Something I've always wondered about - and I've heard differing opinions:

A bank issues a credit card, and when you buy something they give you miles. You pay off your balance, thus incurring no cost.

Here is my question: How does the BANK make money? I've been told that the 2% (or whatever) processing charge goes to the Credit Card processor - like Visa or Mastercard - not to the issuing bank.

Does anyone know for sure if this is true, or how it works?

The merchant bank pays the seller less than 100 cents on the dollar. A discount of 2 to 3 percent is typical.

The WSJ just did a piece on this:

"... annual late-fee revenue for the industry has jumped to a record $7.3 billion from $1.7 billion in 1996 ... About 58% of customers had to pay a late fee during the past year ... In all, late fees represent the third-largest revenue source for card companies, behind interest payments and fees from merchants that accept the cards."

(Registration required)

[This message has been edited by Family flyer (edited 05-22-2002).]

I think credit card issuers call people who pay their bill in full on time every month dead-wood, or something like that. These are the people they make no money off. They make money charging outrageous interest rates/late fees on bills not payed by the due date.

Please don't forget about the new world of debit cards.Merchants pay the same fee on those as a credit card.So thats 2-3% on every debit card tranaction very profitable seeing how there is no credit extended.

I've always wondered, though - why they keep coming after me with offers, even though I've been paying off credit cards on-time for 25 years. I even have one that is giving me 0% interest for 12 months on balance transfers.

Because they are hoping tha tif they give you a good enough offer that you will either start carrying a balance or transfer a balance to them.

People that carry no credit card balances are non-standard. They just don't know what to make of you yet.

If the card has an annual fee, the bank makes some money from that. They make a percentage of the sale, along sometimes with another fee that the merchant pays, our merchant account's percentages was just raised, so now they make more.

They make money from people who don't pay their bill in full each month, and those who pay it ten minutes late so they can charge them a late charge. They make money from people who ride their limit and pay over limit fees because the bank approved a charge that would put them over limit, the bank knows you will pay, and you are happy it only cost you a $25 fee to get $10 worth of gas.

They make money off the float if they don't pay the merchant daily, and they cultivate you inot a good customer so when you need a home improvement loan, or when it's time to deposit that million you won in the lottery, you will think of them.

They may not be making lots of money on all the transactions (except for the fee based ones) but they certainly make up for it in volume.

Actually you are a good customer even if you pay it off in full. They way it works is as follows:

Merchant get charged from 1.15% to 4% on the transaction.

The merchant's bank pays Visa about 1.05% and keeps the rest above 1.05%

Visa then pays the your credit card company 1.00% on the transaction.

So even if you pay on time your bank gets 1% of the money you spend on the card. Visa only make about 0.05% of all money spent on visa BUT THIS IS MASSIVE.

Visa then pay the airline for the miles at say a discounted rate of about 0.6 cents per mile and make 0.4% for every dollar you spend. They then make the REAL profit on you paying interest.

Actually, this can be quite a bit higher if you are in a "high risk" category. For example, a phone sex / internet porn vendor can pay over 10% because of the incredibly high ratio of chargebacks ("No, honey, I have no idea what that charge is for. Someone must have stolen our card number!").

Quite true. So, the merchant bank keeps the difference between the discount rate they charge the merchant and the 1.05% settlement. Obviously, there's money to be made here. They have no credit risk from the cardholders, but they have a huge potential liability should a merchant go under. Any time there's a successful chargeback and they can't collect from the merchant (because they're bankrupt, disappeared, etc.), they have to reimburse the cardholder's bank. Reportedly, the merchant bank for Eastern Airlines nearly went out of business because of the huge chargeback liability they incurred when Eastern went under.



How do you think they afford all of those "Priceless" and "Everywhere you want to be" ads? Actually, one thing that most people don't realize is that both MasterCard International and Visa International are non-profit corporations, albiet not charitable. They exist solely to service member banks, enabling the banks to make a profit. They provide joint marketing, clearinghouse, and brand protection services, but it's up to the member banks to issue cards and make all the money.

I think you meant to say that the issuing bank pays the airline out of the 1% discount rate they got from the merchant bank.

There's also a small per charge fee that goes to VISA .. about 5 - 9 cents per charge.

-David

My merchant fees for Visa & MC are about 2.42% + $.25 per transaction + .3-.5% if the card is something that I can never figure out what is. These are considered low fees as a legit, stable business with a high average ticket ($4-500).

AMEX has just entered the market with a new product. A flat 2.95% with no additional fees. Will try it and see what the hidden surprises are. If no surprises, they will blow Visa/MC out of the water.

Slawecki,

I just got my merchant visa fees lowered to 1.92% with no per item charge(and that is not even close to the low for high volume merchants) by asking and threatening to change providers. Apparently, you can ask for a rate review and reduction every 6 months, but no one ever tells you that.

In terms of how much money Visa makes on the deal, think of the volume. If they can lower my merchant charges by close to .5% with only some minor resistance, there is an enormous margin of profit for them.

One reason they keep sending you offers is because the cost of acquiring a customer is about $100-$150 on average, and they will never acquire a customer unless they send you junk mail.

Also, an interesting trend is payment by debit cards. Have you noticed when you pay at a grocery store by credit, you have to hit a couple of buttons? The discount on debit cards is less and the debit folks are trying to take business from the credit people. Generally, this means your local bank where you have your checking account vs. a national bank that issues the credit cards.