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How credit cards make money

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Re: How credit cards make money

#281

Post by ghaff »

teej wrote: post #3

> 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...

Probably most of it predates me in adulthood, but sitting down and writing checks every week or two used to be a non-trivial chore for most people. These days the challenge for me is remembering that I do need to manually pay a few bills now and then manually.

Re: How credit cards make money

#282

Post by [deleted] »

smnrchrds wrote: post #267
throwawaycities wrote: post #256

Earlier quoted context omitted.

What does that even mean? Credit card companies exist (and make money) in both common law and civil law countries. Or you could even look within the US and examine the singular state that is a civil law jurisdiction and there is no real impact vs the other 49 states. In fact I’d wager a guess very few people even know 1 of the states is a civil law jurisdiction because it has very little impact in practice.

Court decisions in common law jurisdictions have important and long-lasting effects, not only on the case at hand, but for decades (or centuries) to come on things you wouldn't think can be remotely related to the case. It's not like that in civil law jurisdictions. Had this case been in France, the decision on credit card would not have created a precedent that Uber and AirBnB and App Store could use to their advant…

[deleted]

Re: How credit cards make money

#283

Post by perl4ever »

Jensson wrote: post #258
perl4ever wrote: post #237

Earlier quoted context omitted.

There are a number of credit card issuers in the US offering 1.5% cash back. Suppose you charge $1000 each month at the rate of about $33 per day, and also pay it off when the bill is due. In a year, you've gotten 1.5% of $12,000 back which is $180, but you could also look at it as though they are paying you 36% per year to use (on average) $500 of their money. The latter interpretation makes it seem irresistible to…

And you pay 3% on every transaction to get 1.5% back. Seems like a pretty bad deal. Or do you really think businesses just gives you 3% for free on every purchase rather than raising prices on everything to make up for that 3% loss? A raw 3% of revenue is huge, there is no way businesses can take that without raising prices as consumer sales is pretty efficient and has small margins already. So they raise prices for…

You're looking at it the wrong way. It's just a shell game to get around truth-in-lending laws.

Using a credit card is borrowing money. Interest rates have to be disclosed.

So the fees plus the grace period are a way of making it look like typical card users are not paying a lot of interest.

People getting cash back are actually paying low interest rates, because the market dictates it.

If the fees were prohibited, then not much of substance would change, except the numbers would all be higher.

Re: How credit cards make money

#284

Post by ghaff »

edgyquant wrote: post #13
teej wrote: post #3

> 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.)

As sibling says they’re mostly co-branded. But there was a period when every retail gas supplier and most major chains actually had their own credit cards. And you often had to, as a young person, figure out who would give you a card so you could build up credit and move up the credit card ladder.

Re: How credit cards make money

#285

Post by Jensson »

perl4ever wrote: post #283
Jensson wrote: post #258

Earlier quoted context omitted.

And you pay 3% on every transaction to get 1.5% back. Seems like a pretty bad deal. Or do you really think businesses just gives you 3% for free on every purchase rather than raising prices on everything to make up for that 3% loss? A raw 3% of revenue is huge, there is no way businesses can take that without raising prices as consumer sales is pretty efficient and has small margins already. So they raise prices for…

You're looking at it the wrong way. It's just a shell game to get around truth-in-lending laws. Using a credit card is borrowing money. Interest rates have to be disclosed. So the fees plus the grace period are a way of making it look like typical card users are not paying a lot of interest. People getting cash back are actually paying low interest rates, because the market dictates it. If the fees were prohibited, t…

Well, I live in Europe, use debit and the transaction costs are 0.15% with no hidden fees anywhere in the system. And that is the norm, I don't know of anyone who uses credit cards here. (Although we call debit cards issued by Visa or Mastercard credit cards since Americans call those brands of cards credit cards, but people who use them don't have any credit, your account gets deducted instantly and you can't buy if there is no money left).

I'm not sure why Americans say that credit cards with 3% fees would be better than this system, and make fun of Europeans for not wanting to use credit cards. To me it just feels like US finance industry tricked everyone into choosing the more expensive product since they hid the costs of it from the person making the choice. But when people has to pay the real costs of credit cards then basically nobody wants one.

Re: How credit cards make money

#286

Post by perl4ever »

ghaff wrote: post #268
Jensson wrote: post #258

Earlier quoted context omitted.

And you pay 3% on every transaction to get 1.5% back. Seems like a pretty bad deal. Or do you really think businesses just gives you 3% for free on every purchase rather than raising prices on everything to make up for that 3% loss? A raw 3% of revenue is huge, there is no way businesses can take that without raising prices as consumer sales is pretty efficient and has small margins already. So they raise prices for…

I’m not personally—and I may or may not pay cash if someone charges extra for credit. (But handling cash isn’t free.) Yes, someone is paying for my 2% cash back card but it’s still a net benefit to me.

People misinterpret this as some sort of tragedy of the commons, but I think that's begging the question.

We (anyone/anywhere) could pass a law that said no more fees, and the credit card companies could instantly raise interest rates and end grace periods to compensate exactly. And then instead of cash back, they would have cards with much lower rates.

I don't see that anybody would be better or worse off, to first order. The difference is framing, and psychological response.

People look at stuff totally differently when it's divided into different buckets.

Re: How credit cards make money

#287

Post by nikitaga »

treyfitty wrote: post #234

One of the under appreciated legal precedents set a couple years ago was the Ohio V AmEx anti trust case. The case predicated against AmEx’s merchant contract forbidding merchants to steer customers away from using their Amex card. This was a common practice for many years, especially at restaurants since AmEx charged restaurants 6%. The Supreme Court ruled that amex was able to keep the anti-steering provision in me…

This has nothing to do with credit cards and everything to do with the kind of people ruling this country, and the kind of systems we have to keep "electing" them. If that case wasn't about AmEx, it would have been about some other random oligopolist, with the same outcome.

Re: How credit cards make money

#288

Post by throwawaycities »

smnrchrds wrote: post #267
throwawaycities wrote: post #256

Earlier quoted context omitted.

What does that even mean? Credit card companies exist (and make money) in both common law and civil law countries. Or you could even look within the US and examine the singular state that is a civil law jurisdiction and there is no real impact vs the other 49 states. In fact I’d wager a guess very few people even know 1 of the states is a civil law jurisdiction because it has very little impact in practice.

Court decisions in common law jurisdictions have important and long-lasting effects, not only on the case at hand, but for decades (or centuries) to come on things you wouldn't think can be remotely related to the case. It's not like that in civil law jurisdictions. Had this case been in France, the decision on credit card would not have created a precedent that Uber and AirBnB and App Store could use to their advant…

I know the difference between common law and civil law. I just didn’t understand:

> “multiply that effect by some unknown but really large number and you'll arrive at the total impact”

There are countless comparative law articles on civil/common law systems, it’s not exactly clear this “impact” you’re trying to measure. I suppose you could try to determine the number of codified laws in a civil law jurisdiction vs the number of original cases cited in published opinions in a common law country. But even with a total number of cases that relied on stare decisis in rulings, I just don’t know what impact that reveals.

Re: How credit cards make money

#289

Post by ilammy »

ClumsyPilot wrote: post #222
clairity wrote: post #148

Earlier quoted context omitted.

yes, never use your debit card and use only credit cards online, but cash is better for non-major in-person purchases as it's inherently private and anonymous. it's also better for the payee (hopefully a local retailer not a mega-corp), since they don't have to pay the fees. for major in-person purchases, the extra (fraud, warranty, etc.) protections provided by the credit card may be worth the privacy/anonymity trad…

"non-major in-person purchases as it's inherently private and anonymous" Most of the time that's an anti-feature - there is no point of hiding transactions of you buying bread, it could provide you an alibi in case you are accused of a crime, but there is no conceivable way it could be used against you.. (people don't stop to buy bread on the way to the crime scene)

You should consider wearing a gopro in public and stream at all times when you go out, that would surely provide you with an alibi /s

Re: How credit cards make money

#290

Post by SturgeonsLaw »

nikitaga wrote: post #287
treyfitty wrote: post #234

One of the under appreciated legal precedents set a couple years ago was the Ohio V AmEx anti trust case. The case predicated against AmEx’s merchant contract forbidding merchants to steer customers away from using their Amex card. This was a common practice for many years, especially at restaurants since AmEx charged restaurants 6%. The Supreme Court ruled that amex was able to keep the anti-steering provision in me…

This has nothing to do with credit cards and everything to do with the kind of people ruling this country, and the kind of systems we have to keep "electing" them. If that case wasn't about AmEx, it would have been about some other random oligopolist, with the same outcome.

It's at the point where I'm genuinely surprised to legislation that provides benefits to the consumer. On the rare occasions that it does appear, the first thing I wonder is "what's the angle".
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