TonyPlush

I've been trying to figure out the inner workings of the credit card business model. Specifically, I am wondering who gets hurt by churning and sign up bonus abuse.

Take a typical signup bonus scenario. Chase issues a United card which has a sign up bonus of 50K miles. How does the agreement work?

-Chase benefits from the minimum spending requirement, since they earn a ~3% fee that merchants pay whenever the card is used
-Chase benefits in the event that interest is accrued on the card
-United benefits because people are more likely to purchase United flights to earn 2x points?

but...

-Who fronts the cost of the 50K miles? United or Chase?

I imagine it's the airline. In which case, it doesn't seem like the airlines have much to gain from this arrangement. What am I missing?

lazard

United sells the miles to Chase.

johnnie198x

I'd think Chase will bear the cost. Chase issues the card and has the right to determine the sign up bonus to attract customer. United only sells the miles.

jacobsta811

Chase buys miles from United in bulk (likely at far less $/mile than we can, almost certainly under $.01/mi). Chase gets more like 1%, maybe 1.5% from swipe fees, not 3% - (some goes to visa themselves and some to the credit card processor the store is using - and visa/mc in general charge less swipe fees than Amex).

hamhead

As said, airline companies sell the miles in bulk to CC companies. What the CC companies do with those miles is up to them.

TonyPlush

Aha, that ties a lot together.

Where do Visa and Mastercard come in? They get a portion (all?) of the merchant fees?

hamhead

Visa/MC will take a chunk of the swipe fee that the CC company charges the merchant.

It is relatively small. Chase keeps the vast majority of the swipe fee.