June 1, 2023

Blog Online

keeping our headlines to the point

How do credit card companies make money on cashback

5 min read
How do credit card companies make money on cashback

How do credit card companies make money on cashback

Every time you spend your money in a store. The merchant gets 2% less than what you stole. It is this money that helps pay for cash returns. Why does the shopkeeper agree to pay? It’s because cards allow people to spend money they don’t have with them and end up buying a lot more. At first glance, it would seem that it is the merchant who pays the refund. But that is not the case. Any merchant who buys goods for 98 and sells them for 100 would lose money on a card transaction. Therefore, he sets the price of his products at 102 to offset the cost of the card payment. In other words, it is the customer who pays in cash who compensates for the refund.

Credit card interest income and merchant fees

The main way banks make money is interest on credit card accounts. For any given account, the interest charged is equal to the card’s periodic rate multiplied by the average daily balance and the number of days in a billing period. The periodic rate is the annual percentage rate (APR) divided by 365. In the United States, the average credit card interest rate paid on interest-bearing accounts is 19.33%.

The second-largest source of revenue for credit card companies is fees charged to merchants. When a retailer accepts a credit card payment, a percentage of the sale goes to the card-issuing bank.

The following table shows year-to-date credit card receipts from five banks.

How do credit card networks make money?

Visa, Mastercard, and American Express make money from screening fees, which are charged for processing a merchant’s credit card processing transactions. These are different than the exchange fees mentioned above. The card network, the company, which has the logo in the lower right corner of the card, charges a much lower fee with each transaction known as an assessment fee.

The commission is 0.14% of each credit card transaction through Visa and 0.1375% for transactions with Mastercard for pet care adda

First of all, it is important to read the fine print. Other cards only offer cashback for certain categories of purchases, like at restaurants or gas stations.

Of all the fees merchants must pay to accept credit cards, the processor fees are usually the only ones they can influence. Most merchants aren’t large enough to influence interchange or assessment fees. They do this by shopping around for the processor willing to offer the best rates.

Discover’s cashback card

Discover’s cashback card is one of those that boasts a 5% reward on purchases. But, as of 2018, the cardholder agreement states that this offer only extends to specific classifications assigned to different quarters of the year. And it comes with a limit of $1,500 in purchases per quarter.

The disclosure also states that the use of an NFC-enabled credit card or virtual wallet such as Google Wallet may not count toward the program. When merchants accept credit card payments, they must pay a percentage of the transaction amount as a fee to the credit card company.

If the cardholder has a participating cash back rewards program, the credit card issuer simply shares some of the merchant fees with the consumer. The goal is to incentivize people to use their credit cards when making payments instead of cash or debit cards, which do not earn rewards. The more a consumer uses a credit card, the more merchant commissions the credit card company can earn.

credit card companies make money by charging high-interest rates

In addition, credit card companies make money by charging high-interest rates on balances that are carried over from month to month and by issuing late fees for payments that are late or made after the stated due date. .

The more consumers use their credit cards, the more likely they are to miss a payment or carry a balance that will owe fees and interest.

According to the Federal Reserve, the average credit card interest rate is 16.61% as of the first quarter of 2020. The Federal Reserve also reported nearly $1.07 trillion in outstanding revolving credit in March 2020

If you’re thinking of cashback, like me, and they don’t charge an annual fee, and you pay off the card every month so there are no interest charges, why would they want your business? Is that the drift of your question?

They charge merchants that accept credit cards a monthly fee and I think a percentage of the transaction to process that transaction. So they get some money and can afford to pay you back some of it. Maybe if you never let them charge interest or other fees, like I did, they won’t make much of that business after paying the rebate.

Still, it’s probably a bit, and they risk not being able to pay it every month, so maybe at some point you make a mistake and they can charge you. They also like to increase the credit limit from time to time, which could be a way to tempt you into buying something you really can’t afford, and then you’d be paying interest. I’m not giving in to that, but they can wait, and maybe enough people will fall for it to make it worth it.

The bottom line

Cashback rewards sound appealing and can help certain consumers save a bit on credit card purchases.

Because these programs are incentives for consumers to use their credit cards instead of cash or debit cards, they result in higher business fees for the credit card company and may also cause some consumers to increase their debt, providing another source of debt. income for credit. card company

In 2017, the Federal Reserve Bank of Boston reported that the average transaction amount with a non-cash transaction is nearly four times that of an all-cash transaction, greatly increasing revenue from fees. commercial.

And since cash-back credit cards have the subtle psychological incentive to earn money as you spend, people tend to spend even more on them than non-reward cards. So instead of draining corporate profits, cashback rewards programs actually dramatically increase the bottom line for credit card companies.