Busted Duopoly? Probably Not...

Hi everyone!

Visa and Mastercard successfully cornered one of the most enduring duopolies in modern markets.

Until now…maybe…maybe not…

It is nearly impossible to transact without paying a toll to one of these two companies. These are the types of businesses that value investing gurus love because they have built massive moats that have sustained over time.

They have done this through extensive network effects, as more consumers use their cards because more merchants accept them, and more merchants accept them because more consumers use them.

They have also built extensive partnerships with banks and financial institutions worldwide, making it challenging for other payment processors to compete at the same scale and further reinforcing the duopoly’s market power.

Visa and Mastercard set the interchange fees merchants must pay to accept their cards. These fees are a major cost for retailers and a significant revenue source for Visa and Mastercard, and their control over them further entrenches their market position.

This week, we learned of one of the largest antitrust settlements in U.S. history. Visa and Mastercard reached an estimated $30B settlement to limit credit and debit card fees for merchants. Some hope these savings will be passed on to consumers through lower prices.

Swipe fees typically include small fixed fees plus a percentage of total sale amounts, averaging about 1.5% to 3.5% per transaction¹ .

Under the settlement, Visa and Mastercard would reduce swipe rates by at least four basis points (0.04%) - for three years and ensure an average rate of seven basis points (0.07%) below the current average for five years. Both card networks agreed to cap rates for five years and remove anti-steering provisions. Merchants will have more discretion to offer discounts or impose surcharges on cards with higher interchange fees.

Big Whoop! You might be thinking…only 0.07%?! but think about how many transactions this applies to. This shift can add up over time. The fee rollbacks and caps alone are worth $29.79 billion, according to court papers, and Visa estimated that small businesses comprise more than 90% of the settling merchants.

However, the stock market replied with a rather large yawn, as Visa shares closed down 0.2%, while Mastercard rose 0.2%.

At the end of the day, this settlement looks like it may ultimately have flow-through effects that pass savings onto end consumers. Will these effects be largely deflationary? Probably not.

However, the dominance of Visa and Mastercard is not going anywhere soon, as this looks like a speeding ticket in the grand scheme of it all.

Visa and Mastercard will continue to own sophisticated payment processing infrastructures that can handle billions of transactions efficiently and securely. As a necessary component in global commerce, it is healthy and reasonable to keep them in check for the sake of the consumer. But it’s also healthy not to be overly restrictive in order to let free market economies dictate the best solutions.

Consumers going to consume.

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Cheers,

The GRIT Alpha Team

Sources:

1 Bankrate.com (October 2023): https://www.bankrate.com/finance/credit-cards/merchants-guide-to-credit-card-processing-fees/

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