Ever wonder how credit card companies such as Visa and Mastercard manage to generate enormous profits year after year? As someone who uses credit or debit cards on a regular basis, you've likely given them your money without being aware of the nuances of their business strategies.

So, in this article, we'll dissect how these financial behemoths make their money so you can see where your hard-earned dollars ultimately end up.

How does Visa and Mastercard make money for themselves?

When you think of paying with your credit card, you probably think of Visa or MasterCard. Have you ever wondered how these two heavyweight payment networks generate money? You would think it comes from the fees you pay, but the truth is way more complex.

Let's break down exactly how these payment networks profit - and why it matters to you.

Let's decipher the true functions of Visa and Mastercard. They don't lend money directly to customers or issue credit cards, despite what the public believes.

Banks and other financial institutions that collaborate with Visa and Mastercard to provide their cards to consumers are responsible for carrying out these duties (lending money and issuing credit cards). Mastercard and Visa supply the network that makes transactions possible.

For instance, you can think of Visa and Mastercard as the "postal service" for payments. When you make a purchase, they serve as delivery businesses, delivering your payment information from your bank (the sender) to the seller's bank (the recipient). They do not provide the money directly; instead, they ensure that it is delivered to the intended place quickly and safely. Visa and Mastercard charge fees to process payments, just as the postal office does to send packages.

In a nutshell Visa and MasterCard charge a variety of fees to financial institutions, businesses, and in certain cases, consumers too.

Visa and Mastercard: Source of their huge income

It’s time to understand the various income sources of Visa and Mastercard. We’ll talk about 8 major sources of their profit and revenue.

1. Transaction fees

Transaction fees are one of the primary sources of revenue for Visa and MasterCard. Every time you swipe or press your card to pay, the seller receives a fee.

This fee is split among multiple players, including the card issuer (the bank that gave you the card), the acquirer (the merchant’s bank) and Visa or Mastercard, which take a small cut for providing the network that enables the monetary transaction.

1. Interchange fees

The majority of this fee goes toward the interchange fee, which is the amount paid by the merchant's bank to the cardholder's bank to cover the cost of transaction processing.

While Visa and Mastercard do not retain the interchange fee, they do decide on the rates. This fee is between 1% and 3% of the transaction value and varies by location, card type and merchant category.

1. Assessment fees

Visa and MasterCard also make money from "assessment fees." This is their part of the transaction, which is typically a modest percentage (0.10% to 0.13%) of the transaction amount.

It may seem insignificant, but when millions of transactions are performed each day, those minor costs add up quickly.

1. Service fees charged to issuers

Issuers, such as your bank, rely on Visa and Mastercard to run their card businesses. Visa and Mastercard offer fraud protection, network security and data analytics services to the issuers.

In exchange, Visa and Mastercard charge the issuing banks for these services. These costs can vary, but they are normally determined by the volume of transactions performed and other considerations, such as premium card features (like incentives or cashback).

1. Cross-border fees

When you use your card abroad, you may see a cross-border fee on your account. Visa and Mastercard earn a fee ranging from 1% to 3% on international transactions.

Although your bank charges you, a percentage of the fee goes to Visa or Mastercard to facilitate international payments. Essentially, they facilitate the transaction, and both the merchant and you pay for the service.

1. Technology and licensing fees

Visa and MasterCard are not merely payment processors; they are also technology firms. They invest in sophisticated payment technologies, fraud detection and cybersecurity. Banks, merchants and fintech companies rely on Visa and Mastercard's networks for safe transactions, and in exchange, they collect license and technology fees.

For example, a bank that issues a Visa or Mastercard-branded card must pay a licensing fee to utilize their network. Similarly, fintech businesses such as digital wallets and mobile payments apps pay fees to link with Visa or Mastercard's platforms.

1. Value-added service fees

In addition to transactions, Visa and Mastercard also generate income through value-added services. Here are a couple of them -

• Fraud protection: Both the payment giants offer cutting-edge fraud detection solutions that use artificial intelligence and machine learning to identify dubious/fraudulent activity. Banks and merchants pay for these services to reduce fraud risk.

• Loyalty programs: The incentives you receive, such as cashback, points or travel benefits are powered by Visa and Mastercard networks. Card issuers pay for access to these platforms in order to attract and retain customers through attractive rewards.

1. Interest on cash held for settlements

An income source of Visa and Mastercard that isn't as well-known is the interest accumulated on money kept in settlement accounts.

After a credit card transaction, money is temporarily held in escrow by both the cardholder's and the merchant's banks. These funds are held by Visa and Mastercard throughout that time, frequently accumulating interest.

In the bigger picture, the interest generated might not seem like much, but it's still an additional source of income that helps these businesses make billions of dollars a year.

1. Cardholder fees (Indirect revenue)

Visa and Mastercard do not charge you directly for using their cards, but you may incur fees such as annual fees, foreign transaction fees or late payment fees. These fees are charged to your bank rather than Visa or MasterCard.

However, the banks still benefit the payment networks indirectly. Banks that profit from these fees are more likely to issue more cards, resulting in more transactions handled by Visa and Mastercard - and, eventually, more revenues for them.

1. Partnerships and co-branding deals

You've probably come across cards that include both a retailer's logo and a payment network, such as Visa or MasterCard. Visa and Mastercard make a lot of money from co-branded cards, which are frequently issued by airlines, hotels and major retailers.

In these arrangements, the retailer, bank and payment network split the money from transaction fees, interest and other card services.

Visa and Mastercard benefit from co-branding partnerships, in which retail establishments pay for the opportunity to provide special offers to their customers.

Visa and Mastercard revenue; and why should you bother

You might be wondering how much money Visa and Mastercard make from their various revenue streams.

As per reports, Visa generated more than $31 billion in revenue in 2023, with Mastercard following closely at $25 billion.

The scale of these payment giants’ businesses is just massive, and they are expanding rapidly as a result of the growing trend toward digital payments, internet shopping and contactless payment technologies.

Understanding how Visa and MasterCard make money is important not only for financial reasons but also because it affects the economy as a whole.

The costs that Visa and Mastercard charge businesses may be passed on to you, the consumer, in the form of higher prices.

On the other hand, their comprehensive fraud protection and seamless payment systems improve transaction security and convenience for all parties involved.

Furthermore, if you're a small business owner or emerging entrepreneur, understanding how these organizations make money will help you better craft the costs of accepting credit card payments.

Finishing things up!

By perfecting the craft of making payments easier, Visa and Mastercard have grown into enormous global corporations.

They may not be the ones giving you money or loans, but they are the vital tech infrastructure that makes it possible for you to easily make payments whether you're doing grocery shopping in your neighborhood or taking a trip abroad.

The next time you swipe your Visa or Mastercard credit card, you’ll know exactly how these giants are making money - and why they’re worth every penny of their multibillion-dollar empires.