How credit cards make money • Hacker News Board

Re: How credit cards make money

#301

Post by perl4ever » Sat, Nov 06, 2021, 3:51 AM UTC

ilammy wrote: post #292

Jensson wrote: post #285

Earlier quoted context omitted.

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…

> But when people has to pay the real costs of credit cards then basically nobody wants one. I believe there is an opportunity cost for not using a credit card in US: you don't build your credit history. This might leave you disadvantaged in the future because... the finance industry (as an extension, the society) is structured in a way that you must have a good credit history.

I interpret your tone as suggesting the justification is circular and arbitrary, that finance doesn't serve a human need.

Re: How credit cards make money

#302

Post by Dylan16807 » Sat, Nov 06, 2021, 3:59 AM UTC

perl4ever wrote: post #286

ghaff wrote: post #268

Earlier quoted context omitted.

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…

> the credit card companies could instantly raise interest rates and end grace periods to compensate exactly

I don't think you can simplify it that much. If you end grace periods, the people that currently don't pay interest will suddenly be charged huge amounts. If you drastically lower the interest rates to make their costs match the old model, then other people that pay the card off slower will suddenly be paying much less than before.

It's easy enough to ban fees charged to the business, and force them to be charged to the customer, to make pricing more transparent and remove the silliness around rewards. But trying to replace fees with interest rates doesn't work, unless you set up some crazy nonlinear '''interest rate''' calculation.

Re: How credit cards make money

#303

Post by gnicholas » Sat, Nov 06, 2021, 4:00 AM UTC

idoh wrote: post #240

rconti wrote: post #187

Earlier quoted context omitted.

I went with a girlfriend to her small-town-CA home, about 15 years ago. Went to get groceries and she just gave their name and a 3-digit number and the groceries went on the family account. I'm 40, but I had never before seen that in my life.

I saw this happening in Woodside CA (very much in the SF Bay Area) less than a year ago.

Yep, Robert’s Market does this. Great for kids who walk home from the elementary school down the street, and can pick up a snack on the way home.

Given the demographics of Woodside, it’s also frequently used by nannies and other family helpers who shop for the uber-wealthy residents who call Woodside home…

Re: How credit cards make money

#304

Post by dd36 » Sat, Nov 06, 2021, 4:02 AM UTC

SturgeonsLaw wrote: post #290

nikitaga wrote: post #287

Earlier quoted context omitted.

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".

I don’t think the FCRA could come into existence today. It’s crazy that Republicans used to create pro-consumer regulations. We’re so far from that these days that it feels impossible absent some major shock like the CFPB after 2008.

Re: How credit cards make money

#305

Post by ghaff » Sat, Nov 06, 2021, 4:05 AM UTC

Dylan16807 wrote: post #302

perl4ever wrote: post #286

Earlier quoted context omitted.

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…

> the credit card companies could instantly raise interest rates and end grace periods to compensate exactly I don't think you can simplify it that much. If you end grace periods, the people that currently don't pay interest will suddenly be charged huge amounts. If you drastically lower the interest rates to make their costs match the old model, then other people that pay the card off slower will suddenly be paying…

Yes. Grace periods are basically the only way credit cards work for business users among others. Four and five figure balances—paid off on time at the end of the month—are how a lot of people routinely use credit cards.

Re: How credit cards make money

#306

Post by perl4ever » Sat, Nov 06, 2021, 4:09 AM UTC

Jensson wrote: post #264

rsj_hn wrote: post #263

Earlier quoted context omitted.

> A raw 3% of revenue is huge The business doesn't lose 3 percent of revenue, because it also saves money not dealing with cash: - eliminates cash theft - always a chronic problem for business. - reduces costs of transporting/dealing with cash - improves bookkeeping and paper work and it gains revenue by dealing with people who don't use cash. A large number of customers don't make routine purchases with cash, and th…

> The business doesn't lose 3 percent of revenue, because it also saves money not dealing with cash: Debit cards circumvents the need for cash as well and are much cheaper. Everyone uses debit cards where I live, cash is very rare so companies doesn't need to deal with it much. So the difference is really just a straight 3% vs 0.15% with no other consequences.

I think 3% is an exaggeration. And in fact, you can get 2% cash back. I don't think there's very much being charged when all is said and done.

This seems to show the fees can be considerably less than 3%, although PayPal or Square will charge nearly that:

https://www.fool.com/the-ascent/research/average-credit-card...

https://www.mastercard.us/en-us/business/overview/support/me...

Re: How credit cards make money

#307

Post by SilasX » Sat, Nov 06, 2021, 4:13 AM UTC

kasey_junk wrote: post #249

jacquesm wrote: post #178

Earlier quoted context omitted.

I've worked for a bank, let's just say that I can't agree with that. A US bank at that. I just noticed: https://twitter.com/patio11/status/1443756566822285334

I’ve worked for several us financial institutions, including banks and that exchange seems extremely typical to me. Especially the “hold harmless” bits. Which particular part of that story telling rang false to you?

The part where the banking system is a giant kumbaya circle run on gentlemen’s agreements to do the right thing. When you are clearly defrauded or scammed, banks do nothing about it. His entire thread advertises, “I’ve never wired money to a scammer”.

Re: How credit cards make money

#308

Post by perl4ever » Sat, Nov 06, 2021, 4:16 AM UTC

Dylan16807 wrote: post #302

perl4ever wrote: post #286

Earlier quoted context omitted.

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…

> the credit card companies could instantly raise interest rates and end grace periods to compensate exactly I don't think you can simplify it that much. If you end grace periods, the people that currently don't pay interest will suddenly be charged huge amounts. If you drastically lower the interest rates to make their costs match the old model, then other people that pay the card off slower will suddenly be paying…

> the people that currently don't pay interest will suddenly be charged huge amounts

They will be charged the same amount if the interest rates are set accordingly, it will just be explicit.

>other people that pay the card off slower will suddenly be paying much less than before

You say that as if their rate must remain, if not fixed, in a fixed ratio with others. I don't see why.

>trying to replace fees with interest rates doesn't work

You might be right. But I don't see why, and I think that if I can guess a little, people in the industry know much more and are smarter.

Re: How credit cards make money

#309

Post by [deleted] » Sat, Nov 06, 2021, 4:18 AM UTC

ghaff wrote: post #305

Dylan16807 wrote: post #302

Earlier quoted context omitted.

> the credit card companies could instantly raise interest rates and end grace periods to compensate exactly I don't think you can simplify it that much. If you end grace periods, the people that currently don't pay interest will suddenly be charged huge amounts. If you drastically lower the interest rates to make their costs match the old model, then other people that pay the card off slower will suddenly be paying…

Yes. Grace periods are basically the only way credit cards work for business users among others. Four and five figure balances—paid off on time at the end of the month—are how a lot of people routinely use credit cards.

[deleted]

Re: How credit cards make money

#310

Post by vishnugupta » Sat, Nov 06, 2021, 4:19 AM UTC

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...

This point is also made in “ A Piece of the Action: How the Middle Class Joined the Money Class”. It paints a very good historical context to understand our current financial world from the lenses of consumers.

Edit: Ops link takes you to a chapter in the book :-)