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How credit cards make money

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Re: How credit cards make money

#41

Post by TorKlingberg »

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 are still earning interchange, and profit from foreign currency conversion rates unless you watch out for it.

They can also earn money from retailers to promote them to you. Point hunters often end up spending extra to reach a rewards threshold, which can be very profitable for the retailer. It's also common to sign up for a card with great introductory rewards and then keep using it for years, because you get busy and forget to switch card every few months.

Re: How credit cards make money

#42

Post by WalterBright »

adrr wrote: post #39
alberth wrote: post #23

Earlier quoted context omitted.

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.

I take advantage of that by using the card to pay bills (that don't charge a "convenience fee" to use a CC) and try to time things to get as close to the 60 days as I can.

It's just a long standing habit of mine.

Re: How credit cards make money

#43

Post by jiqiren »

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…

Is it true top tier customer reward cards (black/platinum/amex business/etc) have interchange fees that push into 3% territory? If so, how do companies like Square make money when they only charge the merchant 2.6% for a POS transaction?

Re: How credit cards make money

#44

Post by ollien »

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…

> 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 to the first as I possibly can.

Re: How credit cards make money

#45

Post by avn2109 »

steveklabnik wrote: post #15
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…

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.

Semi-related: What happens with interchange and related fees, when an American credit card is used in Europe?

Re: How credit cards make money

#46

Post by sokoloff »

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…

I see this pattern almost weekly with engineers (both online and offline). The hubris is fascinating. (Full disclosure: I was often guilty of this myself for the first decade-plus of my career.)

Re: How credit cards make money

#47

Post by lnwlebjel »

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

Re: How credit cards make money

#48

Post by stefan_ »

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 are still an oligopoly that charges ~2% on every transaction for the grand cost of maintaining a bunch of servers, plus whatever liquidity risk they take on by ignoring all security standards introduced since the magstripe?

If you think you are winning on rewards, you might also believe you can win long-term playing in a casino.

Re: How credit cards make money

#50

Post by patio11 »

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 research papers to e.g. almost any book that looks plausibly interesting about financial fraud (best one: Lying about Money, Dan Davies).

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