Both American Express Company (NYSE:AXP) and Visa Inc (NYSE:V) are well-recognized, ubiquitous brands, and most people would probably think that because their logos are emblazoned on the plastic rectangles residing in our wallets, the two companies run similar businesses. While there are obviously some similarities, investors might be surprised to learn that the two companies feature some striking differences in their business models as well. Let's take a closer look at these two companies' business models, what they are doing to grow their business, and their valuations to determine which one might make a better investment today.

Loosely stacked, colorful credit cards.

American Express and Visa are both excellent companies, but which one is a better investment? Image source: Getty Images.

The case for American Express

American Express operates a closed-loop credit card system, essentially meaning that no third party is necessary in the relationship between the card holder and the company. In other words, American Express issues the credit card, adorns the card with its branded logo, and lends money directly to the consumer. Two huge advantages to this model are that the company collects the interest on its loans, gets to keep it for itself, and is able to carefully collect and utilize the spending and borrowing data of its customers. Before retiring, former CEO Kenneth Chenault noted the advantages this model gave American Express:

[A] diversified integrated business model such as ours, which includes both issuing and network businesses across multiple geographies, products, and customer segments, offers major advantages. We have the flexibility to reallocate investment dollars to different parts of the business across different countries as marketplace conditions change. Our closed loop, which combines information from both our issuing and network businesses, gives us access to data that is both broad and deep. Increasingly, the information we analyze in the age of Big Data is a critical ingredient in building value for both card members and merchants.

The primary drawback to this model is that it exposes the company to credit risk, of which credit card debt is one of the most hazardous. This risk, no matter how well-managed, will always be a compressor of the company's valuation multiple.

Still, in American Express' case at least, the benefits seem to outweigh the cons. The company consistently puts its data to good use in two primary ways. First, Amex uses that data to make excellent lending decisions when it decides to make loans and, as a result, the company consistently sports one of the lowest write-off rates in the industry. In the first quarter, its write-off jumped to 2%, much lower than its credit card-issuing peers.

Second, American Express understands what its customers want. The company offers rewards that it believes differentiate itself from the competition, including perks such as Uber rides, airport lounge access, and free bags on flights. The strategy must be working, as the company consistently ranks high on customer loyalty and satisfaction surveys.

During the quarter's conference call, management said it now expects to hit the high range of its full-year earnings guidance of $6.90 to $7.30. Using $7.20 as a base point, gives the company a forward P/E ratio of 13.7. The company pays a quarterly dividend of $0.35, giving it a dividend yield of 1.42% and a forward payout ratio of only 19.4%!

The case for Visa

In contrast to American Express, Visa runs an open loop credit card system, meaning it doesn't directly lend money to consumers. Instead, Visa serves as a payment network intermediary between its card holders and their banks. While Visa obviously doesn't make money on the interest of its users' card debt, it also doesn't face the credit default risk American Express has to deal with, either. Rather, Visa makes money by taking small slices -- just fractional percentages -- of each purchase facilitated with its network, and based on the number of transactions and payment volume.

Since that's how Visa makes its money, it's good that these two metrics continue to show strong growth. In its first quarter, the payment network saw an 11% increase in payment volume, the amount of money traveling over Visa's network, and a 12% increase in processed transactions, the number of times a Visa account is used to facilitate a transaction. This, in turn, powered robust top- and bottom-line growth: Net revenue grew to $5.1 billion, a 13% increase year over year, and adjusted earnings per share (EPS) rose to $1.11, a whopping 30% increase year over year.

While all of Visa's divisions shined, it had a particularly strong showing in international markets. One of the biggest challenges facing new CEO Al Kelly when he took over in December 2016 was how seamlessly the integration of Visa Europe with the parent company could be completed. Thus far, it has been a raging success. In the company's second-quarter conference call, Kelly said the technical migration of Visa Europe was on schedule and would be finished later this year. This is important because, once complete, Visa will be able to sell its European clients the same security and loyalty tools as it does its other card-issuing customers.

Based on its trailing 12-month earnings per share of $3.95, the company is currently valued with a P/E ratio of about 32. While that's steep, it might be entirely justified based on its 30% EPS growth rate this past quarter. The company pays a quarterly dividend of $0.21, giving it a yield of only 0.65%. While that's pretty meager, it also represents a double-digit percentage hike from last year's payout, the latest in a long line of healthy increases from the company.

The final verdict

I believe both of these companies offer compelling cases for investors, and I would not be surprised to see both outperform the market from this point forward over the next several years. In an expensive market, American Express is a rare company that is showing growth at a valuation far below the market average. Its growing dividend and peerless write-off rates make it, perhaps, the most attractive credit card issuer. That being said, I personally prefer the stronger growth of Visa and its business model that doesn't include any credit risk. In my mind, those two attributes more than make up for the premium valuation it earns.

Matthew Cochrane has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Visa. The Motley Fool recommends American Express. The Motley Fool has a disclosure policy.