Can the Visa-Mastercard duopoly be broken?

"It's like Vegas," says Matt Moore, owner of a small bike shop in Washington's Georgetown . "You know you're going to fuck yourself, the only question is how to fuck yourself the least." The exchange system, in which banks and credit card issuers charge merchants for collecting payments, is hated by many retailers. Merchants remit some $138 billion in fees each year; according to the National Retail Federation, an advocacy group, it is their second highest cost after wages. And while Mr. Moore's customers are less likely to have strong opinions about the system because they're usually unaware of it, they're also hurt by the rising list prices.

The United States has the highest interchange fees of any major economy: costs are an order of magnitude higher than in Europe and China. This largely benefits two companies: Visa and Mastercard, which facilitate more than three-quarters of the country's credit card transactions. That made them two of the most profitable companies in the world, with net margins last year of 51% and 46% respectively. Rank every company (excluding real estate investment trusts) in the S&P 500 Index by their average net profit margins last year, five years ago and ten years ago, and only four appear in top 20 every time. Two are financial information companies, Intercontinental Exchange and the cme Group. The others are Mastercard and Visa.

At first glance, their position seems insurmountable. Already dominant, in recent years businesses have been boosted by a covid-19-induced surge in online shopping. US consumers used credit or debit cards for 45% of their transactions in 2016; by 2021, this figure had reached 57%. Species migration is "an important and long-standing tailwind," says Craig Vosburg of Mastercard. However, two threats loom. The first comes from Washington, where lawmakers hope to break the duo's hold on payments. The second is virtual. Payments have been transformed in Brazil, China and Indonesia by convenient and cheap app-based options from tech giants like Mercado Pago, Ant Group, Tencent and Grab. After a long wait, the new entrants now seem to be able to disrupt the American market.

This would be good news for consumers and retailers. Much of Visa and Mastercard's profits are ultimately driven by the fees charged when a shopper uses a credit or debit card to make a purchase. The EU has capped these fees for credit cards at 0.3% of the value of the transaction; intensive communication...