Credit Card Programs - What's the basic business model of charge cards?

For credit cards it's pretty obvious: that you don't pay your balance in full and you owe interest to them.

But what's the business with charge cards where you should pay your balance in full each month?

The issuer collects transaction fees when the card is used. On average, charge card holders spend substantially more than credit card holders, and have a lower default rate.

I'm not sure of the exact paramaters, but the credit/charge card companies expense the points issued at lower values than you might think.

With airline points, a hyper-efficient traveler might turn 125,000 miles into a first class ticket that would sell for $12,500. But the actual cost to the airline is substantially less than $12,500. Some miles will go unredeemed. Some will be redeemed for awards with a value less than you might think. I read somewhere that American Express pays Delta 0.57 cents per mile.

And remember that there are people out there who charge hundreds of thousands, or even millions, a year on their cards. You can afford a lot of "break-even" accounts if you have a few that run that kind of volume, with the cc issuer collecting a 1.5-2% fee on transactions.

Merchant fees: 2-3% charged to the vendor for purchases.
Annual fees: charged to the cardholder.
And any other fee they can think of to tack on is gravy.

Merchant fees: 2-3% charged to the vendor for purchases.
Annual fees: charged to the cardholder.
And any other fee they can think of to tack on is gravy.

and for premium cards / different countries the merchant fee can be substantially more than 3%.

great business model - but needs regulation imo.

...needs regulation imo.

Why? There seems to be ample competition.

Why? There seems to be ample competition.

Looks a lot like collusion rather than competition to me sometimes.

The CC companies don’t allow the vendors to discriminate against cards in a given brand. 2nd hand knowledge from a bike shop owner is that some of the premium visas here in Canada charge 7% commission.

The socialist in me just thinks they are taking too large of a commission for simply facilitating a transaction.

Thanks for your interesting insights.

In the USA, law prohibits charging extra for CC transactions, although it does permit a "cash discount." Cash discounts were very common for gasoline at one time, then disappeared, and now they exist at many highway fueling stations for diesel fuel. They have never really caught on for anything else, at least not in a publicized way.

Although different cards charge different "interchange fees" I think that either technology or the processing companies themselves charge the same fee no matter what card you use.

I am pretty sure that Amex requires, as a condition of their merchant agreement, that the merchant treat Amex purchases no less favorably than purchases on other CC's. A fair number of merchants do not take Amex, although it's really not that many. The only places I can think of where I live are Sam's Club (Costco does, but that's because they are owned by Amex), the place I get my hair cut, and the place that replaced my broken windshield last year.

Looks a lot like collusion rather than competition to me sometimes.

The CC companies don’t allow the vendors to discriminate against cards in a given brand. 2nd hand knowledge from a bike shop owner is that some of the premium visas here in Canada charge 7% commission.

The socialist in me just thinks they are taking too large of a commission for simply facilitating a transaction.

The socialist in you may not want to hear this, but bike shop owner just needs to join CFIB.

And whatever processor he is using is scr3wing him if he is paying 7%

7% is one hell of a commission... I don't even know of any merchant provider that charges that much...

7% is one hell of a commission... I don't even know of any merchant provider that charges that much...

Maybe if it's for a small transaction like a $2 valve cap? The flat fee will inflate the effective transaction percentage. However, there is probably a discount for lower amounts.

Yep, charge cards are about annual fees and interchange for the merchant.

When others send you money via a credit card or charge card, via Paypal or Google Checkout, ever wondered why the fee is 2.9% + 29c or 30c? :)

Maybe if it's for a small transaction like a $2 valve cap? The flat fee will inflate the effective transaction percentage. However, there is probably a discount for lower amounts.

Could be right. I figured it was due to the lowish volume that an LBS would put through, but might be he was full of crap.