TY for the A2A.

In the good old days, each bank did issue its own credit card. In fact, the first credit card I had was issued by a Bangalore-headquartered public sector bank. It was not a Visa or MasterCard. Such credit cards are called “Closed Loop”.

The problem with that model was that, each bank had to independently go out and sign up merchants to accept its credit card. In the credit card business, this activity is called “Acquiring”. Acquiring costs a lot of time and money. It’s challenging to achieve significant scale. If enough merchants don’t accept the bank’s credit card, the bank can’t find enough takers for signing up for its credit card. This imposed a severe constraint on scaling up of a bank’s credit card business.

To solve this pain, banks got together and invested in the creation of a card network. This network worked in such a way that merchants acquired by any one bank on the network would automatically accept the credit card issued by every other bank on the network. Over time, this network went global. As a result, a Bangalore bank’s credit card was accepted by a supermarket in Timbuctu even though the bank and merchant didn’t know each other. Since credit cards enjoyed a wider acceptance, more and more people signed up for one. As more people got credit cards, more and more merchants signed up for accepting credit cards. This so-called “Network Effect” led to an explosion of scale for the credit card business. Today, I believe there are 20 billion credit cards globally.

The aforementioned card network’s name is Visa.

For providing the network service, issuing and acquiring banks paid a fee to Visa. But, since Visa was jointly owned by many of these same banks, money was really going out of one pocket and coming back into another pocket.

While Visa is now an independent company listed on the stock exchange, AFAIK member banks still own a significant chunk of equity in Visa and therefore earn rich dividends from Visa.

Given the way Visa / MasterCard credit cards work, it makes little sense for a bank to issue its own credit card.

That said, there’s still one bank that does issue its own credit cards and acquire its own merchants, thus getting to keep the entire interchange revenue for itself. That bank is American Express. While AmEx doesn’t have the market share of Visa / MasterCard, it’s a big enough company in its own right and is reputed to be more profitable.

As at its inception, even today Visa accepts only banks as members to its credit card network.

While nonbank payment service providers (e.g. PayTM, Venmo) process credit card payments, it’s only via a bank. They’re not members of the Visa / MasterCard network.