The American Express Company (AXP) is a global financial services company that competes in the credit card space with rivals such as Discover Financial Services (DFS), Visa, Inc. (V), and MasterCard Worldwide (MA). The use of credit cards is a convenience for many people. Imagine if there were no credit cards and you had to have the money available in your bank account in order to buy anything. There would probably be a significant drop off in consumer spending in the United States. But credit cards are not the only service American Express and its competitors offer. We explain how their other offerings and business models differ.

Visa and MasterCard are not Financiers

Visa and MasterCard act as intermediaries in the credit card space. They don’t directly finance credit card transactions. Instead, they allow financial institutions to participate in their networks and issue credit cards that bear the “Visa” or “MasterCard” brand name. When you buy something with your “Visa” or “MasterCard”-branded credit card, the merchant you buy from will process the transaction, using the Visa or MasterCard network, after your issuing financial institution approves the transaction, indicating that you have enough credit on your account. The business establishment will then approve your purchase.

In return for their service, Visa and MasterCard receive a processing and service fee from the financial institution that issues the card. The issuing bank also gets a part of the transaction value as a fee and the merchant’s bank also receives a fee for its service. As for consumers, they pay the issuing institutions in the form of card annual fees, monthly charges for carrying a balance, and late fees.

American Express and Discover Issue Cards

Discover Financial Services and American Express issue cards themselves and thus bear the financing risk. They charge customers for the use of the card and also charges merchants a fee. When you buy something on credit using your Discover brand name card, the merchant gets approval for the transaction from Discover directly. This sort of system is called an open-loop system, rather than the so-called closed-loop system associated with the Visa and MasterCard business model.

Transaction Volume versus Value

Discover charges you interest if you carry a balance and also other types of fees, such as a late payment fee. That’s how the company, and American Express too, generates revenue from customer use of its credit cards. Thus, it is transaction value that drives its credit card business.

In the case of MasterCard and Visa, it is transaction volume that generates their credit card revenue. The more transactions that consumers engage in with their Visa or MasterCard-branded cards, the more processing fees these companies get.

Competition Heats Up

American Express has typically been associated with more of an up-market customer base than its competitors, historically targeting affluent customers. More recently, competing card issuers have been issuing cards with lower annual payments. As a response, American Express has also come up with prepaid debit cards that are targeted at less affluent customers.

As other companies enter this space, American Express cardholders are losing perks, such as exclusive admission to certain airport lounges.

Costco and American Express decided to end their relationship in 2016. Costco later made Citi its exclusive credit card issuer and Visa its new exclusive credit card network for the warehouse retailer in the U.S. and Puerto Rico.

The Bottom Line

American Express’ main direct credit card competitors are MasterCard, Visa, and Discover. While MasterCard and Visa have a different business model than American Express, they all compete in the credit card space. Financial institutions that issue credit cards also compete with American Express for consumer business.