How credit cards make money • Hacker News Board

Re: How credit cards make money

#91

Post by nostromo » Fri, Nov 05, 2021, 7:52 PM UTC

bluedevil2k wrote: post #76

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 missed the biggest advantage of credit cards - the limited liability of the card holder to fraudulent charges! From a financial website… “ CREDIT CARDS Credit cards offer consumers the widest fraud protection. By Federal law, a cardholder is only liable for the first $50 of an unauthorized transaction at most, with many issuers offering cards with zero liability. DEBIT CARDS Debit card holders are protected under…

I got burned by Aliexpress and now I highly recommend people use credit cards for all purchases.

I had a debit card saved on Aliexpress. The account was compromised by unknown means (maybe public wifi). Someone bought several $1,000+ phones from China that shipped to me in the US. I presume the sellers were in on it and were selling me unwanted inventory at inflated prices. Because they had tracking information, my bank (HSBC) said their hands were tied and I lost several thousand dollars overnight. It didn't matter that it was obviously fraud -- I provided customer service emails, logs showing the purchases all happened at 4am local time, and all at the exact same timestamp.

Moral of the story: don't use debit cards, don't save your cards online (save them in your browser and unselect "save this card"), don’t expect your bank to have effective fraud detection, and don't trust Aliexpress to have your back.

Re: How credit cards make money

#92

Post by jedberg » Fri, Nov 05, 2021, 7:54 PM UTC

pdpi wrote: post #86

jedberg wrote: post #61

Earlier quoted context omitted.

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 i…

I just tried this, I opened my bank's app and it took me the whole of 2 minutes to set up a standing order to pay my friend £10 on the first of the month. It would be in his account on the 1st, or the next working day. I pay my cleaner via bank transfer when she leaves my place, and it's in her account by the time she's in the bus. My bank mailing cheques to my landlord is a concept that's just bizarre to me.

Given that you are sending pounds instead of dollars, I'm guessing you live in a civilized place with modern banking and not a backwoods like the USA.

The problem is not technology, it's the USA banking system. We have no way to instantly send money to someone over a few thousand dollars without huge fees. Oftentimes rent exceeds that limit in urban areas.

Re: How credit cards make money

#93

Post by reaperducer » Fri, Nov 05, 2021, 7:54 PM UTC

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…

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 ran into this at my last place. I'm the sort of person who likes to pay things ahead so I don't have to think or worry about them. I was used to paying my rent ahead and quarterly.

When I moved to the new place (in a western state), the apartment company insisted that rent be paid exactly on the 1st, and paid online.

Not only did it not want the rent early, it was not possible to pay early, as the company's online system would show a zero balance, and would not show a payment mechanism.

Even worse — I couldn't pay a bunch up front. It would only allow payments for the exact amount due for that month.

Payment was also accepted by check. But only in person, and with a $75 "processing" fee.

And this wasn't some rinky-dink neighborhood landlord. It was a national apartment company with over 20,000 units in a dozen states.

Interestingly, my new apartment has the same online system as the old one, but allows me to pay however much I want as often as I want. (As long as it's not late, duh.) So it wasn't a technical limitation, it was management's policy.

Re: How credit cards make money

#94

Post by lotsofpulp » Fri, Nov 05, 2021, 7:55 PM UTC

jonas21 wrote: post #24

patio11 wrote: post #14

Earlier quoted context omitted.

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…

> 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…

Even they have their limit. I remember banks going crazy with cash back for opening credit cards, and then 6 years ago, Chase released Sapphire Reserve which basically gave people $1,500 to $2,000 upfront, and then after that I feel the churning scene significantly died down since Chase ended up taking huge losses for that. My wife and I basically got $3k or $4k I think for taking a few minutes to fill out a credit card application.

I imagine all the other banks were not impressed, and ever since then, you can get a few hundred dollars here and there but nothing like the initial Sapphire Reserve promotion came out since.

Re: How credit cards make money

#95

Post by fragmede » Fri, Nov 05, 2021, 7:57 PM UTC

patio11 wrote: post #22

alberth wrote: post #16

> "A much smaller portion of interchange goes to the credit card processor, to the acquiring bank, and to the credit card network" That's technically not accurate. Credit card networks do not earn money from interchange [1]. [1] "Visa does not make money from individual transactions." https://revenuesandprofits.com/how-visa-makes-money-understa...

I would like to reiterate my standard disclaimer for this publication but if you want to bet that I don't understand how scheme fees are calculated that is a poor decision.

That raises a question though: In your opinion, where/in what subjects would betting against you not be a poor decision?

Re: How credit cards make money

#96

Post by lotsofpulp » Fri, Nov 05, 2021, 8:00 PM UTC

WalterBright wrote: post #42

adrr wrote: post #39

Earlier quoted context omitted.

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.

That seems like a lot of trouble compared to setting up auto pay for everything to save a few bucks.

Re: How credit cards make money

#97

Post by computator » Fri, Nov 05, 2021, 8:00 PM UTC

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…

If you have a credit card that charges no foreign exchange fee, could you overpay your credit card (i.e., leave a balance in your favor on the card), then withdraw cash at foreign ATM machines, thereby avoiding both forex fees and credit card interest?

The terms & conditions on my credit card sound like it should work (I shouldn’t be charged interest if I have a credit balance), but I’ve never tried it.

Failing that idea, do you have any tips for frequent American travellers on how to get foreign cash without paying excessive conversion fees?

Re: How credit cards make money

#98

Post by revolvingocelot » Fri, Nov 05, 2021, 8:01 PM UTC

lotsofpulp wrote: post #83

stefan_ wrote: post #53

Earlier quoted context omitted.

The intersection between the people that have random overdrafts and those that just pay off their credit card debt in full every time is the empty set. Why make up excuses for a few rent seekers that tax the entire economy?

Merchants WANT people to use credit cards. There is nothing stopping merchants from offering a cash/debit price and a credit price since 10 years ago. The frank dodd legislation made illegal for card networks to ban offering discounts for debit card payments, and in Mar 2017, the Supreme Court said merchants cannot be barred from advertising higher prices for credit cards. https://www.ftc.gov/tips-advice/business-cen…

>It is very clear that most merchants earn more from people using credit cards more often, otherwise there is no reason they would try to dissuade or offset it by adding a premium for using credit cards.

Can you elaborate? IME merchants do NOT want people to use credit cards; transaction fees eat into the sale price. I remember a time when some electronics stores would explicitly advertise a cash discount, so as to avoid the transaction fees. I once worked in a bar that accepted every major credit card, save American Express, because of their several-points-higher transaction fee. The premium is added to offset this.

How is it very clear that most merchants earn more?

Re: How credit cards make money

#99

Post by drfuchs » Fri, Nov 05, 2021, 8:03 PM UTC

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.

The card issuer doesn’t pay the merchant for a while, so it’s the merchant who is essentially paying the actual debt interest for a few months. Ask the owner of any small business where you use your card how long it takes for them to actually see the money.

Re: How credit cards make money

#100

Post by lotsofpulp » Fri, Nov 05, 2021, 8:03 PM UTC

stefan_ wrote: post #48

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.

> plus whatever liquidity risk they take on by ignoring all security standards introduced since the magstripe?

The card networks told merchants they are risking losing any and all chargeback for non chip purchases a few years ago. If a merchant is taking mag stripe still, that is their risk.

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

I am definitely earning more via cash back rewards than I am paying in fees. A 2% cash back card which can be had for free, gets you pretty close. At 5% cash back, you’re clearly earning more than however much prices are inflated to pay for the card processor fees.

And at the end of the day, I don’t have the option of paying 5% less at most places. So any percent cash back is a win.