eli5 How do credit card companies make money out of people that pay their cards in full before the billing cycle and still get rewards?
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Shops have to pay between 2%-4% per transaction. Some shops by me will give you that percentage off your bill if you pay with cash or check.
Stores pay CC companies (on average) 30cents plus 1-3% simply to process the transaction. Thus all the “Minimum purchase” at smaller shops to use card
Plus, you’re drastically over estimating the number of people that pay off balances before interest kicks in. They’re stingy to a fault, if they weren’t making money they’d stop doing it
Its because the money that they make from the financially irresponsible people (interest from not paying the statements in full) offsets all of the costs (rewards/miles,etc) from the financially responsible people.
Also they get a very small % of all transactions in which that card is used.
The transaction fee on the vendor – so, not directly from you but they still want as many people as possible using the card.
Possibly yearly fees.
They also sell your data along everyone else’s to other vendors.
Finally… they don’t make as much from you! But people who pay the balance in full as the extreme exception so they are okay with it.
“Deadbeats.”
That’s the actual term used In the industry for people who use their credit card and pay their bills on time.
They call us “deadbeats.”
The ones who make minimum payments typically make up for that, but as others have pointed out the big three (Visa, Chase, American Express) take percentages of every transactions from businesses. AMEX is the highest which is why they aren’t as widely accepted, but most if I remember take between 2% and 5% depending on the size of the transaction.
This is why a lot of small business up charge for using a card
Another way to look at the situation:
Credit card companies are not in the business of helping regular people pay with cards. They are in the business of trying to get stores to buy into their proprietary payment network.
Business have to pay a fee for the privilege of being able to swipe cards and use the credit card company’s payment network. This is often some fixed percent of the transaction price (say, 3%). If a business signs up to use a credit card service, they have two options: eat the fee and raise all of their prices to compensate, which could scare off customers, or charge a “convenience fee” on customers who want to pay with cards, which again, could scare off customers.
This seems like a lose-lose. The card companies have to sell this system as something the stores would want to buy. They do that by pointing to how many people use their cards and say, “Man, look at all these people who want to buy things with our cards. You’d lose out on all of them if you didn’t pay for our services…”
If this is to be convincing, the card companies need as many people as possible on their card network. If there aren’t that many cardholders, the stores can just say, “Ha, I don’t care if I lose your customers, there’s barely any of them!” and they won’t pay for the service. So card companies try to inflate their numbers by giving gifts to their cardholders. That’s what reward points and miles and cash back *are* — basically, the card company is bribing people like you to use their network, to prop up their number of users and make their service look more attractive to stores.
So even if you are a “freeloader”, never paying the credit card company any interest or late fees, they’ll still reward you, because you’re not the only way they profit from you using the system. Just your being part of the network alone is profitable, because in addition to being their customer, you are, in a way, also their product.
To tell you the percentages – ranges from 1.5% for debit cards and most Visas and Mastercards for a lower risk merchant (business that accepts cards) to more than 3% for American Express premium cards. If the merchant is in a higher risk industry for chargebacks and/or has more of a history of chargebacks, they get charged more. Accepting cards with more points, perks, and cash back tends to cost more.
Plus merchants usually pay a transaction fee of $.25-$.50.
I worked for a company whose biggest customer insisted on paying an average $100,000 bill each month with an Amex, and it was costing us over $3,000 in fees. We were able to negotiate it down with Amex.
The interest they charge is the big money, but even if everyone paid their cards off monthly the card companies would make money even after paying on the points and perks, which are usually no more than 2% cash value (and that’s if you play the game carefully). Sometimes there are additional deals and discounts but the merchants themselves pay for those (ex: if Peleton offers 20% off to Amex members for a year)
Some of the prestige cards are also HIGH annual fee – $700 a year or more.
It’s called “Interchange”. Interchange is what is charged by the issuing bank to the merchant when they process a card. Interchange typically makes up the majority of the fees merchants pay their credit card processor. This is why you’re starting to see a lot of businesses surcharge card users.
They don’t make money directly from those people; I’ve heard them referred to as “free-loaders.” I’m one of them, because fuck paying interest. But to get anything you need a damn credit score so I carry an extra piece of plastic around with me.
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