VISA Makes Money. But how? Discover the credit card giant’s big secret
VISA makes money, there is no doubt. In this article, we uncover the hidden aspects of VISA’s revenue sources. We’ll delve into the world of this giant and discover how they profit from your transactions without you even realizing it.
VISA’s impressive revenue Growth
In 2022, VISA reported a staggering net revenue of $29.3 billion, marking a remarkable 22% increase compared to the previous year. These numbers are undeniably impressive for any business, but have you ever wondered exactly how VISA manages to rake in such enormous profits?
The power of payments
Payments are a massive industry, and VISA is at the forefront. According to the Nilson Report, credit, debit, and prepaid cards issued in the US generated over a whopping $9.5 TRILLION in purchases in 2022. That’s a 13% increase from the previous year, and VISA accounts for 61% of those transactions. Meanwhile, Mastercard and American Express occupy 26% and 11% respectively, leaving only a modest 2% for Discover cards.
VISA: Only one payment network
Interestingly, while many people proudly say, “I have a VISA card,” VISA doesn’t directly issue credit or debit cards. In reality, it’s banks and financial service companies that handle card issuance, while VISA operates as the network responsible for secure payment processing.
VISA serves as an intermediary between three key players:
- You, the customer making the purchase;
- The bank that holds your money;
- The merchant selling the product or service.
Think of VISA’s network as a conduit for money, similar to how a telecom or internet network transfers voice or data. Remarkably, VISA can process up to 24,000 transactions per second and connects over 18,000 banks and financial institutions worldwide.
The mystery behind the payment terminal
Every time you use your VISA card, a series of messages traverse the VISA network:
- Initially, a message flows from a point of sale or an online store to your bank.
- Following that, the payment undergoes verification and authorization.
- Finally, the message returns to complete the transaction, transferring money from your account to the merchant’s.
Remarkably, all you see is a simple message that confirms your successful payment, often accompanied by a familiar green checkmark ✅.
Your VISA card, is indeed your bank’s card
Even though your card features the VISA logo, technically, it’s your bank’s card. This means that all your payment conditions, rewards, and cashback are determined by financial institutions, not VISA.
Now, you might be wondering, if VISA doesn’t charge credit card interest or have direct relationships with consumers, how do VISA makes money? The answer lies in the unique position VISA occupies within the payment ecosystem. While VISA doesn’t profit from interest charges, they earn revenue from transaction fees paid by merchants and banks for using their secure payment network.
Revenue sources unveiled: This is how VISA makes money
In 2022, VISA achieved an astounding gross revenue of $39.6 billion, showcasing their dominance in the payment industry. But have you ever wondered where this massive revenue comes from?
VISA’s revenue sources are diversified, with various components contributing significantly to their earnings. Let’s break it down:
Data processing fees
The largest chunk of VISA’s revenue, approximately 36%, is generated from data processing fees. These fees are levied on vendors every time a customer uses a VISA credit or debit card to make a purchase.
Service fees from card issuers
Around 34% of VISA’s revenue comes from service fees charged to card issuers who partner with VISA for their payment methods.
International transaction revenues
VISA also earns about 25% of its revenue from international transactions, including cross-border purchases and currency exchange services.
License fees and technology
VISA has developed state-of-the-art technology that enables secure and fast transactions worldwide, and other companies pay to use these solutions. A smaller but significant portion, approximately 5%, is derived from license fees charged for the use of the VISA brand or its technology.
This is how VISA makes money
In essence, VISA primary income stream is fueled by banks and merchants who rely on VISA’s secure and efficient payment processing services. While you, as a customer, don’t directly pay VISA, your transactions involve fees that ultimately support VISA’s business model.
Ads
What’s behind data processing fees
Now that you know how VISA makes money, let’s talk in more detail about data processing fees, as they are the main basis of its revenue.
The retailer’s swipe fee
Did you know that every time you use your VISA card to make a purchase, the retailer pays a data processing fee, commonly referred to as a “swipe fee”? This fee typically amounts to around 2% of the total purchase value and varies based on several factors:
- The type of merchant
- The cost of the sale
- The payment product used
- The processing technology employed
- The geographical region or country
Additionally, risk plays a role in determining the magnitude of swipe fees. As a result, credit card swipe fees tend to be higher than those for debit cards, and businesses with higher risk profiles, such as casinos, may face elevated fees.
Revenue flow from swipe fees
A substantial portion of VISA’s revenue is derived from the swipe fees paid by merchants to the banks that issued VISA cards to customers. The issuing bank retains a portion of the fee and transfers the remainder to VISA.
The impact on small businesses
While larger corporations may not be significantly affected by swipe fees, small businesses often struggle to manage these costs. In 2021, U.S. merchants collectively paid a staggering $137.8 billion in swipe fees, nearly seven times more than two decades ago! According to the National Retail Federation, swipe fees rank as most retailers’ highest operating expenses after labor. This ultimately translates to an estimated $900 increase in consumer prices annually for the average household.
The retailer’s alternative: cash discounts
In response to these fees, it is increasingly common to find “cash discounts,” i.e., price reductions that businesses offer when you pay in cash. By avoiding the use of cards, you can get an immediate 4% discount on the products you buy.
So, the next time you use your VISA card, remember that, although you don’t pay VISA directly, you contribute in one way or another to increasing their revenue through your bank and your online or in-store purchases. This is just the beginning of the story of VISA and their impressive business model!
Transaction processing fees: Are they really fair?
Interestingly, despite escalating fees charged by banks and payment networks, the Federal Reserve’s biannual survey indicates that transaction processing costs have decreased for banks. Presently, the cost hovers around 4 cents per transaction, compared to approximately 8 cents per transaction a decade earlier.
While there’s ongoing debate about the fairness of swipe fees, some argue that VISA, like other payment networks, maintains a balanced structure, with banks contributing more revenue than merchants.
The unbalanced balance
As already mentioned, service fees charged to banks bring in just 2% less revenue than data processing fees charged to businesses. It’s important to note that VISA collaborates with nearly 18,000 banks, while there are tens of millions of merchants worldwide. This means that while an individual bank may pay more than an individual business, the collective revenue from businesses surpasses that of banks. Consider this: both your local bakery and Amazon, despite their size differences, pay nearly the same data processing fees. No wonder VISA makes money, piles of money!
The cost of cash: A not very cost-effective alternative
Moreover, it’s essential to recognize that cash transactions also come at a cost for merchants. Dealing with cash entails the need for cash drawers, armored trucks, managerial personnel to handle cash counts and security, and more. Card payments not only simplify the process, but also accelerate checkout lines and facilitate eCommerce, making them a preferred choice for both businesses and consumers.
VISA’s humble beginnings
VISA, the colossal global corporation operating in over 200 countries and employing over 26,000 people, had rather humble beginnings. The story of the VISA card traces back to the late 1950s, when Bank of America introduced its BankAmericard, allowing customers to make credit-based purchases at participating merchants.
While we won’t delve too deep into the inception of the first credit cards here, as we’ve discussed it in a previous article, we encourage you to check it out if you haven’t already. At the end of this article, you’ll find the link.
The visionary Dee Hock and the birth of a unified platform
It’s impossible to recount VISA’s history without highlighting Dee Hock. He is widely regarded as one of the founders of the VISA we know today. His journey began when he worked as an assistant manager at the National Bank of Commerce in Seattle, a bank franchised by Bank of America. At the time, general-purpose credit cards were confined to local use within California, with Bank of America licensing the program to other U.S. banks.
Dee Hock, however, envisioned something greater for the BankAmericard program. He saw the potential for it to evolve into a national credit card system, leading him to conceive a plan for a unified platform that would serve both banks and merchants.
Hock’s initial proposal involved creating a non-profit organization owned by member banks, which would collectively share the costs of developing this new payment system.
Ads
After refining his plan, Hock approached Bank of America’s senior management, convincing them that a unified credit card system would be more efficient and cost-effective than the existing fragmented regional systems.
From BankAmericard to VISA: A journey of innovation
The birth of BankAmericard
Initially skeptical, Bank of America eventually threw its support behind Hock’s vision. In 1968, Dee Hock founded the National BankAmericard Inc. (NBI), an organization that employed a decentralized model. This model allowed regional and national offices significant autonomy to cater to the unique needs of their local markets.
Transformation into VISA
In 1970, Bank of America relinquished control over BankAmericard, but they retained the right to license the program internationally. By 1972, BankAmericard had expanded its presence to 15 countries.
As BankAmericard’s international network continued to grow, international banks faced various challenges. To address these issues, Bank of America hired Dee Hock as a consultant, entrusting him with a role similar to what he had done with domestic licensees. This initiative led to the creation of the International Bankcard Company (IBANCO).
By 1976, BankAmericard underwent a transformation and rebranded itself as VISA. Simultaneously, the International Bankcard Company (IBANCO) adopted the name VISA International.
Where did the name VISA come from?
The name “VISA” was selected by the company’s founder, Dee Hock. He believed that the word was universally recognizable in many languages, making it easy to remember and pronounce.
Unveiling VISA’s secret: The chaordic organization
Today, VISA stands as the dominant payment network, with a staggering share of almost 53% of all electronic cards in circulation within the United States. In contrast, Mastercard accounts for only 32% of American cards.
So, what’s VISA’s secret to becoming a sector leader? The answer lies in two words: “chaordic organization.” Although this term may be new to you, the concept is straightforward.
A chaordic organization combines elements of both chaos and order, and Dee Hock coined this term to describe VISA’s unique operational model. Unlike traditional hierarchical structures, chaordic organizations lack a central authority or hierarchy. Power is distributed among all members, empowering employees to make decisions and take risks.
Dee Hock firmly believed that traditional hierarchical structures couldn’t adapt quickly enough to thrive in the rapidly changing world of finance.
As journalist and author Harrison Owen aptly noted, “Dee Hock did what most senior executives would consider total madness. He gave up the illusion of control, in order to allow a great organization to be born.”
Success based on innovation
While the concepts of flexibility and adaptability have gained popularity recently, VISA was already applying these principles in the 1960s. Many credit this innovative business structure as a key factor in VISA’s enduring success.
Throughout its existence, VISA maintained a relentless focus on innovation. In 1976, it introduced the first electronic authorization system, revolutionizing card transactions by enabling real-time verification. In the ensuing decades, VISA continued to pioneer new products and services, including debit cards and e-commerce solutions.
Today, VISA stands as one of the world’s largest payment processing companies, boasting billions of cards in circulation and partnerships with thousands of member banks.
Going public and raising capital
In 2006, VISA embarked on a path toward becoming a publicly traded company, culminating in the merger of VISA Canada, VISA International, and VISA USA. Meanwhile, VISA Europe became a separate entity owned by member banks, holding a minority stake in VISA Inc.
After corporate restructuring, VISA went public in 2008, raising a staggering $17.9 billion in one of the largest U.S. public offerings to date. It was only surpassed six years later by Alibaba, raising $21.8 billion by going public on the New York Stock Exchange (NYSE).
VISA’s legal challenges and litigations
VISA’s journey to success wasn’t without its legal challenges. The payment processing sector, in particular, faced numerous antitrust lawsuits and claims of anti-competitive conduct. The most notable case involved a lawsuit by retailers against VISA and Mastercard over excessive fees, dating back to 2005. While a settlement of $7.25 billion was reached in 2012, many major retailers opted out and pursued separate lawsuits. In 2018, VISA and Mastercard agreed to a $6.2 billion settlement, but the litigation continues, with the case remaining unresolved.
Despite legal battles, VISA’s stock consistently outperforms the S&P 500 index, at least over the past five years. However, a rare exception occurred in November 2021 when Amazon announced its plans to stop accepting VISA credit cards issued in the UK, resulting in a dip in VISA’s stock growth compared to the S&P 500.
VISA today
Today, VISA has evolved into one of the world’s most significant payment processing networks. Their revenue continues to grow, along with the number of transactions conducted using VISA cards. They’ve not only pioneered payment technology but have transformed it into an everyday commodity. Few can imagine life without the convenience of card payments.
VISA not only created a payment technology, but also a commodity. Few people can imagine their life today without electronic payments.
Now, do you understand how you unwittingly contribute to the way VISA makes money by simply using your card? The VISA story is a testament to the power of innovation and adaptability in the financial world.
Related articles
Click here if you are keen to learn about the origin of credit cards.
