Payment Card Industry Primer

Payment Card Economics Review, Vol. 2, pp. 29-46, Winter 2004

17 Pages Posted: 25 Jan 2005


This primer covers some of the basic facts needed to understand the payment card industry. Some of these facts are well known. These days, we're all familiar with credit cards. Many of us, however, have probably not given much thought to prepaid cards and their potential significance. For lower-income individuals who have a regular job but don't have a checking account, getting their salary on prepaid cards can offer significant savings and convenience over having to cash a paper check.

Other important industry facts have to do with the structure of the different systems. American Express, for example, is a fairly typical company. It sells its products and makes money for itself much as almost all companies do. MasterCard, on the other hand, is a cooperative that operates for the benefits of its members, running some centralized operations while leaving the bulk of the work (including efforts to make a profit) in the hands of individual members. Members cooperate in agreeing on and funding MasterCard's activities but compete vigorously with each other in soliciting cardholders and merchants. MasterCard is not in the business of making money from being MasterCard - all those catchy Priceless advertisements help members sell cards but don't fill up MasterCard's coffers.

Another industry characteristic is the presence of consumers on two sides - cardholders and merchants. All card systems must attract enough consumers on each side to be successful. Systems such as Visa and MasterCard have to coordinate the banks that serve cardholders (issuers) with the banks that serve merchants (acquirers). They do this via the interchange fee - a fee paid by the acquirer to the issuer on each transaction.

Finally, the structure on the issuer and acquirer sides of the payment card industry are important. Both sides are highly competitive. The issuer business closely fits the textbook economic model of a highly competitive industry - cardholders can choose from and switch among many competing issuers. The acquirer business is more concentrated, as the increased scale needed to serve merchants efficiently has driven smaller firms out of the business, but the remaining larger firms compete aggressively on price, especially for the business of major retailers.

Suggested Citation

Chang, Howard H., Payment Card Industry Primer. Payment Card Economics Review, Vol. 2, pp. 29-46, Winter 2004, Available at SSRN:

Howard H. Chang (Contact Author)

Global Economics Group, LLC ( email )

140 S. Dearborn, Suite 1000
Chicago, IL 60603
United States
312-533-4602 (Phone)


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