What Makes Credit Card Networks Such Durable Money Machines

On a global level, Visa (NYSE: V) and Mastercard (NYSE: MA) are the two dominant credit card networks. They have virtually ubiquitous acceptance, with a presence in more than 200 countries and territories. They process trillions of dollars in payment volume each quarter. And billions of their cards are used worldwide.

Their industry positions have resulted in tremendous profits. During the past five years, Visa's quarterly net income margin averaged 51.2%, while Mastercard's was slightly lower at 45.4%. When it comes to generating earnings, there is no issue.

What makes these companies such durable money machines?

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Toll booth operators within the broader economy

Both Visa and Mastercard operate open payment networks. This means that their partner banks issue credit cards to customers, taking on the credit risk. And those transactions run across the Visa and Mastercard payment platforms.

Think of Visa and Mastercard as controlling the highway system within the broader economy. And each time a card gets swiped at checkout, the payment flows must pay a toll to be processed. These companies are essentially a tax collection system on commerce.

The technological infrastructure is already built, with minimal capital expenditures needed to continue growing. Every additioinal transaction adds virtually no marginal cost. These are businesses with significant fixed expenses that are more than offset by their substantial revenue.

The result is that each transaction produces extremely high margins. Visa's operating margin in its fiscal 2026 second quarter (ended March 31) was a superb 64.4%, while Mastercard's operating margin was 58.4% during the same period (representing its Q1 2026).

Free cash flow (FCF) generation is robust. Combined, Visa and Mastercard brought in $5.2 billion in FCF during the first three months of this year. This allows them to return substantial amounts of money to shareholders through dividends and stock buybacks.

Benefiting from rising spending activity

Now that we've learned why Visa and Mastercard are money machines, it's time to understand what makes their performance so durable. These companies are essentially pegged to economic growth, generally, and to higher spending levels, specifically.

What's more, they benefit from the secular shift toward cashless transactions. In the U.S., one of the most developed economies, 83% of consumers still used cash at least once in the previous 30 days (more than any other payment method), according to October 2024 data from the Federal Reserve Bank of Atlanta. The opportunity for digital penetration is much more sizable in emerging markets.

Visa and Mastercard can also be viewed as beneficiaries of inflation, or at least positioned not to be hurt by rising prices across the economy. When the Consumer Price Index surged a few years ago, both businesses were reporting more than 20% year-over-year revenue growth in late 2021 and early 2022. This setup makes them particularly resilient in the current macro environment.

Should you buy these two stocks?

Visa and Mastercard have had to deal with volatility in the past several months. The former's shares trade 11% off their peak (as of June 16), while the latter's are 16% below their record. You might be wondering if you should buy these two financial stocks on the dip.

The bull case rests on their ability to continue increasing profits. Sell-side analysts expect double-digit annualized diluted earnings per share growth through their respective 2028 fiscal years. I believe there is a high probability this will happen, given their historical trends.

Visa trades at a price-to-earnings (P/E) ratio of 29, about the same as Mastercard. The dominant competitive positions these businesses have established, which support their status as durable money machines, warrant what appear to be premium valuations. These stocks can provide a solid foundation for any portfolio.

Neil Patel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Mastercard and Visa. The Motley Fool has a disclosure policy.