Card Networks Like Visa and Mastercard Don't Take Credit Losses. American Express Does. Here's Why That Matters for the Stock.

Visa and Mastercard are essential to modern commerce, facilitating trillions of dollars in transactions each quarter. However, they don't issue consumer cards directly; instead, they work with financial institutions to manage this process. This enables them to sidestep credit risk and associated losses, which is reflected in their remarkable profitability. Consequently, these companies are highly valued by investors.

American Express (AXP), in contrast, operates a closed-loop system, processing payments and issuing its premium credit cards in-house. This exposes the company to credit risk and related operational challenges. Investors must comprehend this distinction between Amex and Visa/Mastercard. The latter's business models are highly lucrative; their operating margins were nearly 60% over the last three months ending September 30th.

Therefore, shareholders are drawn to these companies due to their profitability. With substantial infrastructure in place, each transaction yields high margins, resulting in market capitalizations more than double and triple those of Amex, respectively.

Amex, however, functions more like a traditional bank. It underwrites new cardholders, opens accounts, processes payments, manages risk, and handles customer relationships. This exposes Amex to the credit cycle. A severe economic downturn could significantly impact Amex more than Visa and Mastercard. In the last quarter, Amex generated $4.9 billion in net interest income but holds $215 billion in card balances, with $3.3 billion in provisions for credit losses over the past nine months.

Visa and Mastercard have more efficient business models, resulting in higher earnings multiples. This explains why they trade at significantly higher rates compared to Amex. Nevertheless, Amex remains a quality company. Warren Buffett, for instance, holds a substantial stake in the company. Over the past five years, Amex has delivered a market-beating total return.

The company targets affluent customers who have a lower financial risk profile. Amex's brand is linked to lifestyle and prestige, attracting customers despite high annual fees. Amex's low net charge-off rates, compared to its peers, and its customers' usage of cards as spending tools rather than holding revolving balances also contribute to its resilience against macroeconomic pressures.

As of November 14, 2026, Amex's forward price-to-earnings ratio stands at 16.1, lower than Visa and Mastercard's due to their lack of capital tied up in lending activities. Investors should consider this when deciding which company to invest in.