How credit card companies actually make money

The network layer is a duopoly and it is not close. Visa has 4,484 million cards in circulation and Mastercard 2,948 million, against 156 million for JCB, 141 million for American Express and 72 million for Discover — and Amex had a hundred-year head start on both of them.

The 2–3% a merchant loses on a sale does not go to the network. It goes to the bank that issued the card, as compensation for carrying the credit risk and guaranteeing the merchant gets paid whether or not the cardholder ever does. Visa and Mastercard charge a separate, far smaller fee for shepherding the money between the two banks — a digital escrow, not a toll booth.

The networks were not built in Silicon Valley — they were built by the banks. Visa was founded by Bank of America, turned into a co-op of other banks and then spun out. Mastercard was created in answer to it by smaller banks who feared being squeezed out. Every CEO in the history of both companies came from a big bank. They are a product of the system, not a challenger to it.

Which is why neither side ever attacks the other. The banks do not launch competing networks and the networks do not start issuing cards. Their only real competition is technology, so both partner with anyone — crypto, fintech, wallets — to be a component of whatever comes next rather than its target.

Now the part that explains everything else: a credit card is the only loan in America with no legal rate ceiling and no tether to the Fed. A 600-FICO cardholder pays 26.96% and an 800-plus cardholder still pays 17.95%, against 12.29% on a personal loan, 6.70% on a 30-year mortgage and 6.61% on a new car. A consumer checking account pays the customer 0.08%.

The trick is that the loans are tiny, which is a feature. The average credit card balance is $29,855 against $409,942 on a mortgage and $663,000 on a commercial loan. Small principal means low exposure, cheap underwriting and almost no enforcement cost — and the rate is four times higher.

America is that culture. Americans spend $18,000 per head per year on non-essentials, against $11,047 in Australia, $9,523 in Canada, $8,830 in the UK, $5,387 in China and $2,992 in Germany. Personal consumption is 68% of U.S. GDP against 39% in China and 31% in Singapore.

The accounts show where the money actually is. In 2007 Bank of America's card division booked $17 billion of net interest against $9 billion of card and swipe fees; Chase booked $12 billion against $3 billion. Interest is not a supplement to the swipe fee — it is multiples of it, and it only arrives when a cardholder fails to pay in full.

So the entire product was designed around getting people to carry a balance. Through the 1980s and 1990s issuers raised rates without notice, moved due dates, buried penalty rates in fine print, approved transactions past the credit limit to charge the overlimit fee, and invented inactivity fees to force a monthly swipe. Interest was charged on balances that had already been paid off.

The 0% balance transfer was the cleverest version of it. Move your debt to this card and pay nothing for a year — which captures the balance now and defers the profit, because the issuer only has to wait for one slip. As the prime market saturated, the same offers were pushed down into subprime.

2009 was the only year it ever broke. Card divisions that had been running 34% margins went to 8% at Chase, 2% at Bank of America and −22% at Wells Fargo in 2008, then −17% and −20% at Chase and BofA in 2009. Credit card debt is unsecured, so when Americans lost homes and jobs it was the first thing to go unpaid.

After the crash the banks could not use the stick any more, so they switched to the carrot. Points cost nothing to create, carry no book liability, have no fixed dollar value, and can be devalued at will by the company that issues them — and 10,000 points markets far better than $100.

Set against the interchange it buys, the reward budget is modest. In 2023 Chase took $31 billion in swipe fees and paid $25 billion in rewards and partner payments, American Express $33 billion against $15 billion, Bank of America $13 billion against $9 billion. Only Citi paid out more than it took in — and none of these figures include a cent of interest.

American Express works the opposite way and proves the rule. It charges the highest interchange of any network at 3.18% against 2.51% for Mastercard, 2.43% for Visa and 2.40% for Discover, and justifies it on cardholder quality. But affluent cardholders pay in full, so Amex earns on billings rather than balances — and its card divisions run 22% and 21% margins against 50% for its payment network.

Discover proves it from the bottom. Late to the market, barred from the big banks' distribution, it built its business on students and freelancers and on interest rather than interchange — and the one and only year it ever lost money was the Great Recession. Its problem is retention: a borrower whose score and income improve leaves for a Big 4 card with better rewards.

Add it all up for 2024 and the ranking is the argument. American Express takes $61 billion, Visa $36 billion, Mastercard $27 billion, Capital One $26 billion, Chase $23 billion, Discover $21 billion, Citi $19 billion and Bank of America $17 billion. The networks are not the biggest earners in their own duopoly — and they were built by the people who are.