Mastercard and Visa are “open loop” networks. Open loop networks rely heavily on several parties (usually 5-8 players) to complete a simple network transaction. Let’s start with the consumer, the merchant and their banks. The consumer is issued a card by a bank. For example, a Milage Plus Visa card from Chase. In this case Chase handle all things associated with the consumer and they take the risk if the consumer defaults on their credit card bill. When a consumer pays for a product using their card, the merchant has a bank that handles their money.
Then you have several players that work to enable the banks, merchants and consumers to transact using a credit card. They are merchant acquirers, processors, gateways, terminal providers, the networks and the list goes on. Each of these parties get a fraction of every transaction that goes through each of their associated merchants and this can get expensive! Small merchants pay on average 3.5%, just for an in-person transaction. Online transactions (or card-not-present transactions) are even more costly.
So can Mastercard or Visa give away transactions? Sure, they can subsidize transactions for a given period, but even if they wanted to, they could not do so on a long term or a wide-spread basis. At the end of the day, they don’t take any risks but they do “earn” 600 basis points of every every dollar transacted through their network.
So in short, Mastercard and VISA must charge heavily to pay all of the relevant parties their fair share of evergreen fees. Open loop networks like Mastercard and VISA will never be able fully subsidize transactions and that could be their downfall.