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

61–70 of 445 posts

Re: How credit cards make money

#61

Post by jedberg »

ollien wrote: post #44
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…

What state are you in? What they are doing may be illegal. In California the rent is on time as long as you pay in advance of the deadline. If you send in six months rent all at once, then you are on time for the next six months.

Also your bank may be able to do this for you. If you add your landlord as a bill pay recipient and set the due date as the 1st, the bank will mail the check on the appropriate day, and if it arrives late, will often cover the late fee.

Re: How credit cards make money

#62

Post by patio11 »

TorKlingberg wrote: post #38
patio11 wrote: post #32

Earlier quoted context omitted.

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?

"Never" is a strong word, but you're welcome to read the English-language reports of Japanese lenders which break this out for their consumer businesses. Factors which generally tend to depress it include low revolving credit use, relatively high underwriting standards for credit (not solely a positive thing—ask your favorite Japan-resident foreigner for stories sometime), formal or informal risk transfer, outsourcing collections to the yakuza by policy [0], etc.

[0] I feel it necessary to say "I am not making this up. It happened at first-rate financial institutions many times within the last 20 years."

Re: How credit cards make money

#63

Post by amance »

jiqiren wrote: post #43
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?

No. Aggregate interchange for top-tier Visa and Mastercard personal cards maxes out at ~2.3%.

Corporate cards actually earn significantly higher interchange, but even those don't aggregate out above 3%. Actually, the networks spend a lot of time policing banks from trying to arbitrage the difference by issuing corporate cards to individuals.

Payment processors like Square just know that their margins will vary by the type of card used by consumers, but aim to have an aggregate positive margin across all cards. Once you get into enterprise contract negotiations with them though, they'll look at your card mix to make a pricing offer.

Re: How credit cards make money

#64

Post by patio11 »

throwawaaaaay17 wrote: post #60
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…

Why not write on Substack? I'd love a comments section for your newsletter.

I welcome comments in my inbox but, having long-ago had them on my blog, do not consider the lack of them a bug.

Re: How credit cards make money

#65

Post by vmception »

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 what arrangement behind the scenes is, shares? More targeted customer data?

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

You're the data product, like every other cool free thing over the last decade, and they have a sustainable business model.

And if you ever do have a disruption in your earnings while you are floating a balance on the credit card, you've just become their whale customer that is paying for the whole operation with interest. By the time you default they really don't care about collections because they've already made so much, they're very ready to sell off the debt to some collections agency for pennies. You can be the most meticulous and responsible user of debt, and still have this happen to you eventually. They're just the house in their credit casino and all they have to do is wait.

Re: How credit cards make money

#66

Post by fragmede »

avn2109 wrote: post #45
steveklabnik wrote: post #15

Earlier quoted context omitted.

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?

Ooh that's a good one. It includes a detour into some really weird forex stuff. If you're used to it it's not that weird but as a American, with US credit card, and a US bank account who then banks exclusively in USD, I found it complicated and fascinating.

Basically, other countries can bank in USD sometimes, so there's a weird corner case that you can send USD to a merchant but can land in their account as $converted_currency or USD that isn't so corner. I'll let patio11 cover this (if/when he gets to it) as there are details I no longer have access to and thus can't do the subject justice.

Re: How credit cards make money

#67

Post by darkwater »

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.

> ("why are wire transfers free in Europe but not in the US")

this applies only to a subset of Europe or european banks.

Re: How credit cards make money

#68

Post by pessimizer »

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.

> It's not clear why they don't just fire us as customers.

They do. When they do it aggressively, it results in bad PR, though.

Re: How credit cards make money

#69

Post by amance »

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…

Patrick, as someone with a startup in this space, I just want to say that your content is fantastic. I really appreciated reading this, and was unaware that Japan had a (pricing cartel?) with rewards. Is the market highly concentrated there as it is in the US? If it is indeed an inexplicable coordination situation, has there ever been any antitrust action in this space there?

Re: How credit cards make money

#70

Post by fragmede »

jiqiren wrote: post #43
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?

Square, by virtue of their business model, get lower interchange fee because charges where the credit card is present, has lower fees. Online-only merchants get no such discount.
Post reply on HN