Credit Card Articles

American Express vs. MasterCard

15 December 2010 by CreditCardsCo™

When looking at the major credit card companies it can be difficult to discern the differences between them. On the surface they look quite similar, especially to the consumer's eye, and while this may be true of MasterCard and Visa to some extent, there are significant differences between MasterCard and American Express.

The MasterCard Business Model

The most significant difference between American Express and MasterCard is how they have built their business model over the years. While all three major credit card companies arose during the tumultuous financial growth of the 1950's, MasterCard, along with Visa, began to develop in a very different vein then Amex, also known as American Express.

MasterCard developed more as a middleman and a contact between merchants and card providers. First of all they do not create or issue their own cards and instead farm that work out to other financial institutions like banks. This is one of the reasons there are so many variations of MasterCard cards and that you can get one of them from so many different organizations. The bank is then known as the issuer of the card and is charged by MasterCard to be a recognized issuer of their cards.

On the merchant side, business owners agree to pay a small fee to MasterCard to be allowed to accept MasterCard as payment. This is a standard practice for all credit card companies and is one of the reasons that some places do not carry certain credit cards. At the end of every business day the business owner takes all the receipts from credit cards and brings them to his or her local bank.

That bank then sends those receipts to the banks, which issued the various cards. The issuers then, when the receipts are received, take out a fee, which pays both the organization and MasterCard and, once that fee is collected, MasterCard sends the remaining amount to the business owner's bank. Then, finally, the merchant's bank takes a small fee and the rest goes to the business owner.

Because of the flexibility of this model and the freedom that it has given financial institutions to both collect fees and issue cards, MasterCard has become one of the largest credit card distributors in the world. MasterCard and Visa now share an open digital network that allows easier transfer of funds and permits banks to issue both MasterCard and Visa credit cards.

The American Express Business Model

American Express, which began making its way into the credit card industry in the 1950's, which was an outgrowth of its earlier core competency, traveler's checks. In the 1850's American Express began as a company trying to compete with the United States Postal Service and would issue traveler's checks, which could be redeemed at banks for that amount of cash.

When you understand how American Express evolved into Amex you can better understand the differences between the business practices of Amex and MasterCard. The charge card became very similar to the way traveler's checks were intended to be used. This accounts for the difference between MasterCard's business model, which appeared later, and Amex's. The charge card was initially intended for traveling and entertainment expenditures.

Amex cards, unlike MasterCard, which has a wide network, is a far more unitary organization. Amex alone can issue cards as well as create contracts with business owners and settle the debts between merchants and consumers. Because of this American Express has far more control over its operations and can more easily dictate how and where the card is used.

Another major difference in the business model is the size of the fee that American Express charges merchants. Amex charges higher fees, which may account for the smaller scope and market penetration of Amex. However, Amex tries to compensate for this difference in market penetration by offering more AMEX Benefits and incentives with their more specialized cards.

Amex's specialized cards in one of the other important differences in business model structure. Because they control their card use more thoroughly, they are able to personally tailor card types to consumer groups like small business owners or students. This is a power that Master Card cannot as easily leverage.

The Big Picture

While Amex and MasterCard do have very different business practices, they function very similarly for consumers. The best thing to do is simply find a card that best suits your needs and not worry about how the company structures their business.

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