Mastercard

What Is Mastercard?

Mastercard is a multinational financial services corporation that facilitates global payment processing between merchants, consumers, and their banks. Operating within the broader realm of payment systems, Mastercard does not issue credit cards or debit cards directly; instead, it provides the technological infrastructure and network through which these transactions are authorized, cleared, and settled. The company's primary business involves processing payments between the banks of merchants and the financial institution that issued the card.

History and Origin

Mastercard's origins trace back to 1966 when a consortium of banks, spearheaded by Karl H. Hinke of Marine Midland Bank, formed the Interbank Card Association (ICA) in Buffalo, New York. This alliance was a strategic response to the growing success of Bank of America's BankAmericard, which later evolved into Visa Inc.¹³, ¹⁴ The ICA aimed to create a shared network allowing member banks to issue mutually acceptable credit cards.¹¹, ¹²

In 1969, the ICA introduced its unified national brand, "Master Charge: The Interbank Card," featuring a distinctive logo of overlapping orange and yellow circles.⁹, ¹⁰ A decade later, in 1979, "Master Charge: The Interbank Card" was officially rebranded as Mastercard, a name intended to reflect its expanding international reach and capabilities.⁸ The company continued to expand globally throughout the 1980s, becoming the first payment card accepted in the People's Republic of China in 1987 and the Soviet Union in 1988.⁷ Mastercard has been publicly traded since its Initial Public Offering (IPO) in 2006.⁶ More information on the company's evolution can be found on the Mastercard Brand History page.

Key Takeaways

• Mastercard is a global technology company in the payments industry, not a direct card issuer.
• It provides the network for processing credit, debit, and prepaid card transactions worldwide.
• Mastercard earns revenue through transaction fees, assessments, and other value-added services.
• The company plays a significant role in developing payment security standards like EMV.
• Mastercard's influence extends to enabling various digital payments and innovations.

Interpreting Mastercard

Mastercard operates as a critical intermediary in the global payment ecosystem. When a consumer uses a Mastercard-branded card at a merchant terminal, Mastercard's network facilitates the communication between the merchant's acquiring bank and the consumer's issuing bank. This process ensures that funds are authorized, cleared, and eventually settled, enabling secure and efficient transactions. Understanding Mastercard's role involves recognizing its position as a payment network provider, distinct from the banks that issue the cards or the merchants that accept them. This distinction is crucial in comprehending how transaction flows and associated fees, such as interchange fees, are managed within the system.

Hypothetical Example

Imagine Sarah is purchasing a new laptop online for $1,200 using her Mastercard credit card. When she enters her card details and clicks "submit," the following occurs:

1. Authorization Request: The merchant's payment gateway sends an authorization request through its acquiring bank to the Mastercard network.
2. Network Routing: Mastercard's global network receives this request and routes it to Sarah's issuing bank (e.g., her bank).
3. Issuing Bank Approval: Sarah's bank checks her account balance and credit limit. Assuming sufficient funds, the bank approves the transaction and sends an approval message back through the Mastercard network.
4. Merchant Confirmation: Mastercard relays the approval to the acquiring bank, which then informs the merchant that the payment is authorized. Sarah's purchase is confirmed.
5. Clearing and Settlement: Later, typically at the end of the day, the transaction is "cleared," meaning the details are confirmed. Then, "settlement" occurs, where funds are transferred from Sarah's bank, through the Mastercard network, to the merchant's bank, minus any applicable fees.

This entire process, from authorization to settlement, is seamlessly facilitated by the Mastercard network.

Practical Applications

Mastercard's network and services are integral to numerous aspects of modern commerce and personal finance:

• Retail Transactions: Everyday purchases at brick-and-mortar stores and online retailers globally rely on Mastercard's infrastructure for secure and rapid payment processing.
• Cross-Border Payments: Mastercard enables international transactions, allowing consumers to use their cards in different countries and facilitating remittances and other cross-border electronic funds transfer services. The Federal Reserve's Payments Study provides comprehensive data on the volume and value of these transactions, with cross-border payments made with U.S.-issued cards reaching 7.5 billion transactions and $0.47 trillion in value in 2022.⁵
• Travel and Hospitality: From booking flights and hotels to paying for services abroad, Mastercard cards are widely accepted, supported by their extensive global network.
• Digital Payments and Innovation: Mastercard is actively involved in developing and promoting new payment technologies, including mobile wallet solutions and tokenization, which enhance convenience and fraud prevention.
• EMV Adoption: Mastercard was a co-creator of the EMV standard (Europay, Mastercard, and Visa), which uses chip technology for enhanced security in card-present transactions. This standard has significantly reduced counterfeit card fraud in countries where it has been widely adopted.⁴ Mastercard continues to promote the adoption of EMV technology globally. Mastercard EMV Standards

Limitations and Criticisms

Despite its extensive reach and utility, Mastercard, like other major payment networks, faces limitations and has drawn criticism. A primary area of concern revolves around interchange fees, also known as "swipe fees," which are charged to merchants for processing card transactions. Merchants have long argued that these fees are excessive and can significantly impact their profitability, especially for small businesses. This has led to numerous antitrust lawsuits and regulatory scrutiny globally. For instance, a class action settlement estimated to be between $5.5 billion and $6.2 billion was reached for U.S. merchants who accepted Visa and Mastercard payments between January 1, 2004, and January 25, 2019, related to alleged violations of antitrust laws regarding these fees.², ³ More details can be found on the Payment Card Settlement website. Additionally, a proposed settlement for up to $30 billion in a similar merchant class action against Visa and Mastercard was announced in March 2024, which includes modifications to network rules.¹

Another criticism sometimes leveled against large payment networks like Mastercard is their potential for market dominance, which can limit competition and innovation from smaller payment solution providers. While Mastercard invests heavily in security measures and fraud prevention technologies, such as EMV, the broader payment ecosystem still faces ongoing challenges from cyber threats and data breaches.

Mastercard vs. Visa

Mastercard and Visa are often considered direct competitors, but they operate on very similar business models within the payment systems industry. Both companies are multinational financial services corporations that primarily facilitate electronic payment transactions by providing global networks. Neither Mastercard nor Visa directly issue cards or extend credit to consumers. Instead, they license their brands and networks to thousands of banks and financial institutions worldwide, which then issue the branded credit, debit, and prepaid cards to consumers and acquire merchants to accept those cards.

The primary differences often lie in their market share, historical origins, and subtle variations in network rules or fee structures that may apply to issuing banks and merchants. Historically, both emerged from banking consortia aimed at competing with Bank of America's BankAmericard (which became Visa). Consumers often hold cards from both networks, and most merchants accept both, leading to significant overlap in their services. Any perceived difference in acceptance or benefits typically stems from the specific issuing bank's card features rather than the underlying Mastercard or Visa network itself.

FAQs

How does Mastercard make money?

Mastercard primarily generates revenue through transaction processing fees, which are fees charged to financial institutions based on the volume and value of transactions processed through its network. It also earns revenue from other services, such as cross-border transaction fees, licensing fees, and value-added services like data analytics and fraud prevention tools.

Does Mastercard issue cards directly?

No, Mastercard does not issue cards directly to consumers. Instead, it operates as a technology company and payment network. Banks and other financial institutions license the Mastercard brand and utilize its network to issue credit cards, debit cards, and prepaid cards to their customers.

What is the Mastercard network?

The Mastercard network is a global electronic infrastructure that facilitates the secure and efficient transmission of transaction data between a merchant's bank (acquiring bank) and a cardholder's bank (issuing bank). This network enables authorization, clearing, and settlement for millions of transactions daily worldwide.

What is EMV, and how is Mastercard involved?

EMV stands for Europay, Mastercard, and Visa, the three companies that initially created the global standard for chip-based payment cards. EMV technology embeds a microchip in credit and debit cards, generating a unique cryptogram for each transaction, which significantly enhances security against counterfeit card fraud compared to traditional magnetic stripe cards. Mastercard is a key proponent and implementer of EMV standards globally.

Is Mastercard a public company?

Yes, Mastercard (NYSE: MA) is a publicly traded company. It transitioned from a cooperative owned by member banks to a publicly owned corporation in 2006.