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How credit cards make money

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Re: How credit cards make money

#101

Post by lotsofpulp »

revolvingocelot wrote: post #98
lotsofpulp wrote: post #83

Earlier quoted context omitted.

Merchants WANT people to use credit cards. There is nothing stopping merchants from offering a cash/debit price and a credit price since 10 years ago. The frank dodd legislation made illegal for card networks to ban offering discounts for debit card payments, and in Mar 2017, the Supreme Court said merchants cannot be barred from advertising higher prices for credit cards. https://www.ftc.gov/tips-advice/business-cen…

>It is very clear that most merchants earn more from people using credit cards more often, otherwise there is no reason they would try to dissuade or offset it by adding a premium for using credit cards. Can you elaborate? IME merchants do NOT want people to use credit cards; transaction fees eat into the sale price. I remember a time when some electronics stores would explicitly advertise a cash discount, so as to a…

> How is it very clear that most merchants earn more?

Because they do not offer discounts for cash/debit, and they also do not charge a fee for using credit card.

As I showed in my post, legally, merchants are clear to advertise higher prices for credit card users. The fact that they do not means they do not want to dissuade credit card use. From there, it follows that since businesses are interested in earning more money, that if they do not want to dissuade credit card use, then they must be earning more money (or at least breaking even) due to people using credit cards.

People spend more money when they use credit cards than debit/cash. Note that my above post specified “most merchants”, not all merchants. Obviously, some merchants do benefit from dissuading credit card use, such as the examples I gave, or many gas stations and small restaurants or convenience stores.

Re: How credit cards make money

#102

Post by patio11 »

fragmede wrote: post #95
patio11 wrote: post #22

Earlier quoted context omitted.

I would like to reiterate my standard disclaimer for this publication but if you want to bet that I don't understand how scheme fees are calculated that is a poor decision.

That raises a question though: In your opinion, where/in what subjects would betting against you not be a poor decision?

I'm less good at poker than many people's model of me predicts. (Probably juuuuuust about good enough to do 2/5 profitably in Vegas, though I mostly play tournaments because they're more fun for me.)

Re: How credit cards make money

#103

Post by Nextgrid »

reaperducer wrote: post #93
ollien wrote: post #44

Earlier quoted context omitted.

> You are no longer obsessing over "early payday" features or ACH speeds. Timing ACH payments _sucks_. Tangential, but I'm in a renting situation where my landlord demands rent land in their account on the first of the month. Receiving rent on the 26th (i.e. 5 days early, not 26 days late) was deemed "too confusing" for them. I now have to play this awful game of timing ACH transfers to land on their account as close…

I'm in a renting situation where my landlord demands rent land in their account on the first of the month. Receiving rent on the 26th (i.e. 5 days early, not 26 days late) was deemed "too confusing" for them. I ran into this at my last place. I'm the sort of person who likes to pay things ahead so I don't have to think or worry about them. I was used to paying my rent ahead and quarterly. When I moved to the new plac…

A lot of landlords would absolutely prefer someone who pays long in advance. If I were you I would've given these guys the middle finger and found a better landlord.

Re: How credit cards make money

#104

Post by mandevil »

flerchin wrote: post #11

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.

The issuing banks have teams of people who are very smart, have extremely accurate data down to the individual transaction, access to the computers to crunch that data appropriately, and spend their (working) lives on this topic. You are a dude doing this in their spare time as a hobby, with access only to your own set of data and not even the full set of that (e.g. you don't see the interchange fees etc.)

I suspect that the bank is winning much more than you think on your business, even if you are getting a good reward. They are getting other people to pay them even more than they are paying you.

Maximizing credit card reward can be a hobby that leads to minor ROI- like investing in individual stocks it might be lucrative and if you enjoy it more than golf definitely pursue it. But don't think you are fleecing Bank of America or Chase or whomever.

Re: How credit cards make money

#105

Post by vineyardmike »

patio11 wrote: post #9

I'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…

Hey Patrick,

Thanks for this. I'm earlier in my career but very interested in fintech, so as i explore where i want to go, your writing has been immensely helpful and informative!

I am particularly fascinated at the moment by the world of differences in how finances work for people vs businesses. (eg. People typically pay taxes in income, but businesses pay taxes on profit. That leads to differences in how money is made/spent between those groups.)

I guess one suggestion i have for your newsletter is in how credit is given to businesses - humans (at least in US) have fairly well understood credit scores. Its well documented how credit card companies, consumer loans, mortgages evaluate individual credit from those scores, but how does a business acquire credit to for short term spending (corp cards), what about to make big CapEx purchases like buildings, maybe even for financial funds and speculative transactions? How are those businesses evaluated, underwritten, etc? What about banks borrowing from other banks?

Re: How credit cards make money

#106

Post by bombcar »

vel0city wrote: post #85
morpheuskafka wrote: post #37

> Debit cards are a very similar product with enough under-the-hood differences that they deserve their own moment in the sun. In particular, due to a quirk of U.S. interchange regulation, they basically fund most of the fintech industry Basically, the Durbin Amendment caps interchange on debit cards at a far, far lower rate than credit cards; they also have different networks (not MC or Visa) that can be run at leas…

Can you further explain that cash deposit to credit card payment process through an ATM? I've only ever used ATMs to withdraw funds, never to make deposits, so I don't know what that process would look like or which banks would let me do that.

Right before using phones to deposit checks, some of the more advanced ATMs would let you deposit checks directing via scanning (older ones would basically just take the check and a teller would handle it later).

Re: How credit cards make money

#107

Post by adzm »

gregmac wrote: post #88
bluedevil2k wrote: post #76

Earlier quoted context omitted.

You missed the biggest advantage of credit cards - the limited liability of the card holder to fraudulent charges! From a financial website… “ CREDIT CARDS Credit cards offer consumers the widest fraud protection. By Federal law, a cardholder is only liable for the first $50 of an unauthorized transaction at most, with many issuers offering cards with zero liability. DEBIT CARDS Debit card holders are protected under…

This is one of the main reasons why I use credit cards over debit. If there's a dispute over a charge, I believe with debit cards the money is still out of your account until it gets sorted out -- this could be days or weeks. With credit cards, the money in dispute is not "owed" to the card company, and at worst it reduces your available credit by that amount, which is only an issue if you're spending enough to max y…

FWIW I had fraudulent debit charges credited to my account the next day while under investigation. Though the experience was enough to pretty much stop using debit cards except for specific accounts that are not my primary.

Re: How credit cards make money

#108

Post by bradj »

patio11 wrote: post #50
lnwlebjel wrote: post #47

Patrick, how much do you read in a given day (eg. hours?) All those words (and the deep knowledge they reveal) must come from somewhere. And what do you read? Not just twitter I suspect. This article of yours is fascinating: https://bam.kalzumeus.com/archive/financial-innovation-is-ha... Thanks

Varies wildly by the day (and year); probably two hours at the median. I have an advantage in that this sort of thing was a hobby for me for 20 years and then it became very work-relevant the last 5. Someday I'll try to curate a reading list but in the meanwhile the sort of things I read are generally the sort of things I link to in essays/on Twitter/etc. Everything from WSJ to Byrne Hobart's newsletter to Fed resear…

Have you read up about the world of commodity trading at all? I imagine you’d be interested in the book The World for Sale if you haven’t already read it. Interesting combination of market structure, fraud and geopolitics.

Re: How credit cards make money

#109

Post by quickthrowman »

vmception wrote: post #65
flerchin wrote: post #11

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.

They just keep extending credit until they're right. It cost them nothing to extend you credit and pretty much one interest payment makes up for it. The perks that offset the annual fees on their fee cards are just an accounting gimmick on their end. "Oh cool Audible gets to print awesome revenue numbers while we just pay back the customer that paid who feels like it makes their annual fee worth it" and who knows wha…

> And if you actually are spending, as you suggest, they make enough from the merchants who are eating the 3% transaction fee.

You mean, the customer eating the 3% fee? The merchant isn’t going to take the hit to their margins, the interchange fee is built into the price of what you are buying.

Re: How credit cards make money

#110

Post by kasey_junk »

revolvingocelot wrote: post #98
lotsofpulp wrote: post #83

Earlier quoted context omitted.

Merchants WANT people to use credit cards. There is nothing stopping merchants from offering a cash/debit price and a credit price since 10 years ago. The frank dodd legislation made illegal for card networks to ban offering discounts for debit card payments, and in Mar 2017, the Supreme Court said merchants cannot be barred from advertising higher prices for credit cards. https://www.ftc.gov/tips-advice/business-cen…

>It is very clear that most merchants earn more from people using credit cards more often, otherwise there is no reason they would try to dissuade or offset it by adding a premium for using credit cards. Can you elaborate? IME merchants do NOT want people to use credit cards; transaction fees eat into the sale price. I remember a time when some electronics stores would explicitly advertise a cash discount, so as to a…

Cash management is also very expensive for most merchants. There are effectively 3 reasons merchants might prefer cards to cash these days a) their volume is so low that cash management is not an issue (that is the transaction fees) b) their margins are so low on a particular item that the transaction fee eats all of it but the broader business still uses credit cards or c) they do not want an electronic record of the sale.
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