American Express Vs Visa Stock: When the economy is uncertain, betting on the companies that hold the strings makes sense on some level – it’s like betting on the house.
Look at credit cards. They get to collect interest and fees from people who maintain a balance on their credit cards. As such, the companies who issue these payment methods can benefit from a poor economy, a bad job market, and just about anything else that causes financial hardships.
At the same time, spending goes up when the economy is strong and most of that extra spending involves credit cards. Credit card issuers win that way too – just like “the house.”
If credit card issuers are the house, credit card providers are the ATMs and exchange counters. They collect transaction fees when gamblers buy chips. Like “the house,” these companies benefit every time someone uses a credit card with their logo on it.
Credit card providers, like Visa [NYSE: V] or American Express [NYSE: AXP], are basically an oligopoly. There are only a handful of credit card providers in the world and they make a little on every transaction without absorbing any of the risk. However, that doesn’t mean they are a guaranteed investment.
Pros & Cons of Investing in Credit Card Providers
One of the biggest pros of investing in credit card companies is that the world is becoming largely cashless. Credit cards are a major convenience in a world that includes so much online shopping; they make it easy to pay safely.
Also, they take on very little risk. The financial company that backs the credit card absorbs everything. The credit card provider just takes a little off the top in exchange for processing the transaction.
That said, there are downsides.
While, yes, there is an oligopoly – there are basically only four providers:
- American Express,
- Mastercard, and
These companies offer very few unique distinctions between themselves. People choose credit cards based on the benefits and conditions their issuers include – not the providers.
As such, credit card providers have very little power over their future successes. Further, there is a range of new payment tools that exist outside the realm of credit cards.
Is American Express a Buy?
American Express divides its operations into three segments:
- Global Commercial Services (GCS),
- Global Consumer Services Group (GCSG), and
- Global Merchant & Network Services (GMNS).
It is a credit card provider as well as an issuer. In some cases, it also manages card-issuing activities.
By sitting on both sides of the table, American Express creates a closed-loop system that helps inform and improve its operations.
This strategy helps the company analyze customer spending better, quantify risk more effectively, and ultimately limit its risk.
Further, American Express [NYSE: AXP] is also strategic in how it positions itself.
The credit card provider puts emphasis on driving spending as opposed to fees. They call it a “spend-centric” business model and it is one of the reasons that American Express cardholders spend more than other card holders.
The way this works in practice is the company uses the revenues it earns from these transactions to reward card members who spend more with better perks and create marketing campaigns that target those individuals.
Many of the incentives AMEX offers are geared towards higher net worth or income. Merchants and credit card issuers are happy because they get loyal customers as well as the earnings from these larger transactions, be it a fee or interest paid. Everyone wins, and American Express is set apart from the rest.
Should You Invest in Visa Stock?
Visa takes an opposite approach. It wants to be everything to everyone, for less.
Every year, the company processes 173 billion transactions around the world and there are 3.3 billion cardholders. Here’s how it does it.
The company works hard to be as innovative, efficient, and safe as possible. To this end, Visa [NYSE: V] has seven pillars to its business strategy.
First, there is its foundational efforts. Visa works towards building technology assets so that it can include a broader range of customers than other credit card providers.
It also works to protect its customers and issuers with world-class security as well as position itself as a recognized, compelling brand.
Moving forward, Visa tries to attract the best talent so it can achieve growth. Visa sees this as having three components. It wants to drive digital payments, deepen its partnerships with issuers, and expand access to its products.
In some cases, this involves enabling micro enterprises, appealing to financially underserved populations, or addressing developing economies.
Visa never operates as an issuer. Instead, the company broadens its efforts through its processing power. It has also been working to incorporate and involve fintechs as well as embrace new digital payment options.
Visa works with device manufacturers as well as messaging platforms and technology companies to pursue these avenues.
The company is moving past payments between consumers and businesses (C2B) or businesses and businesses (B2B). It is also pursuing person-to-person (P2P) transactions and government-to-consumer (G2C) business.
American Express vs Visa Stock: The Bottom Line
Visa’s strategy does help put the company in a unique position, but it is high-risk too. Being everything to everyone tends to either work out exceedingly well or fall flat.
There are dozens of options these days and even more if certain finance technologies ever reach mainstream. From P2P apps to bitcoin, consumers have options that exist outside of the realm of traditional banking and credit cards. Visa has the benefit of trust and brand recognition, but that may or may not translate to returns on your stock investment.
With American Express, those consumers are rewarded for staying put. Plus, well-qualified consumers do not have the same need for P2P, bankless solutions as someone in a developing country or from an underserved population.
The question here is whether American Express can continue to attract these big spenders and reward them in a way that makes sense. Relationships will be important here as well as perceived value. For example, if the price of flights become cheaper, will offering flights or miles as credit card rewards be as compelling?
The bottom line is this. While investing in credit card companies can result in some serious returns for your portfolio, they may not. Make sure you understand how credit card providers work before you ante up.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.