Hacker News Board Hacker News, browsed like a classic message board
Live data from Hacker News

How credit cards make money

bam.kalzumeus.com

Post reply on HN
Print view View original

31–40 of 445 posts

Re: How credit cards make money

#31

Post by jonas21 »

patio11 wrote: post #29
jonas21 wrote: post #24

Earlier quoted context omitted.

> 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 I feel like that user is typically the sort who enjoys telling anyone who will listen about how they managed to get great rewards from their card. With all that free marketing, the credit card issuer is probably happy to…

FWIW: I think technologists are far too quick to jump to "I bet they want to do it for free marketing" and far too slow to think "I bet they have a large team of people who does almost literally nothing other than study this exact question, has thought about it for hundreds of thousands more hours than any credit card user has, and has a highly developed technical infrastructure capable of authoritatively answering i…

Oh, I don't doubt that they have a very sophisticated model for this. I'm just saying they probably take customer acquisition cost into account in the model too.

"I bet they do it for free marketing" doesn't mean "I bet they didn't do the math". It means "I bet their marketing department measures everything and is good at math too."

Re: How credit cards make money

#32

Post by patio11 »

TorKlingberg wrote: post #26
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…

I take it interchange fees is the reason some small stores will not take credit cards for small purchases, and low-margin stores will often not take Amex. Separately, is the "credit score" system a particularly American concept? In the UK the credit report companies will give you a number, but it seems to be something they make up to fill a consumer demand rather than something card issuers actually use. Do you know…

Substantially correct on the first part. In particular, and depends on the region/processor/card brand, many SMBs will have interchange which has a fixed-per-transaction component in addition to a percentage fee, and that can be prohibitive at small "basket" sizes.

The U.S. has the world's most developed and widely relied upon credit reporting infrastructure, by a substantial margin. The history of FICO doesn't quite fit into the margins of this comment but I'd love to do an issue on it someday. Credit scores per se are less a thing in Japan but there are cross-issuer I-can't-believe-its-not-bureaus which have information sharing agreements, the dominant purpose of them being identifying fraudulent actors and account takeovers rather than credit risk (nearly zero in Japan, historically).

Re: How credit cards make money

#34

Post by askingpatio21 »

Hey Patio - what's your current take on Crypto and have you / do you cover that in your newsletter or have a more recent twtr thread to send us to?

I know you've been a major skeptic of the gratuitous pyramiding, wash trading, and shaky (or non existent) foundation of Tether etc

But w/your depth of knowledge on the current financial system would be very interested in your take on the current market and next gens of defi / staking / shared pools / etc

Would love to see you ingest and break that all down

https://techcrunch.com/2021/10/13/payments-giant-stripe-says...

Re: How credit cards make money

#35

Post by jfk13 »

alexfrydl wrote: post #28
BenoitEssiambre wrote: post #20

Earlier quoted context omitted.

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.

This is definitely true but just fyi by now you should be getting 2% back on everything, more if it's specific categories. If you're only getting 1% and have good credit, you need a new card.

Note that while this may be the case in the US, where interchange fees are outrageous and therefore the cards can offer such "rewards", the relevant figures may look quite different in other places.

Re: How credit cards make money

#36

Post by jasode »

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.)

>it seems every store has its own credit card.

Fyi, vast majority of those are co-branded cards which means they are underwritten by a bank. Examples:

- Amazon VISA card is underwritten by Chase Bank

- Costco VISA card is underwritten by Citi Bank

If you look closely on the Pep Boys card, you'll see who the bank issuer is.

It's different from the old days of mom&pop grocery stores running their own ledger of customer accounts. The grocery store was the actual lender of credit. With co-branded credit cards, it's the bank and not the retailer that's lending money for customers to buy merchandise.

Re: How credit cards make money

#37

Post by morpheuskafka »

> 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 least for in person transactions. However, the limit does not apply to banks with less than $10 billion in assets.

This is why some online banks can offer lower fees and sometimes even debit cash back (1% is the most I've seen though, so not competitive with credit). But its also why ever fintech under the sun pushes debit cards so heavily--the debit card is issued by a (small, non Durbin-covered) partner bank who then shares revenue with the fintech company.

At the end of the day, credit cards are still significant better for customers. You can have multiple cards with different benefits while keeping all your money in one place, and you can prevent overdrafts because you don't have random subscriptions taking out unpredictable amounts of money in the middle of the night and causing a check to bounce the next day. You are no longer obsessing over "early payday" features or ACH speeds.

Credit cards also provide a nice hack to allow cash deposit for those with only online banks--you can often use a big bank's ATM to make a payment towards the credit card, allowing you to get rid of ordinary amounts of cash.

Re: How credit cards make money

#38

Post by TorKlingberg »

patio11 wrote: post #32
TorKlingberg wrote: post #26

Earlier quoted context omitted.

I take it interchange fees is the reason some small stores will not take credit cards for small purchases, and low-margin stores will often not take Amex. Separately, is the "credit score" system a particularly American concept? In the UK the credit report companies will give you a number, but it seems to be something they make up to fill a consumer demand rather than something card issuers actually use. Do you know…

Substantially correct on the first part. In particular, and depends on the region/processor/card brand, many SMBs will have interchange which has a fixed-per-transaction component in addition to a percentage fee, and that can be prohibitive at small "basket" sizes. The U.S. has the world's most developed and widely relied upon credit reporting infrastructure, by a substantial margin. The history of FICO doesn't quite…

Thank you. It matches my impression that lenders in other countries do share information, but mainly negative factors such as defaults. Than means "credit building" does not exist in the same way.

> nearly zero in Japan, historically

That surprises me actually. I know Japan has a very, let's say, high conscientiousness culture but do they never get into economic problems and are simply unable to pay card bills?

Re: How credit cards make money

#39

Post by adrr »

alberth wrote: post #23
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.

Issuers get higher interchange rate for customers they deem as high-spenders. So while these high-spenders (who presumably also pay off their bills) aren't generating interest revenue for the Issuer, they are generating higher interchange revenue.

But the card issuer is issuing debt for 0% to these users. Upwards of 60 days. That cost money to the card issuer.

Re: How credit cards make money

#40

Post by WalterBright »

patio11 wrote: post #14
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.

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, t…

The term for us, who pay off their entire balance every month, is "deadbeats".
Post reply on HN