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Modern credit cards have become a game where even casual consumers obsess over earning points, spend hours researching their next card, and fixate on getting the best rewards possible. There's more options now than ever in history. In the past decade, an ecosystem of publications and influencers have emerged, promising to help people navigate this ever growing complexity into digestible recommendations. And banks have paid them millions of dollars to push their products and to keep up this consumer frenzy on top of all their usual TV, direct mail, and online advertising. All this gamification exists for a reason.
Credit cards are a highly profitable business. Getting people to project their vacations, lifestyle, and social status on these tiny pieces of plastic and metal is all part of the plan. If people care so much that they'll even spend their free time thinking about their next card, the money will keep flowing. Even though the industry has been around since the '50s, power has rested in the same hands. On the network side, it's a duopoly with Visa and Mastercard. Their closest challenger is American Express, but even they are still too small to pose a real threat despite the fact that they had a 100-year head start before Visa and Mastercard. There's more competition when we look at the companies that
actually issue credit cards, but the line's share of those profits still go to the same big four American banks. No one has been able to break this power structure. Even fintech startups, for all their talk of disruption, have never been able to crack this dynamic, as even their credit cards still go through Visa and Mastercard. Even with growing political pressure and the intense regulation through the past decade, it's the same tight-knit circle of market makers that are colluding and happy to keep the other in business. In this episode, we're diving into the business conspiracy and the economics of credit cards through the biggest players in Visa, Mastercard, American Express,
Discover, Chase, and City Bank. When you use a credit card, whether tap or swipe or insert, it's the merchant who takes your payment and bears the costs. They're the ones who have to pay the swipe fees and they've tried for decades ways to push the cost back onto consumers, whether through markups or search charges. When you take 2 to 3% of every transaction, that money adds up very quickly. But contrary to popular belief, those swipe fees are not going in the pockets of Visa or Mastercard. That 2 to 3% actually goes to the bank that issued that person's credit card as compensation to them for taking on the credit risk and
guaranteeing payment to the business on behalf of the individual. Mastercard and Visa then charge their own separate fee as software middlemen who shepherd the transfer of money from the card holders bank to the merchants's bank account almost like a digital mini escrow. The merchant or the business keeps the rest after all these fees are deducted and this happens on every transaction. There are minimum of three parties involved and often a fourth or a fifth if the payment is handled on a physical terminal like Square or Verafhone keyed in an online gateway like Stripe or PayPal or through NFC like Apple Pay or Google Pay. Every middleman takes its own cut.
Despite an increasing number of hands in the pot, credit cards have remained a lucrative business. They're the crown jewels even for the big banks as their business divisions boast the highest growth and strongest margins greater than that of investment banking, auto loans, commercial loans, and mortgages. Even though every party in this transaction is playing their part, the elephant in the room still exists. Why are the banks so happy to keep Visa and Mastercard around as middlemen? Why aren't the big banks more ruthless in pushing their own networks when they're already so aggressive about extracting every dollar of profit for every other product? And why are Visa and Mastercard so willing to be the public whipping boy
for politicians when they could easily point the finger at their banking partners as the ones who are taking the swipe fees? The reality is that Visa and Mastercard were not tech companies born in Silicon Valley. Instead, they were born out of the big banks. Visa was founded by Bank of America, turned into a co-op with other banks, and then eventually spun out into its own independent entity. And Mastercard was formed in response by the smaller banks who allied together under the concern that they would get muscled out by the bigger banks. And in time, Mastercard also became a standalone publicly traded company. This means that Visa and Mastercard are not some new age futuristic tech company.
They're a product of the system themselves, and they enable the banks just as much as the banks enable them. Every single CEO in the history of Visa and Mastercard has come from a big bank. They all exist in this unspoken harmony where the banks won't encroach onto the networks and vice versa. Thus, Visa and Mastercard can focus on getting ahead of potential challengers that are emerging from the front and never have to worry about getting squeezed out from the rear. Their only competition is new technology, and Visa eagerly partners with just about anyone and everyone to ensure that they're seen as a partner rather than a target. Like Mastercard,
they have no opinions on the future, just that they need to be a part of it. As both companies have programs dedicated to helping crypto and fintech startups get to market faster. And if a startup did want to go head-on against these legacy networks, they wouldn't make any progress because no big bank, whether from the merchant side or the card holder side, would ever join a network at the expense of Visa and Mastercard. It was in the mid1 1980s when credit cards became popular. The only real lines of credit available to the average American back then were either payday lenders or lone sharks. The banks were the issuers of credit cards and the networks who made such payments possible both made a fortune in
this emerging market. It was like a perfect division of labor as the system collectively worked to push credit card adoption to both consumers and businesses. The networks like Visa, Mastercard, and American Express were in an arms race to sign as many merchants as possible. Meanwhile, the banks issuing credit cards were in their own arms race to sign up as many consumers for their specific card product as possible. The networks make money off volume, so they care about getting in as many swipes as possible. The banks, however, make money off of interest, and credit cards are like rocket fuel to conventional banking. In the simplest abstraction, banks take money from
people who don't need it, and they charge the borrowers a higher interest rate than whatever they pay the depositors. The spread is where banks make money. Yet, the average person typically only really borrows money for big purchases like cars, home, or business assets. As a result, there are three constraints. First, most people aren't buying a car or house every year. So, opportunities to lend are limited. The second is that these purchases are expensive. So, you as a bank have to make sure that you're lending to the right people to enforce collection of payments and to protect yourself in case they run off. And all of this overhead
eats into margins. The third is competition. People are generally diligent about taking loans out and they'll optimize for whoever gives them the lowest interest rate. So, you as a bank are always competing for your loans with everyone else. And lastly, it's the Fed who sets the interest rate as a baseline, so you can't collude with other banks, and you're tethered by forces beyond your control. Credit cards break all of these restraints as microloans. The average American credit line is tiny compared to that of a mortgage, but what is lost in deal size is made up for in interest.
Banks who issue credit cards can charge any interest rate they want with no legal limit or relation to the Fed. It's a dream come true for these lenders, as they get to charge radically high interest rates for low amounts of money. With such tiny loan sizes, the risk is lower and the due diligence is simpler. The total addressable market is also greater and the driving force is culture as the only constraint is individual frugality. Unless there's a societal shift away from materialism, Americans will always buy more, more, and more. And credit cards fuel that consumerism. But ultimately, the US economy as a whole is built on consumerism. And all the banks and networks needed to do was to condition generations of Americans to take loans
on everything from daily routine expenses to one-time splurges. The banks could make a killing, charging higher interest to more people than ever with less money. And networks could also make their own fortune, adding on their fees. But credit card holders only pay interest when they don't pay off what they owe in full. And because that's where banks make the most money, their goal is to encourage Americans to spend beyond their means. No different than the lone sharks and payday lenders that came before. In the Wild West, from the 80s to 2000s, banks did everything they could to get people to carry balances.
They frequently raised interest rates without notice, changed up due dates to confuse card holders, hid penalties and fine prints that would jack up the interest rates to much higher than the ones that were advertised, automatically approved transactions even if card holders were over their limit. And they tacked on huge late fees. And when someone did carry a balance, they were charged interest on not just what they owed, but also their previous balance, even if it had been paid off. As adoption matured in the '90s, the battleground shifted. Banks needed to incentivize people into using their specific cards over the ones they already had in their wallet. And they invented inactivity fees to force people
to use their card at least once a month. To maximize revenue, you need high balances along with the high interest rates. The returns from charging 25% interest on $100 versus 20% on $1,000 is night and day. To cut through the growing market saturation, the industry shifted once again and started offering unprecedented 0% APR balance transfers. Americans could now transfer unpaid balances from any of their existing cards into this new one with no interest for a certain period of time. The banks were happy to lose money on these offers because at the very least they would have captured the balance and now it was just a waiting game for the card holder to slip up. As long as there's a
balance, the opportunity for interest can exist. With saturation at the top and the middle of the market, banks began extending credit to lowincome subprime borrowers as their new cash cows. These predatory practices in lending led to massive profits for American banks through the 2000s. The money earned from charging interest on card holders greatly exceeded the money made from swipe fees by multiple zeros year after year. Visa and Mastercard themselves enjoyed record earnings in this gold rush as they sold the back-end shovels that made it possible for these banks to issue these credit cards in the first place. And in the case of one hand watches the other, the big banks were happy to pay millions for these tools to
fund their offspring. Yet, when the Great Recession hit, profits disappeared, banks crashed, and regulation came swiftly. The dangerous patterns that had caused the housing crisis had played out in credit cards. Like with mortgages, the unregulated credit business had devolved into extending deceptively friendly loans to people and profitering off their failures to pay it back. The once high- growth, high margin credit card division of every bank crashed as Americans lost their homes and jobs. And since credit cards are unsecured debt with no collateral, they were the lowest on the totem pole in priorities. With widespread delinquencies, the bank suffered massive losses and whatever
revenue they had generated from interest that year went to funding the write-offs. For the first time ever, profit margins plummeted to low single digits across the industry, with some banks even ending up in the red. In response, the Obama administration pushed the Card Act of 2009, which curtailed these industry-wide predatory practices by mandating disclosures, providing notice on rate increases, fixing payment deadlines, setting age limits, and banning marketing to college students. Yet the damage from the downturn was ultimately limited to just the banks as the card issuers. Visa and Mastercard continued to make their fortunes during and through the Great Recession as software middlemen with zero exposure to the end consumer. The
only reason they each declared a loss in 2007 was because of the one-time antirust litigation payments. Both Visa and Mastercard coughed up billions of dollars in settlement that year with their rivals. The US government had discovered the collusion between Visa, Mastercard, and the big banks. The big four had conspired to build and fortify Visa and Mastercard's Duopoly by not allowing all the banks below them to issue credit cards for competing networks like American Express and Discover. And if you're a smaller regional bank that does regular business with Chase, City Bank, Boa, or Wells Fargo, you really have no choice but to follow what they tell you to do. Despite the hard evidence from the DOJ, the
government took no action beyond the civil monetary penalties. Hilariously, Visa and Mastercard knew that these fines were coming and quickly went public leading up to the settlement, and they used the funds directly raised from the public markets from their IPOs to pay off these penalties. Despite having the upper hand in the bank bailout, the government opted to continue its crusade of industry-wide regulation on all networks rather than the obvious duopoly. Visa and Mastercard at this point were light years ahead in network volume compared to American Express, who had been the true first mover and pioneer of credit cards. even discover the nimble lean upstart had no chance of
closing this gap as neither network could ever replicate the relationships access incentives and shared agenda with the big banks that only Visa and Mastercard enjoyed. The Great Recession ultimately did nothing to stop the trajectories of this duopoly. Even when Americans switched to debit cards to avoid the interest risk and to develop better spending habits, Visa, Mastercard, and the big bank still profited by charging the same swipe fees and splitting the proceeds amongst themselves. It was in 2011 when the US government capped the swipe fee for debit cards to 21 cents and 0.05% which is substantially lower than that of credit cards. This piece of regulation was pushed once again with an industry-wide holistic view under the
rationale that some electronic payment was better than none at all. This was a rare case where the government prioritized its interests ahead of the financial system. Low swipe fees on debit cards would mean more businesses accepting plastic over cash. And less cash in the long run would mean less opportunity for tax evasion, laundering, and corruption, which was a win, even if it came at the expense of bank profits. As the economy recovered, Visa and Mastercard earnings continued to surge with the full backing of the big banks. Since the government showed no concern with the duopoly, the two networks were able to focus on getting ahead of their only remaining threat in technology. They created new security
standards like EMV chip cards and provided day one support for any emerging potential technology like optical readers and smart speakers. Visa and Mastercard have no opinions on the future. Instead, their goal as middlemen is to be present anywhere and everywhere. With day one support for everything, they can wait and see to see what technologies will take off like NFC, contactless, and tap to pay and then ramp up their investment accordingly. There's a clear division of ambitions. Visa and Mastercard focus on consumerto business transactions. The majority of money that flows through both networks every year is on consumer credit and very little of it is on commercial credit. The big banks on the
other hand focus on businessto business and business to consumer transactions. While C2B, B2B and B TOC are covered so thoroughly. There's a lot less coverage for C to C. This is why the biggest fintech services of the modern age like PayPal, Venmo, Wise, and Cash App are all built on consumer to consumer transactions because the legacy financial system historically regarded these payments as too low value to be worth their time. These days, however, the big banks are fighting back to make up ground on consumer to consumer transactions through zel and the networks have set their eyes on unlocking greater consumerto business payment volume by encouraging card holders to now put bigger expenses on their credit cards like rent. Visa and
Mastercard have also set their sights on government to consumer transactions. Their pitch is that their software vendors as much as they are payment networks with their tools. They pitch that they can help countries reach their unbanked populations, modernize benefits distribution to citizens, and better inform politicians on monetary policy. And because just about every country in the world has some asset parked in a big American bank, it's a piece of cake for Visa and Mastercard to get facetime in front of political decision makers off of warm introductions from the banks themselves. As a result, the revenue from selling software services has increased year after year and will continue that way as anyone doing
business with the big four will inevitably do business with Visa or Mastercard. This is why China and Russia with their nationalized networks, banks, and technology remain the only big markets that Visa and Mastercard publicly admit that they have no shot of winning. While they regularly argue in public that they have to be able to charge these swipe fees in order to maintain the security, safety, uptime, and reliability of their network, the numbers tell a very different story. Visa and Mastercard have only lost money once in the past 20 years, and that was only due to the antirust settlement. Credit lending at its core is so profitable for both the big issuers and the big networks that profits rebounded
the year after to double digits in spite of the greater regulation. Margins have remained at 30 to 50% across the board every year for the big card issuers and the networks. While Visa, Mastercard, and the big four found the right lanes to chase without stepping on each other's toes, they all face the same conundrum exiting the Great Recession. It's one thing to maintain margins and another to grow the pie. While the networks focused on technology, the banks needed to evolve. As card issuers, they could no longer aggressively prey on anyone and everyone like before with trick offers and hidden fees. And they needed to get Americans off of debit cards as the swipe fees were now capped and there was no interest to be made.
So, the big banks collectively changed up their game. Instead of the stick like before, they opted for carrots. With rewards, card holders would be encouraged and incentivized to keep spending. And every bank invested millions into new products to attract prime borrowers and to keep their specific cards at the top of wallets. But to get customers to spend, there needed to be flashier, sexier incentives. Instead of the boring conventional 2% cash back and 0% balance transfer, the banks turned credit into a game of points. Americans were hit with dazzling new card products, promising tens or hundreds of thousands of these virtual madeup points on signup that cost nothing to generate and category-based multipliers. There's no
direct dollar value, no book liability, and the onus is on the card holder to get value out of these points. And since the banks are the creators and dispensers of this virtual currency, they can freely inflate or devalue these points any time. And when it comes to marketing, 10,000 points sounds a lot more enticing than $100. The banking business is all about arbitrage, and taking something that's worth less in one market and selling it in a different market for more. They applied that science to credit cards. To get consumers to see values in these fake points and to care about accumulating them in the first place, they needed to be redeemable for something more meaningful beyond cash. The banks found
their silver bullet in travel partners who were already running loyalty programs of their own and needed ways to reward business travelers and to encourage loyalty. While co-branded airline credit cards and mileage exchange programs first started in the '90s, it was only until after the Great Recession when all the banks began to go allin on this direction. They started purchasing loyalty points in bulk and had a discount directly from the airlines and hotels to the tunes of hundreds of millions of dollars for the leading brands. The banks then dangled these points in front of card holders to incentivize spending. As long as card holders spend, the banks as issuers will always make their money back on the
swipe fees or interest. On the other side of the table, the airlines and hotels love these partnerships because they get a huge lump sum of cash out of nothing. And they too also have full control over the value of these loyalty points. They don't incur any costs until a card holder actually redeems these points into a real reservation. And even then, these airlines and hotels, just like the banks, can always adjust what, how much, and where these points can be used to minimize losses. But there's only so many airlines and hotels in the world, and only a few of them are truly valuable enough for their loyalty points to be worth chasing in the eyes of a consumers. It's a case of where the
rich get richer. Leading airlines and hotels get to demand greater payouts and higher valuations for their points, and the money they make selling these points to the big banks surpass what their smaller rivals make by orders of magnitude. The banks in this angle have progressively less negotiating power. The appeal of their cards line these virtual points, which are ultimately only valuable if they're redeemable at leading brands. If they want to keep their card holders, their spending, and their balances, they really have no choice but to pay for these carrots no matter how expensive they get. The big four through the 2010s found themselves in a new arms race to partner with brands outside of travel
and leisure. Leading brands like Kroger, Amazon, IKEA, and Costco have all partnered with banks to launch co-branded credit cards. Since these retailers don't have loyalty programs, the only reward they can offer card holders is cash back. But the banks are happy to offer these products because these brands bring their established mature customer base who are already paying and spending money today, albeit with a bunch of random cards. Co-branded credit cards are meant to consolidate and to funnel this spending into one specific card. And it's a no-brainer as taking 2% on every Amazon order is no small fortune. But these retailers want their share of the pie, too. Whenever they successfully sign up a customer to their credit card, the
issuing bank that they've partnered with pays them a cash bounty. This is why flight attendants will pitch passengers before landing about the credit card, and cashiers will also pitch shoppers at checkout. The issuing bank will also provide rebates and revenue sharing. So, whenever these card holders use these co-branded cards at the retailer or partner stores, whether in person or online, the partner gets to keep 100% of the purchase rather than the usual 98%. And when the same customers use these co-branded cards at other stores or when they carry balances, the retail partner also gets a kickback from the interest and swipe fee. Banks these days are eager to partner with any and every
popular brand. But not every partnership is a success. Uber and Starbucks are examples of co-branded credit cards that were discontinued after just a few short years due to low signups, unsustainable benefits, and lower thanex expected transaction volume. Since the great recession, Chase, the largest issuer of credit cards in the US, has rolled out Ultimate Rewards. Sapphire Products, Airport Lounges, partnered with Marriott, Hyatt, Southwest United, and bought the infatuation to chase high-spending chronically online millennials. Chase has sunk a progressively bigger chunk of its swipe fees over the years to keeping its co-brand partners happy and its rewards portal stocked with the latest and greatest. City Bank is the second
largest issuer of credit cards in the nation. They focus less on travel and more on an older general purpose audience by partnering with Costco, American Airlines, and Best Buy. But while the big four lead the way these days in terms of adoption, rewards, and awareness, the reality is that they're all just taking a page out of the competition. It was their tight-knit collusion with Visa and Mastercard that enabled the big banks to catch up so quickly and to weaken the first mover advantage of its rivals. Discover started in the mid1 1980s as a standalone credit card company 20 years after Visa and Mastercard. They're a card issuer, payment network, and bank all-in-one, but their late entry meant
they needed to do more to stand out from the duopoly. Discover cards had no annual fees, which was uncommon at the time, and featured a first ever cash back bonus, which the big four decades later would make a standard reward across all their products. Naturally, Discover was willing to front so much of these costs back then because they knew they could make the money back on interest. Yet, what's unique about Discover is not how they make their money, but from whom? The big banks have built their business on the foundation of retail banking. Even though personal banking is a low margin, hightouch business, it's invaluable because these retail relationships ultimately feed the
higher margin businesses like credit cards and mortgages. But Discover as the nimble upstart could never replicate the centuries of physical scale and retail presence of the big banks. As a result, they had to settle for a serving the underserved low end of the population and Discover made its name as a beginner credit card for college students and freelancers. Discover's business since the 2000s has been fueled by interest and getting its card holders to carry balances. Swipe fees contribute just a tiny portion of revenue every year. Discover through history has struggled with getting merchants to accept its cards. As mentioned before, some of this was beyond their control. The big four
had barred banks in its networks from issuing Discover credit cards which meant all the marketing, customer acquisition, and merchant adoption was placed on the shoulders of Discover alone whereas those same costs for Visa and Mastercard were shared across many. The other angle here is that Discover historically needed to charge higher swipe fees as they had to offset their greater overhead as both a card issuer and a payment network. But their greatest flaw is LTV. The good borrowers by measure of FICO score or income will always outgrow Discover and move their spend to one of the big four where their rewards are more flexible, valuable, and aspirational. Meanwhile, the subprime
borrowers will stay. And this is why Discover's profit margins are much more volatile and sensitive as their losses will spike in any downturn. While Discover occupies the bottom of the market, American Express occupies the top. Like them, American Express is an issuer, network, and bank all-in-one. They had made their name in the 80s, positioning their cards as invitationonly status symbols for the ultra wealthy, and merchants that accepted MX were regarded as equally prestigious establishments. But once the big banks stepped their game up, MX quickly fell out of fashion. Visa and Mastercard emerged on the scene, offering lower swipe fees, and they could do so because they were subsidized
by the big banks. As a result, merchants push backed against American Express's higher swipe fees, and the landscape shifted to favor the lowest bidder. While American Express continues to charge the highest swipe fee of any network to this day, their argument to merchants is that their card holders are worth this premium. Their clientele are affluent and indulgent, as American Express card holders spend on average three times more than that of a Visa or credit card, and they've behaved that way every year for the past three decades. But the challenge is that these super prime borrowers are generally not only wealthy but also responsible. Thus, while Discover and the big banks make
most of their money on getting customers to spend beyond their means, American Express makes most of its money on swipe fees rather than interest. Given that their business is built on billings rather than balances, American Express was the first major card to offer a point system where card holders could redeem rewards from a variety of brands rather than be locked into one specific airline or hotel, which was the norm in the '90s. American Express was also the first to build premium airline lounges for its card holders, a perk that Chase and City Bank are now emulating a decade later. Without the high interest income, AMX's credit card business is much lower margin than any of its rivals. The highest margin
business for American Express instead is in the payments network in the authorization, clearing, and settlement of transactions. Credit lending is a highly resilient and lucrative business, whether at the top, middle, or bottom of the market. It's why Goldman Sachs jumped head first to launch a card with Apple. But like the Starbucks, General Motors, and Uber card before it, it's not a slam dunk unless you're in the big four. The money is really in the interest, which only comes from getting people to carry balances. And all the gamification that people do with credit cards these days and hoarding points, timing redemptions, researching tier lists, and projecting their future
lifestyle on these pieces of plastic and metal are all carrots planted by the banks to get people addicted to spending. American Express and Discover are ultimately too small as networks to have any real influence. And anything they do in terms of innovation is easily copied by the big four who have the pockets, inside connections, and influence to make a bigger splash. When AMX bought Resi to get more into the high-end restaurant space, Chase responded just 2 years later by buying out the infatuation and Zagat. It's much easier for banks to cross-ell credit cards to individuals that they have an existing banking relationship with. And the average American is not going to be as technical as a Redditor
when it comes to signing up cards and redeeming rewards. Both AMX and Discovery have tried to move more downstream with checkings and savings products. But their personal banking products will always be inferior to the big four. Ultimately, the biggest profiters from credit cards are not the networks, but rather the big banks. and Visa and Mastercard at their core only exist as a duopoly to enrich and to protect their creators. The only thing that has ever poked a hole in this power structure were the buy now pay later startups in Clara, Afterpay and Affirm. Buy now pay later was a direct alternative to credit cards. If consumers started to prefer these pay and for plans, then they would stop carrying balances on their credit cards.
Then these new Silicon Valley middlemen would rake in the billions of dollars of interest that normally flowed into the pockets of the big banks. And because a firm, Clara, and Afterpay had inserted themselves ahead of the credit card statement, then the banks would lose out on their most valuable and highest margin revenue stream. This is why the big four reacted so quickly and aggressively. They rolled out buy now pay later programs of their own, and they banned card holders from using their credit cards to pay for these services in an effort to squeeze these startups out of the financial system entirely. It's hard to believe that the recent congressional hearings are nothing more than populist political
theater as the real puppet masters are nowhere in the room and no politician is going to go after them. This network duopoly of Visa and Mastercard is no accident, but rather the result of a multi-deade long conspiracy to protect the old guard and to keep power in the hands of America's biggest banks that are too big to fail and now too cunning to be singled out.
