American Express's Main Competition

Mastercard, Visa, and Discover are top rivals of American Express

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 Incorporated (MA). While credit card users may consider these four competing companies similar, the companies differ in the customers they serve and the way they generate their revenues. Credit cards are not the only service American Express and its competitors offer. We explain how their other offerings and business models differ.

Key Takeaways

  • As one of the biggest financial services companies in the world, American Express competes with Discover, Visa, and Mastercard in credit card services.
  • Visa and Mastercard do not directly finance credit card transactions; instead, they operate payment processing networks that enable financial institutions to process credit card transactions.
  • Visa and Mastercard make money by charging processing and service fees to the financial institutions that issue credit cards.
  • Both American Express and Discover issue credit cards directly to their customers without working with an intermediary financial institution.
  • In return for bearing the financing risk, American Express and Discover charge customers for the use of the card and charge merchants a fee as well.

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.

$14.6 trillion

Per the Federal Reserve Bank of New York, the total household debt in the United States as of the first quarter of 2021 (includes credit card, mortgage, home equity lines of credit, auto, and student loan debt).

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 charge 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, generate revenue from customer use of its credit cards. Thus, it is the 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 came 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 Citigroup Inc. (C) 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’s 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.

Article Sources
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  1. Federal Reserve Bank of New York. "Household Debt and Credit Report."

  2. American Express. "American Express Serve."

  3. U.S. Securities and Exchange Commission, "Costco Wholesale Corporation 2016 Form 10-K," Pages 34-35.

  4. Citigroup, Inc. "New Costco Anywhere Visa Card by Citi Offers Cash-Back Rewards on Every Purchase."