How Credit Cards Work In The U.S. | CNBC Marathon
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Visa is a dominant player in the payment industry, facing legal challenges due to its market power, despite significant revenue and value growth. American Express lags behind Visa and MasterCard in domestic payment volume, targeting affluent customers with premium perks for retention.
Insights
- Visa's revenue model thrives on earning a small percentage of every transaction made with a Visa card, showcasing high profitability due to its incremental margins and diverse revenue streams.
- American Express (Amex) targets high-spending customers by offering premium perks and rewards, focusing on affluent cardholders to drive revenue growth, while operating in a closed-loop system that allows for tailored rewards and decreased credit risk.
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Recent questions
How much did Americans spend on Visa cards in 2019?
$6.7 trillion
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Summary
00:00
Visa: Dominant Player in Payment Industry
- Visa, a dominant player in the payment card industry, saw Americans spend $6.7 trillion using debit or credit cards in 2019, with over 60% of purchases made on Visa cards.
- Visa's legal dominance has been challenged by the Department of Justice, citing Visa's "market power" and leading to various litigations.
- Visa's value as of October 2021 was over $480 billion, with a reported net revenue of $21.8 billion in 2020 and a significant increase in shares over the past five years.
- Visa's revenue model involves earning about $0.25 for every $100 spent on a Visa card, with high incremental margins contributing to its profitability.
- Visa's revenue sources include data processing fees, service revenues, and international transaction revenues, with investments in new payment methods for future revenue streams.
- Visa's success has led to legal challenges, including antitrust lawsuits and settlements, such as the $5.5 billion settlement with merchants in 2019.
- Visa's business model operates on a four-party system, involving the customer, bank, merchant, and Visa as a middleman connecting transactions.
- Visa's revenue structure includes fees from card issuers, data processing, service revenues, and international transactions, with a focus on facilitating secure digital payments.
- Visa's dominance in the payment industry has led to concerns over high swipe fees for merchants, with fees doubling from $25.6 billion in 2009 to $67.6 billion in 2019.
- Despite criticisms, some argue that Visa's business structure is balanced and supports merchants, playing a central role in facilitating digital payments and changing the world of commerce.
14:16
"Amex's Unique Business Model and Growth"
- Managerial level individuals are responsible for cash counting and theft prevention at the end of each shift.
- There is debate over the cost of card payments, but alternatives are also costly, especially with contactless payments.
- American Express (Amex) made $52.9 billion in total revenues in 2022, but lags behind Visa and MasterCard in domestic payment volume.
- Amex focuses on customers who spend a lot and pay off their cards, offering premium perks to retain them.
- Amex's revenue has grown over 32% since 2017, with steady business growth and earnings in the low double digits.
- Amex operates in a closed loop system, acting as issuer, acquirer, and network, unlike Visa and MasterCard.
- Amex earns from interest and discount revenues, with discount fees from merchants contributing over 58% of total revenue.
- Amex targets affluent cardholders who spend more, providing strong rewards and benefits to retain them.
- Amex's closed loop system allows for tailored rewards and decreased credit risk compared to other major issuing banks.
- Amex is diversifying its customer base, targeting millennials and underbanked Americans, while investing in technology and global expansion.
28:25
Understanding Credit Scores and Financial Stability
- Credit scores are numerical representations of financial stability and creditworthiness, ranging from 300 to 850.
- Scores in the 500s are considered very bad, while those in the 600s are termed subprime or near-prime, with the national average falling between 710 and 720.
- Credit scores and reports are distinct entities, with reports detailing credit information and scores calculated based on this data.
- Fair Isaac Corporation (FICO) calculates credit scores, with 90% of top lenders utilizing these scores, determined by payment history, amount owed, credit history length, new credit, and credit types.
- Credit scores enable precise lending decisions, contributing to low interest rates and efficient credit decisions.
- Credit scores aim to prevent lending discrimination by providing an objective assessment of creditworthiness.
- Despite good intentions, credit scoring systems still exhibit discrimination, with Black Americans facing lower credit scores compared to other racial groups.
- Errors in credit reports can lead to miscalculated scores, affecting individuals' access to credit, jobs, or housing.
- Regulatory oversight is crucial for ensuring fairness and transparency within the credit scoring industry, with ongoing efforts to reform the system.
- Responsible financial habits, such as timely payments and avoiding excessive credit card debt, are key to maintaining good credit scores and financial stability.
42:22
Discover: Mass Market Success with Customer Satisfaction
- Discover has 57 million cards in circulation, targeting the masses rather than luxury travelers.
- The company focuses on the average consumer, ranking in the middle among credit card issuers.
- Discover excels in customer satisfaction, topping the J.D. Power survey in 2019.
- The company operates as both a credit card network and issuer, providing a stable revenue source.
- Discover's business model is lend-focused, contrasting with American Express's spend-focused approach.
- Despite facing challenges, Discover has grown significantly since its launch in 1986, pioneering cashback and no annual fee cards.
