I feel like folks like us, that never miss a payment, and max out our rewards, are net-losses for most credit card issuers. It's not clear why they don't just fire us as customers.
How credit cards make money
11–20 of 445 posts
Re: How credit cards make money
#12Thank goodness the "How" was automatically removed from the title. I was in danger of understanding it.
Re: How credit cards make money
#13> It’s often forgotten, but prior to credit cards, many Main Street retailers like e.g. pharmacies maintained hundreds or thousands of credit accounts for customers individually, necessitating their own back offices, accounting, and collections headache. This article is a great history of how the modern credit card came into being https://www.washingtonpost.com/archive/lifestyle/magazine/19...
I find this ironic since now days it seems every store has its own credit card. I even have a card from pep boys (and was given a free oil change just to sign up.)
Re: How credit cards make money
#14I feel like folks like us, that never miss a payment, and max out our rewards, are net-losses for most credit card issuers. It's not clear why they don't just fire us as customers.
So credit card issuers are pretty sophisticated with regards to this, and many of them track different user personas and use them to dice up their portfolio by archetypes. The "folks like us" archetype is one which is definitely tracked and goes by different names at different places.
I express no strong opinion on whether you personally are contribution margin negative for your issuer. On a portfolio level though, this is extremely well studied and extremely clear: that archetype is staggeringly contribution margin positive. It's actually one of the best performing ones at some issuers, principally because the archetype spends a lot per account, has negligible defaults for non-fraudulent users, and therefore earns lots of interchange at favorable margins.
It is possible, given the design of individual products, that a user with close-to-optimal spending decisions is contribution margin negative on individual products and potentially on all accounts with a particular issuer. People outside the credit card ecosystem believe this is much more common than it actually happens. A lot of thought goes into the design of products to decrease the likelihood of adverse use, cap the damages, and encourage users who are very skilled at gamesmanship to game their way to being contribution positive.
Re: How credit cards make money
#15I'm happy to answer any questions or take suggestions for future issues if you have them, HN. Repeating something I've said before: this is the 3rd issue of a weekly newsletter, and its going to come out on every Friday for the foreseeable future. As someone who has spent more than 10 years here, I'm keenly sensitive to HN's desire to not have the front page be as predictable as my new shipping cadence. I'd appreciat…
One thing that might be fun to cover: I got in a twitter discussion today about why Europeans don't use credit cards as much as people do in the US. Researching this question and related ones ("why are wire transfers free in Europe but not in the US") are basically impossible to Google, as similar but not actually good results ("the cheapest way to wire money to Europe") drown out any primary resources.
Re: How credit cards make money
#16> "A much smaller portion of interchange goes to the credit card processor, to the acquiring bank, and to the credit card network"
That's technically not accurate. Credit card networks do not earn money from interchange [1].
[1] "Visa does not make money from individual transactions." https://revenuesandprofits.com/how-visa-makes-money-understa...
Re: How credit cards make money
#17> It’s often forgotten, but prior to credit cards, many Main Street retailers like e.g. pharmacies maintained hundreds or thousands of credit accounts for customers individually, necessitating their own back offices, accounting, and collections headache. This article is a great history of how the modern credit card came into being https://www.washingtonpost.com/archive/lifestyle/magazine/19...
I find this ironic since now days it seems every store has its own credit card. I even have a card from pep boys (and was given a free oil change just to sign up.)
It's because there are white label credit cards that are extremely easy to setup if you're a business and they're so profitable. Not only does the store get a sale upfront which a customer might not have been able to afford without it, they get additional revenue when folks are slow to repay their bill.
Re: How credit cards make money
#18I feel like folks like us, that never miss a payment, and max out our rewards, are net-losses for most credit card issuers. It's not clear why they don't just fire us as customers.
Depending on the issuer, you might still be net positive as there’s a higher chance you’ll buy other products from them later. Think home loans, brokerage accounts, CDs, etc.
Re: How credit cards make money
#19I feel like folks like us, that never miss a payment, and max out our rewards, are net-losses for most credit card issuers. It's not clear why they don't just fire us as customers.
In particular it's good to remember that for every dollar you spend on your credit card, the credit card company is charging the merchant a percentage fee, so even folks who never miss a payment and max their rewards can still be very profitable
Re: How credit cards make money
#20I feel like folks like us, that never miss a payment, and max out our rewards, are net-losses for most credit card issuers. It's not clear why they don't just fire us as customers.
My understanding is that merchants are charged around 3% of all that you purchase in interchange/surcharge while you get only like 1% back in reward.