Difference Between the Credit Card Issuer and the Credit Card Network

Visa, MasterCard, Discover and Amex. What's the difference?

First, Visa and MasterCard are owned by networks of banks, roughly the same 7,000 American banks and thousands more internationally. Major players such as Citi, Capital One and Bank of America are dominant. The banks, not Visa and MasterCard, issue the cards and set the terms. Discover and American Express, on the other hand, serve as their own banks and issue their own cards. That's the key difference, but what does that difference mean?

Imagine a boxing match

In one corner we have Visa and MasterCard, the dominant champions of the U.S. credit card market, controlling a combined 70 percent of transaction value. In the opposite corner we have Discover, the pesky challenger with a 10 percent share, striving to move among the heavyweights.A general non-combatant is American Express, also at 10 percent market share, which seems content to maintain its place as the favorite of upscale customers.

What does this mean to you, the consumer? Visa and MasterCard continue to be accepted in the most locations, especially on the international front. They represent convenience and dependability. Discover continues to try to crash the party with stronger incentives and customer loyalty.

Seeds of the Credit Card Divide

History helps to explain today's scenario. In 1949, Diner's Club established the first modern charge card program, targeting the same high-income group that gradually moved toward American Express. A charge card is different from a credit card in that the full amount must be paid by the following month. Bank of America, based on the West Coast, launched the first large-scale credit card operation during the late 1950s. Executives soon discovered that they would need a nationwide network of member banks to succeed. This venture spun off into the Visa network, and an imitator group in 1966 launched the MasterCard network.

In 1986, Visa and MasterCard informed member banks that if they marketed Discover products, they would have to cut ties

Executives from member banks serve on the boards of the Visa and MasterCard networks. Meanwhile, the networks established relationships with merchants so that for each $100 charged to a credit card, Visa and/or MasterCard received $2, with the individual card-issuing bank taking an additional 50 cents. Merchants were upset with giving up 2.5 percent of their gross receipts, and they gradually built a protest movement.

Sears, Roebuck and Co., with its newly acquired Dean Witter financial arm, finally issued a challenge in 1986, putting up the financial backing for a new credit card: Discover. It promised merchants a better interchange deal and offered cash-back incentives to cardholders. Visa and MasterCard responded by informing member banks that if they marketed Discover products, they would have to cut ties with Visa and MasterCard.

Subsequently, two federal court cases went in Discover's favor. In 2003, Visa and MasterCard settled a merchant class-action lawsuit by paying a combined $3 billion in damages and agreeing to give the retailers more of a voice regarding interchange fees. A year later, Visa and MasterCard again settled out of court, paying a combined $2.75 billion to resolve an antitrust case launched by the U.S. Department of Justice.

Can Discover Crack Visa and MasterCard's Dominance?

Even with favorable court rulings, Discover has struggled to gain market share. Today, Discover's strategy is to partner with retailers rather than banks. The best example of this is its partnerships with Wal-Mart and Sam's Club.

Analysts say a severe economic recession will continue, at least until the end of this year, and probably into 2010. Still, widespread use of credit cards will continue. Research indicates that among all households with incomes of more than $30,000, more than 90 percent hold at least one credit card. The average is six cards.

Michael Thompson

---

Read more about Credit Cards

Read more about Personal Loans

Read more about Credit Repair

Bad credit credit cards

See more credit cards