Originally Posted by
hydrogen
So I'm not sure if my logic makes sense but if I have a 5 or 6 figure tax bill to pay, it seems silly not to use Chexy? And bonus AE points to add too for this. Most cards in my wallet can manage to get >1.75% return even if you exclude the AE points. I just can't explain how the math works out for the company though so it seems almost too good to be true.
You pay Chexy 1.75%. That's below the usual interchange rates for Visa and Amex cards, so clearly they've cut a deal that gives them lower fees (the fact they're charging so much more for Mastercard says that they
haven't been able to get a deal with those guys). Let's say they're paying 1.25%. That leaves them 0.5%, and that's their revenue. Someone should take a look at their T&Cs and see whether they're selling your data as well, which is a huge business these days. Whether it will be profitable, TBD. Most tech start-ups have grand plans that depend on scaling rapidly to very high customer/revenue numbers and per-unit costs declining quickly due to economies of scale. Rarely do things work out as well as they forecast, so most of them go under. I have no insight in to Chexy's business plan or capital raised to date, just going off macro numbers - about 80% of start-ups fail entirely, a few lose a little bit / break even / make a small amount of money, and less than 1% become massive successes that return many, many times the initial investment, which is what drives all the VCs' profits. Again, not a slight on Chexy, they may be one of the few that succeeds rather than the 80% that fails, I have no idea.
As for your return on using the service, again, depends on how you value the Aeroplan points. If you use a Visa VIP / Amex Reserve card at 1.25 points per dollar, you're paying 1.4 cents per point (1.75 cents of fees per $ / 1.25 points per $). That's better than even the best Aeroplan promos, but there might well be cheaper ways to acquire points.
Originally Posted by
Francesco_2102
Chexy charges the 1.75% fee. Of course, your credit card company will take some of that (and that's how the bank affords to give you rewards). But chexy have evidently calculated that there's a profit after the bank takes their cut.
Also, Chexy bills you 3 days earlier, so once there's enough people making payments through Chexy, they'll always have a substantial amount in their wallets at any given time. I'm not sure what the rules/laws are regarding what they can do with that money (and what happens if they do what they're not supposed to), but investing it somehow can generate more profits for them.
Credit card transactions don't settle (cash in bank account for the vendor) same day. It's typically 1-3 business days after the transaction. Let's say their deal with the Visa/Amex gets them 2 business days. They'll be restricted in what they can do with that cash since they have to pay it out within a day or so, and it will likely be in a non-interest-bearing account. Even if they make interest on the float (the cash they're sitting on), it's not going to be very meaningful. At 1% interest, if they're sitting on $1 billion (i.e. they're processing $365 billion a year of payments, which is a massive amount), it's only $10 million of interest. That sounds like a lot, but if they're taking a 0.5% cut on the transaction volume, that's over $1.8 billion per year, so the $10 million is a rounding error. Even if I'm off by a factor of 10 and they think they can run this on 5 bps instead of 50 bps (which they can't), that's still $183 million of revenue from net transaction fees, making the interest on the float immaterial.
Great points on the value of aeroplan points on average being less than what one might naively expect.
Also, I notice you're considering the 10,000 bonus on your calculation of points per dollar spent. This is interesting because, unlike getting a credit card for the first year bonuses and waived first year annual fee, there are no big negatives to simply stop using Chexy after the first year, once you collected the 10,000 points.
Many would argue there no or very few negatives to cancelling a credit card once you've collected the sign-up bonus either, but yes, it's the same principle. The bonus changes the economics quite a bit in the short term.