hands with interbank payments at all, as this would be very tedious and expensive to do. This would involve one bank sending cash to another, and cash isn’t used at all in interbank relationships, and this is just one of the reasons why not, the sheer great expense of this.
What banks do is settle payments between one another in bulk, which ends up having them owing each other various amounts of money each day, and these accounts are normally settled by accounts held in the central bank of one’s country.
So one of the things that MasterCard does is process these payments between banks, between the credit card issuing bank and the bank where the money is to be sent, and make this a whole lot easier than it would be otherwise. If banks had to do this themselves this would be much less efficient, but MasterCard handles all of this for them, which is an important component of the process indeed.
The second major function of MasterCard is to allow for acceptance of a bank’s credit card at a merchant. This is closely related to the payment processor function, for instance since MasterCard processes payments for its member banks, all a merchant has to do is to do business with MasterCard to take MasterCards, they don’t need business arrangements with the various tens of thousands of banks that issue MasterCards.
In managing these payments, MasterCard gets a cut of the gross receipts, and although it’s a very small percentage, the sheer number of transactions they process leads to billions of dollars in profit for the company each year.
Most of the money collected in fees by credit cards actually goes to the issuing banks, and fees represent a large part of the credit card issuers’ profit, and they are more than happy to have their cardholders pay off their balances each month and pay no interest since they are making plenty of money from their mere use.
MasterCard isn’t involved in the issuing of credit at all actually, neither short term or longer term, they just process the transactions, but this is a vital function.
MasterCard is no longer just an association of banks issuing credit cards, but for most of their history this is what the company consisted of. In 1996 the company went public, and now they aren’t just owned by the banks, as anyone can buy shares of MasterCard.
Aside from processing credit card payments, MasterCard also plays a role in providing users of their cards a more consistent experience across the various financial institutions that they are partnered with, as this association has card issuers abiding by a common set of rules, which benefits both cardholders and merchants by providing consistency.
MasterCard is also involved in credit card security, and while this responsibility ultimately falls upon the card issuer, MasterCard contributes technological support by way of its role as a processor.
MasterCard also plays a role in organizing common features and benefits of their cards, including things like protection against fraud, as well as benefits like increased warranty protection and the like.
Ultimately, MasterCard is set up to assist credit card issuers in managing their credit cards, and while the credit card issuers bear a lot of this load themselves, MasterCard does play an integral part of the credit card experience for all parties involved.
As has been the case with Visa, MasterCard’s sheer market influence has made them the brunt of several major lawsuits, contending that they have too much power to set prices, and this has placed certain restrictions on the influence they have on the credit card market, but nonetheless their impact on the credit card market continues to be very substantial indeed.