Visa make money, How Visa Makes Money? Understanding Visa Business Model

How Visa Makes Money: Data Processing, Service, and International Transactions

Apr 25, at PM Author Bio As an economic crimes detective, Matthew focuses on helping others avoid becoming victims of fraud and scams.

Visa credit card’s place in market

He is most familiar with the fintech and payments industry and devotes much of his writing to covering these two sectors. While this might sound painfully obvious, many invest in companies with only a vague notion of how they make money.

Firstly, we explain how Visa credit card payment processing works. Then, we explain the key elements of the Visa business model.

To be sure, some business models are easier to grasp than others. Other companies' business models are not so obvious.

How Visa doesn't make money

V data by YCharts While the returns have been unquestionably great, Visa's business model is often misunderstood. While it might commonly be called a credit card company, that definition is ambiguous and doesn't really explain how it generates revenue.

Without further ado, let's take a closer look at this market-beating investment and determine exactly how it creates all those profits for investors.

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How Visa doesn't make money Because a lot of confusion exists on this point, let's start with how Visa does not make money. Therefore, when consumers make credit card payments Visa does not profit from the interest rates charged by the card.

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  • How Visa Inc Makes Money | The Motley Fool

Image source: Pixabay. There are pros and cons to this model. The obvious downside is that consumers pay a lot of credit card interest each year and none of that revenue goes to Visa.

The positive is that Visa faces none of the default risk that comes from lending money.

What do we know about Visa and Mastercard?

For what it's worth, Wall Street tends to assign visa make money higher valuations to companies that do not face loan default risk. The four-party payment model Visa essentially acts as the middleman in a four-party model which, besides Visa, includes the card-issuing financial institution, the merchant, and the acquirers the merchant's bank.

According to the company's K report, internet 2020 earnings annual filing with the SEC, every time a card is used Visa collects fees, as tiny slivers taken out of each transaction amount it can vary depending on the card-issuing bank and merchant where it is usedin three main ways: service revenues, data processing revenues, and international transaction revenues.

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Service revenues are what the company earns for services provided to card issuers for the use of Visa products. The primary driver of this revenue category is payment volume. In other words, the more a product costs, the more revenue Visa makes in this category.

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For example, a gallon of milk will not bring in nearly as much service revenue as a brand-new energy-efficient refrigerator. What makes this type of revenue special is that it is a built-in hedge against inflation.

How Visa Makes Money? Understanding Visa Business Model

If the cost of widgets rises due to consumer inflation, Visa's and Mastercard's revenue will automatically grow right along with it! Data processing revenues are the microscopic fees Visa collects for the authorization, settlement, clearing, and other various access and maintenance fees for its vast payment network.

What does Visa do? The answer might surprise you

These revenues are based on the number of transactions that are made across Visa make money network; not how much money is being charged. What exactly do these terms mean? Well, the authorization is the process by which Visa routes the transaction from the point-of-sale to the card issuer for approval.

Who issues my Visa credit card?

The clearing is the exchange of the transaction information between the issuer and acquirer after a sale is made and authorized while the settlement is the facilitation of the actual exchange of funds between the involved parties. Finally, international transaction revenues are earned for cross-border and currency conversion activities.

These revenues are generated whenever a card holder purchases goods in a country different from the card-issuers country of origin.

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  • It does not issue cards, nor extend credit or set interest rates or fees, yet a Visa credit card is in the hands of just about every second credit card user.
  • How Do Credit Card Companies Make Money? - NerdWallet

Because these fees make up such a significant chunk of Visa's total revenue, the company is especially sensitive to economic downturns across the world or whenever an event occurs, like the outbreak of a disease or act of terrorism, which can significantly hurt a region's tourism industry.

It also means Visa is affected by the strength of the U.

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The Foolish conclusion What I have found to be helpful when I only vaguely understand a company's business model, is to read the company's business overview section in its annual K report. The reports are usually found on a company's investor relations website.

How Do Credit Card Companies Make Money?

Fifteen minutes spent reading this section is a great launching pad for further discovery and education about a company. Nearly all the information in this article was taken from Visa's most recent annual filing.

V is one of the dominant digital payments brands globally, providing services in more than countries to individual consumers, merchants, financial institutions, and governments. The company provides a broad range of services, which include authorization, clearing, and settlement services for financial institutions and merchants.

Understanding how a company makes money is a must for potential investors as it is nearly impossible to evaluate a corporation's prospects without knowing the visa make money ways it earns revenues.

It would be a shame to visa make money potentially great investments, like Visa, because of a lack of understanding its fundamental business model. Motley Fool Returns.

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