How Visa and Mastercard make money without lending a cent

Swipe a Visa card and it feels as if Visa lent you the money. It didn’t. Visa and Mastercard are networks: they carry the payment message between your bank and the shop’s bank, check it, and settle it. The loan, if there is one, comes from the bank whose name is also on your card.

That distinction is the whole business model. Because they don’t lend, the two networks don’t lose money when cardholders fail to pay their bills. Instead they earn a sliver of almost every transaction, which adds up when they handle trillions of dollars of spending a year.

Who gets paid when you pay

The fee a shop pays on a card purchase is split three ways:

• Interchange goes to the bank that issued the card. It is the largest slice, and it funds rewards points and cash back.
• The acquirer, the shop’s bank or payment processor, takes a cut for handling the merchant’s side.
• The network, Visa or Mastercard, charges its own much smaller fees for running the system.

The network’s slice is small per payment, but once the network exists, handling one more payment costs it almost nothing. That is why both companies report profit margins most businesses can only dream of.

Why travel matters so much

Fees are higher when the card and the shop are in different countries, because currency conversion and extra checks are involved. That makes cross-border spending one of the networks’ most profitable lines, and it means their results are sensitive to tourism and business travel. A strong year for international trips usually shows up quickly in their numbers.

American Express is different

American Express runs its own network too, but it also issues most of its cards and lends to its customers. That closed loop lets it earn both the merchant fee and the interest on card balances, and it also carries the losses when borrowers default. AmEx behaves partly like a network and partly like a bank, so its results move more with the economy than Visa’s or Mastercard’s.

The risks

• Fee caps. Regulators can limit what card payments cost merchants. The EU already caps interchange on most consumer cards, and US lawmakers regularly propose rules aimed at card fees.
• Instant bank payments. Systems such as UPI in India and Pix in Brazil let people pay straight from their bank accounts, usually for free, and have taken a large share of everyday payments there.
• Big merchants. Large retailers have the scale to push back on fees and steer shoppers toward cheaper ways to pay.

So far, card spending has kept growing as cash use falls, and both networks have added services such as fraud screening and payments between businesses. The question for investors is less whether cards survive and more how much of each payment the networks can keep.