Better Buy: American Express or Discover Financial Services?
Credit card companies have been among the most durable during this recent bear market. The big four -- Visa, Mastercard, American Express (NYSE: AXP), and Discover Financial Services (NYSE: DFS), all outperformed the market last year.
But the latter two, American Express and Discover, are quite different from the other big two, Visa and Mastercard. That's because they operate closed-loop models, meaning they are issuers, lenders, and credit processors, all within their own networks. Both are great stocks, but let's take a closer look at each to see which is the better buy.
While both Discover and American Express have closed-loop networks, there is a key difference in terms of how they generate revenue. American Express generates most of its revenue from fees, namely, discount fees. These are fees that merchants pay when a customer buys something with an American Express card. American Express charges much higher merchant, or swipe, fees than other credit card companies, and that's because it can by catering to a more affluent clientele and corporate clients. The merchants are typically those that offer higher-end products, and while they don't like paying higher fees, they do like the business that comes from American Express cardholders.
Source Fool.com
