The role of card processors

Credit card processors such as VISA and MasterCard are vital to the way in which credit cards work.  This is because no bank could convincingly run a payment card on its own, as it would be hard to keep all the payments within one network, although this was tried.  This is because a shop keeper who wished to accept a wide enough variety of cards would have to keep a large number of accounts open with a number of banks in order to receive the money.  Having a relationship with the card processor means that only two or three card accounts are kept open and the shop keeper can accept cards from almost any one.

The early payment cards did try to have a single payer model.  The very first payment card was Diner’s club.  As the name suggests this was aimed primarily at people who were regular customers of restaurants. At first had a strong bias towards the New York area.  It was not a credit card, but a charge card. This meant that the card had to be paid off in full every month.

American Express also decided to come into the charge card market.  Unlike Diners Club it was not aimed solely at the restaurant market, but aimed at a wider group of vendors.  As American Express already had quite a wide network for their travelers’ checks they had a ready made network of international businesses that could accept them, but they were unlikely to grow outside this network.  American Express was also a charge card.

The first successful credit card was the Bank of America Card, which was introduced in California.  This quickly met with a rival, the Inter-bank Card Association, which was a group of large Californian banks that was in opposition to the Bank of America Card, and who later became MasterCard.  They were a pioneer in multi-bank credit cards.  Bank of America soon followed and changed its card into VISA, inviting other banks to issue it.

These two co-operatives quickly became a large presence as banks were happy to issue cards that they knew would be widely accepted and vendors were happy to open accounts with credit card providers who would have a large amount of card holders.  Much later on both MasterCard and VISA incorporated.

The heart of the card providers system is their payment system. VISA tends to be more centralized than MasterCard.  This means that VISA can be faster but MasterCard is more resilient if the telephone networks break down.