Why Indian Public Sector Banks Don't Form Their Own Debit and Credit Card Networks Like Visa and Mastercard

Visa and Mastercard, along with other card payment networks, serve as financial intermediaries and clearinghouses between cardholders and merchants. When a payment is made using a Visa card, for example, Visa communicates with the card issuer, the customer's bank, to confirm the availability of funds. If the transaction is confirmed, Visa then forwards the money to the merchant's acquiring bank, allowing the transaction to be settled instantly. In return for these services, card payment networks charge interchange fees. These fees are often paid by merchants that accept payment cards, along with card issuers and merchant acquirers.

How Card Networks Generate Revenue

Every time a transaction is processed through a Visa, Mastercard, or other payment card network, the network earns money through interchange fees. Card issuers and merchant acquirers also earn money through their fees. Some merchants pass on these fees to customers who use credit cards as a surcharge, while others simply incorporate the interchange fees into their price tags, leading to an effective subsidization of card users by customers who pay in other ways.

Demand for Independent Card Networks

While there is little incentive for banks to create their own independent card networks, due to the steady revenue generated through the use of established networks like Visa and Mastercard, merchants might find it advantageous to establish alternative payment systems. The hefty merchant fees associated with card payment networks and banks can significantly impact their profits, particularly for low-margin merchants. As a result, we have seen large retailers like Walmart in the United States and Migros in Switzerland create their own store cards or payment apps and promote these to their customers.

Challenges in Promoting Alternative Payment Systems

The concept of encouraging customers to adopt more affordable but less convenient payment solutions has largely failed. One major issue is that consumers prefer the convenience of cards that can be used across multiple merchants rather than being confined to a single or a small group of businesses. Efforts to promote alternative, more affordable payment systems have met with resistance. This is partly due to the hidden nature of merchant fees, which are often not fully appreciated by consumers, who may blame merchants rather than payment card networks for higher prices.

Merchants' Preference for Cashless Payments

Merchants generally do not want to discourage cashless payments because research has shown that cashless customers tend to spend more. In many cases, the increased spending offsets the higher transaction costs passed on to customers. Furthermore, the higher spending encouraged by the use of payment cards provides an incentive for merchants to continue accepting cards from networks like Visa and Mastercard.

Establishment of Visa and Mastercard

The dominance of Visa and Mastercard, along with other networks like American Express, UnionPay, and Discover, can be attributed to their early entry into the market. Since banks and merchants are profiting from the existing payment card schemes, there is little incentive for them to change the system. As consumers bear the costs of these schemes, they have largely accepted higher prices in exchange for the convenience and speed of card payments.

In conclusion, while there are incentives for both banks and merchants to create their own card networks, the current system is well-established and profitable for all parties involved. The lack of a strong incentive for change, coupled with consumer preference for the convenience of widely accepted cards, has maintained the status quo.

Keywords: debt card network, credit card network, interchange fees, merchant fees, Indian public sector banks