System Wars
The author tells the story of the "Boston Fee Party": during an economic recession, a coalition of restaurateurs in Boston approached AMEX about reducing their commission on sales (AMEX charges 3.25%, versus 2% for Visa), and AMEX refused, suggesting its charges were reasonable given that its customer base was more affluent than those of the other cards.
News of the conflict spread - to other locations, and soon, restaurants across the country were clamoring against AMEX. Naturally, Visa rushed in, slicing its own commissions further, in an attempt to capitalize on the conflict
It was a PR nightmare for AMEX, as Visa fought back and gained ground, and it enabled them to undermine AMEX's prestige. AMEX had previously been successful in selling its card to affluent users by advertising that merchants "only take American Express" - and now Visa was able to launch a counterattack with the tag line "And they don't take American Express."
As a result, AMEX lost much of its prestige, and was compelled to invest in an expansion campaign to get its card accepted by more merchants, and to lower its standards of cardholders to regain ground in the marketplace, which did significant damage to the aura of prestige that was once a significant competitive advantage for the company.
This was one of a number of decisive battles over the years between the major credit card systems, and as payment cards have reached maturity, competition over customers is expected to intensify.
The Warriors
Currently, the major competitors for consumers remain the big four: Visa (48%), Mastercard (28%), American Express (16%), and Discover (6%), with 2% of the market divided among other players (store cards, Diners Club, etc.)
EN: The percentages above reflect the amount of retail transactions. This may be apples-and-oranges: while all credit cards make money off of transaction fees, there is also substantial income from annual fees (AMEX makes money off a cardholder who does not use the card at all) and interest (Visa makes money off of standing balances). Without numbers to indicate where profit is earned, it's not clear whether the volume of purchases is a meaningful competitive measurement: it's merely what they have in common.
The Weapons of War
In a mature market of commodity products, advertising is one of the most significant methods of competition. Advertising leads customers to prefer one card over another for their purchases, whether for reasons of prestige, ubiquity, or actual benefits.
Gaining merchant acceptance is also critical. However, given that there are few merchants who do not accept a specific card anymore, there are few opportunities for a card service to break new ground.
Fringe benefits are also methods to gain a competitive edge: credit cards may offer fraud protection, offer to waive late payment fees, or provide any of an array of extra benefits to stand out from the field.
Finally, there is the matter of innovation to expand into new territory: the "first" card to be accepted at a gas pump or vending machine has a temporary competitive advantage (until others move in as well) that can help establish customer perceptions and behavior.
The Rise and Decline of American Express Cards
AMEX is used as an example to illustrate the competitive interaction of card systems. The company began in the express mail business (a faster and more reliable alternative to postal mail in the nineteenth century).
The company expanded into financial services to deal with the transfer of money around the country (rather than shipping currency, the company maintained banks in various locations) and enabled commercial customers to do transactions by checks that were redeemable at any branch. The company also opened several branches in Europe to serve international trade and travelers.
Eventually, American Express checks were widely accepted, and while others attempted to move in on the business, they were unable to gain as wide an acceptance. It is estimated by some sources that AMEX controlled up to 75% of the travelers check business worldwide.
The profit model for the company was novel: in addition to charging fees for the checks, the company made money on the float. It was not uncommon for individuals to return from travel and hold onto the checks for their next trip abroad, or for businesses to maintain a stash of travelers checks instead of cash. The difference was substantial, as was the profit AMEX made from the interest on these deposits.
Diners Club began as an association of restaurants in various countries where patrons could "charge" their meals to a bill that would be paid upon their return home. Naturally, this took a bit out of AMEX's business, as it decreased the need of these customers (1.25 million of them, by 1960) for AMEX traveler's checks to pay for meals abroad.
AMEX considered simply buying them out, but decided to compete instead: it charged a significantly lower fee to merchants (facilitating its adoption), but a higher fee to consumers (which it used as a method of selling the "prestige" of "membership" - the latter term largely borrowed from the "club" structure of its competitor).
However, the model for card charges was opposite of that of travelers checks: instead of making money on the float, the company was losing money (it had to pay merchants but wait on customers to pay it back).
Around 1961, the company considered dumping the unprofitable program, but instead hired George Walters (who later became a legend in the industry), who took steps to address the issue - namely, raising the annual fee to get rid of deadbeats, cracking down on customers who failed to pay their bills promptly, and working to extend the network of merchants who accepted the card, both abroad and at home.
By the 1970's, the card had permeated the travel and entertainment industry, beating back Diner's Club, and had become a must-have for travelers and business people, and expanded into the merchant sector.
Having been bruised by deadbeats in the past, the company expanded slowly, focusing on high-end merchants who served affluent customers (who would generally have no problem paying the bills) - and as a result, it lagged behind newcomers MasterCard and Visa in gaining a share of the sizable middle market.
However, what it lacked in numbers, it made up for in quality: AMEX was used by upscale consumers for upscale purchases, and felt it important to maintain the air of prestige (also, since AMEX made its profit from an annual fee rather than individual purchases, it focused on the number of cardholders as its measure of success, whether they used the card or not)
By the late 1980's, AMEX had lost much of its advantage in terms of wide acceptance: Visa could be used at most of the same merchants, ad 90% of AMEX cardholders also had a Visa card.
The main source of differentiation was in the charge-card versus credit-card model: AMEX offered a higher credit line and no accrual of interest charges, but charged a high annual fee and required charges to be paid off each month.
And then, came the "Boston Fee party" detailed earlier, in which AMEX lost considerable ground, including its most distinctive competitive advantage (an air of exclusivity with the most prestigious retailers).
After that point, AMEX launched a credit card under the "Optima" logo and experimented with a wide array of gimmicks (airline miles, fraud protection, discounts, etc.) to attempt to gain ground in the middle market, which it had so long overlooked.
The company has also attempted to enter into joint ventures with banks and retailers, enabling them to issue private-label cards backed by AMEX, and to forge stronger alliances with businesses who use AMEX as a corporate card (the requirement to pay each month was seen as a security measure against employees accruing large amounts of charges over time).
The company continues to struggle to gain a foothold in the middle market, as well as experimenting with a number of niche markets to fortify its position.
The Bankcard Battles
Another major battle in the card industry was fought between Visa and MasterCard, which were highly similar in their features and operations and were regarded by customers as almost indistinguishable in all of the most critical considerations.
Visa's "attack" on AMEX was less intended to draw market share from them, but to differentiate itself from MasterCard. The advertising agency saw AMEX as a "straw man," against whom it would be easy for Visa to position itself for the middle market. Additionally, Since Visa was attacking American Express, MasterCard was perceived as a bystander, who had no excuse to enter the fray.
This tactic was highly successful - Visa was considered to be a "better card" than MasterCard and it was perceived as being accepted by more merchants. Even a decade after the advertising campaign, Visa retained consumer preference by nearly two-to-one over MasterCard. Meanwhile, MasterCard held a number of image-bolstering campaigns that came off as having a "me-too" flavor, which only made them seem like a small and insignificant player in the industry.
Management and Control in the Bankcard Associations
Bankcard associations operate similar to franchises: the upstream entity (card service) sets terms to which the franchise (card issuer) must adhere in order to retain the right to issue the cards.
Originally, Visa and MasterCard were joint ventures among member banks, and the members formed the governing board, and any profits were distributed to the members (EN: This probably changed when Visa became a public corporation)
Incentives for System Competition with Overlapping Membership
It's also worth noting that banks often issue multiple cards: a single bank may offer MasterCard and Visa to its customers, hence it is a member of both associations and has a hand in the governance of both organizations.
One concern is that this causes potential for a cartel, in which the same individuals run multiple "competing" organizations in a collusive manner, at the expense of the customer. To avoid legal complications, both associations attempt to run at a break-even level and return any "profits" to member banks proportionally, which avoids accusations of profiteering (if there is no personal profit, there is no motive to collude against the marketplace).
Another constraint is that bank members may vote in both organizations, but no single bank may hold board-level positions in both organizations, and are not permitted to interact with their counterparts except on certain fraud and security issues.
Actual Competition between MasterCard and Visa
Mostly, the competition between MasterCard and Visa is a matter of a technology race: each organization has a separate R&D wing, which attempts to streamline processes and develop improvements to operate more efficiently, thereby decreasing the amount of commission they need to charge merchants. The author suggests this form of competition is beneficial to the marketplace.
However, the author concedes that this is not a "textbook model" of competition