Most investors lump them together into the same industry category. And understandably so. From the point of view of consumers, they all seamlessly work together without a second thought.

The fact is, however, the credit card business is multilayered; each layer's businesses and business models are distinct. And these differences change the investment thesis for each of these groups' stocks, making only one of these roles the best foundation for a long-term buy.

But first things first.

How the credit card business really works

There are three different components at work whenever you use plastic to make a purchase.

The first of these is the obvious one staring you in the face -- the card-swiping device. These usually aren't owned by the merchant. Rather, they're supplied by players like Verifone or increasingly, Block (XYZ -0.17%) (formerly Square). These outfits keep a few cents' worth of every transaction and may also charge a monthly subscription fee.

At the other end of every card-based transaction is the consumer and his or her credit card issuer. Bank of America (BAC -0.03%) and Citigroup (C +0.54%) are among the biggest issuers, which of course assume all the lending-based risk. But, JPMorgan Chase (JPM +0.17%) is the biggest credit lending name in terms of total purchase volume.

Image source: Getty Images.

There's a critical layer between these two, however, that keeps this aspect of consumerism humming. Those are payment network operators Visa (V -1.66%) and Mastercard (MA -1.93%), which handle everything that happens between card readers and transaction approvals, keeping track of who's-owed-what between merchants and lenders. For their trouble, Mastercard and Visa also keep a small fraction of every dollar processed through their networks.

So where do American Express (AXP -0.56%) and Capital One (NYSE: COF) fit in? These two companies are both payment network operators and issuers, albeit smaller players in each aspect of the business.

And the winner is...

The question remains, however: Which of these business models makes for the best long-term investment?

They each have their obvious upsides, particularly given that cards are increasingly being used to cover everyday expenses like utility bills, parking, groceries, and quick trips to convenience stores.

If there's only room in your buy-and-hold portfolio for one of these names, it's arguably a payment network operator like Visa or Mastercard. They don't have the growth potential that lenders like Citi or Capital One might bring to the table. But they also don't face risks of loan write-downs or defaults when the economy sours. To this end, with the exception of the headwind from the COVID-19 pandemic, at no point in the past 10 years has Visa or Mastercard experienced a decline in 12-month revenue or earnings before interest, taxes, depreciation, and amortization (EBITDA).

V Revenue (TTM) data by YCharts.

Consistent, predictable performance is a big part of any long-term holding's net success.

Their other long-term upside is their duopoly-like control of the entire payment-middleman portion of the credit card market. Although American Express and Capital One (through its Discover arm) are also in the payment network business, Visa and Mastercard are well entrenched simply because they've both been around for so long. This leaves them well positioned to tack on new profit centers as opportunities surface, like the customer engagement and loyalty tools Mastercard offers to merchants.