How do visa and mastercard make money

When most people think of Mastercard, Inc. MA , they think of credit cards. As such, Mastercard connects many different participants in various kinds of transactions: consumers, merchants, financial institutions, governments, and more. V , Mastercard enjoyed decades of privately held success before an early s initial public offering IPO.

Indeed, Mastercard actually began as a response to what would eventually become Visa. After Bank of America Corp. BAC launched a bank card in the late s, a coalition of regional credit card providers came together to launch Mastercard in Since that time, the company has gone through numerous expansions and rebrandings, but it has enjoyed consistent popularity among an increasingly global base.

Investors love Mastercard. As of Aug. Still, for all the investor hype, end users seem equally satisfied. The seamlessness with which you make a Mastercard transaction belies a comprehensive network of merchants, financial institutions, and settlement banks, each of which receives a cut of a process that takes mere milliseconds.

Mastercard facilitates transactions in more than currencies across more than countries and territories. Though the company does not have a monopoly on the payments industry—not only because of similar operations such as Visa but also because of a growing number of new payment service providers—it is nonetheless hugely successful across the globe.

A big part of this success has to do with the Mastercard brand and the cachet it holds. A typical Mastercard transaction involves five parties: In addition to the payments processor itself, the event includes a consumer or account holder and their issuer bank, as well as a merchant and their acquirer bank.

Typically, an account holder uses a Mastercard-branded card to make a purchase with a merchant. When the transaction is authorized, the issuer bank pays the cost of the transaction minus an interchange fee, also known as a swipe fee to the acquirer bank.

The account holder is then charged the cost of the transaction, minus a merchant discount. Interchange fees are key in providing value to merchants who accept Mastercard payment products. Mastercard does not generate revenue from these fees. The merchant discount fee helps to cover costs for the acquirer bank.

Where does Mastercard earn money in this system? Mastercard charges the financial institutions that issue cards a fee based on gross dollar volume of account holder activity. The company also earns revenue from switched transaction fees covering authorization, clearing, settlement, and certain cross-border and domestic transactions. The COVID pandemic has only accelerated the change in consumer behavior as more and more of us shop for our essentials online.

Even the older generation who are not as tech savvy are learning to navigate different e-commerce platforms during this period. Even in physical stores, we are turning to contactless payments as the fastest and safest way to transact as opposed to cash transactions. In an oligopoly controlled by three companies, it common for Mastercard to get caught up in antitrust lawsuits from time to time.

For example, in , Mastercard, Visa, and a number of banks including JPMorgan Chase, Citigroup, and Bank of America were sued by 12 million merchants , alleging that they colluded to inflate interchange fees and prohibited them from directing consumers toward other methods of payment. Under the settlement agreement, merchants will be restricted from suing the card networks over the same card-swipe-fee claims for several years.

Companies with dominant positions in the market get caught up with antitrust lawsuits repeatedly. It happens to Google, Facebook and Amazon all the time. Mastercard has been a stock market stalwart from its listing in May Besides the stock market crash in , Mastercard has been on a steady upward trend ever since.

In the near term, Mastercard looks like it will continue to ride on secular growth trends in the e-commerce and payments space. Will player like Union Pay affect Mastercard market? Also new digital payment company like Square, will it affect the long term market share of Mastercard, Visa?

Thanks for your article. Mastercard and Visa are the dominant networks outside of China. PayPal and Square are great platforms to make online transactions but they do not have the same influence as Alipay and WeChat.

The networks were smart to partner with tech firms that wanted to offer digital payments before they could establish their own to bypass them. Both Visa and MasterCard are largely the same, except that Visa has a larger market share. Both are acquiring companies in the last couple of years to offer more features to their customers or serve their fintech partners better.

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. Discounted offers are only available to new members. Stock Advisor will renew at the then current list price.

Average returns of all recommendations since inception. Cost basis and return based on previous market day close. Investing Best Accounts. Stock Market Basics. Stock Market. Each issuing authority sets its terms and conditions for the use of its facilities by the cardholder, and Visa doesn't interfere with these policies. During the processing of payments, the issuers authorize the cardholder transaction and fund the settlement obligation for the cardholders' spending.

Issuers will collect payments from cardholders, and the issuers also accept responsibility for late or non-payment by the cardholder. Some of the processing services offered by Visa include authorization, sale clearing, debit issuer processing, and settlement.

The company also offers value-add services like risk management, dispute management, loyalty services, and information services. For acquirers, their main customers are merchants in their network. The acquirer provides the merchant with payment connectivity to the Visa network. Acquirers may establish an applicable merchant fee or discount rate. During transactions, the acquirer receives its settlement funds from the issuer, crediting merchants for the transaction value. In exchange, the acquirer takes a percentage cut before crediting the merchants.

Acquirers then assume the risk of merchant compliance and non-fulfillment. Visa generates its revenue primarily from the fees collected from financial institutions using its network. The company bases its charges on the transaction volume funneled by the institution. Visa makes money by collecting fees from financial institutions to issue Visa credit, debit, and prepaid cards.

They also collect payments from merchants based on the transaction volumes of goods and services purchased with Visa cards. Visa's profit comes from being the middleman in the transaction, facilitating the seamless processing of payments between the merchant and the bank or financial services provider.

They do not make any money on the interest charged for Visa-branded credit card payments. Instead, these fees go to the issuing institution. Visa reports earnings through a single segment, known as payment services.

However, it divides its operations into four segments, with each of the components responsible for generating revenue for the organization. Visa operating revenue consists of service fees, data processing fees, and international earnings. The client incentive arrangements the company has with its partners reduce its earnings with costs for facilitating business. Visa collects service revenue from institutional clients like banks and other partners that want Visa-branded payment solutions.