How Do Visa and Mastercard Make Money?

Although a Visa (V 0.46%) or Mastercard (MA 0.45%) logo may be on some of the credit or debit cards in your wallet, these two companies don't actually issue any of these cards themselves. Instead, Visa and Mastercard serve as middlemen in the payment transaction process.

In this clip from Industry Focus: Financials, host Shannon Jones and Fool.com contributor Matt Frankel discuss how payment processors like Visa and Mastercard generate their revenue.

A full transcript follows the video.

This video was recorded on July 30, 2018.

Shannon Jones: How do Visa and Mastercard actually make money?

Matt Frankel: First of all, I only need to really run down one business model, because both of these companies are 95% the same business. The one thing that, especially new investors to these companies are interested to find out is that these are not the companies that actually issue credit cards. These are what are known as payment processors.

There are generally four parties that are involved in a payments transaction. There's the issuing bank that actually loans money to the customer through their credit card. If you have a Bank of America credit card in your wallet, a Capital One credit card, these are the issuing banks. Then, you have the payment processor, like Visa or Mastercard. Then, you have the merchant. And then, finally, you have the merchant's bank. It's called a four-party payments system. Visa and Mastercard are just the middlemen between the issuing banks that are lending the money and the merchants and the merchants' banks that are receiving the money.

There are three main ways that Visa and Mastercard make their money. Of course, it's a little more complicated than we can get into in a relatively short podcast. But, the main categories are service revenue, which are also known as swipe fees. Every time you swipe your credit card at a point-of-sale terminal, Visa or Mastercard or whoever is backing your card gets a small cut of whatever that revenue is. A long time ago, when I actually helped run a business, it was in the neighborhood of 1%, a little more than 1% for Visa and Mastercard. So, they get a percentage of every transaction, which known as service revenue.

They also get what's called data processing revenue, which is a small, fixed amount that they get for things like actually transferring the money from one place to another, providing settlement data to a merchant, things like that. Then, there's also what's called international revenues, which are, if your credit card charges you a foreign exchange fee, or something to that effect. Any time that a credit card is used outside of its main area, you get a nice, additional, international revenue stream, if it has to deal with currency exchanges or convenience fees, those sorts of things.

Jones: Really, for companies like Visa and Mastercard, volume is where the money is at. The more transactions they process, the more revenue they make. The goal, of course, is to extend their network, especially internationally, which is key. Really, the more banks and partnerships that they're able to sign on board, the better, as well.