Visa Inc (V), Mastercard Inc (MA), Discover Financial Services (DFS): An Industry in Which All Companies Make Huge Profits

Although Discover Financial Services (NYSE:DFS) is far behind MasterCard and Visa Inc (NYSE:V), its merchant acceptance level is starting to increase as its brand becomes better-known among consumers. In addition, the company acquired Diners Club International — which operates a global network — as parts of an international expansion plan. The acquisition enabled the company to overcome the catch-22 that makes market entry nearly impossible.

As a result of its small but growing presence, Discover may be a good acquisition target for MasterCard — which is desperate to gain ground on Visa.

Bottom line

Visa Inc (NYSE:V), Mastercard Inc (NYSE:MA), and Discover enjoy the advantages of barriers to entry. The paradox of organic growth — that a large number of merchants is required to attract consumers, and vice versa — makes it nearly impossible for a latecomer to build a global network from the ground up. The only practical way to enter the market is to acquire an existing network, as Discover did in its acquisition of Diners Club.

As a result, each of the three companies will likely earn outsized profits for years to come. Any company that has structurally-protected profits is likely a good long-term investment, even if the price seems a little high today. Over the long run, the value creation will be so much greater than the average company that paying a small premium to the market will hardly make a difference.

The article An Industry in Which All Companies Make Huge Profits originally appeared on Fool.com and is written by Ted Cooper.

Ted Cooper has no position in any stocks mentioned. The Motley Fool recommends MasterCard and Visa. The Motley Fool owns shares of MasterCard. Ted is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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