How Do Credit Card Companies Make Money?

Thinking of how do credit card companies make money? How did credit card companies start? Or you need more information about credit card companies?

This article is explanatory enough to give you answers to all your questions in detail. Without further delay, let’s jump right in.

How do credit card companies make money?

Well, there are two types of credit card companies.

On one hand you have the issuers: the banks who essentially hand out the cards.

You also have the networks, who process these transactions, such as Visa or MasterCard. American Express and some others act as both issuers and networks.

• Transaction Fee

One way these companies make money is by charging the retailer in the form of a transaction fee. This number is usually between 1 and 3%.

Suppose at a given store, this number is 3%. This means if someone buys $100 worth of items using a credit card, the store keeps $97. The remaining $3 is paid to the issuer and network.

These few dollars may not seem like much, but over time they add up. But why would a store do this? Why would they give up precious revenue? Two reasons.

No. 1: Customer convenience

Stores are in competition with one another. They need to make their experience as easy and hassle-free as possible. Otherwise, customers will shop somewhere else.

No. 2: Impulse shopping

When not paying in cash, people spend more since the money spent does not feel real. This of course is good for the store. More spending = more revenue. This is especially true if the money doesn’t even need to be paid back right away. This brings us to the other way these companies make money.

• Interest

This is additional money paid when the balance owed is not paid at the end of the month.

• Fees

The other way they make money is through fees. Fees for having the card. Fees for cash advances. Fees for paying late.

How Credit Card Companies Started

In New York City, 1949. A man by the name of Frank McNamara is out at dinner with his clients. He realizes he left his wallet in another suit. His wife pays the tab but he comes up with an idea. What if nobody had to carry around cash? What if people didn’t have to carry cheques either? Instead, the bill could be charged to their name using a card.

At the same meal, McNamara talks this over with the restaurant owner. The next day, he returns to the same restaurant and pays using a piece of cardboard with a signature. Diners Club, the first credit card is created.

The Diners Club card was good for a few restaurants and other establishments. Cardholders had to pay their bill at the end of the month. But the guys at Bank of America had a better idea.

Why make people pay their balance off at the end of the month? Offer them “free money” for now. They’ll have to pay it off eventually. And by the way, you’ll have to pay more later, but enjoy yourself for the time being.

This card was called BankAmericard, but later became its own company: Visa.

What kinds of customers are they targeting?

How do they make the most money?

Their main source of profit are the customers with revolving debt. For the most part, they only make minimum payments, allowing interest to be charged and build up. They’ll pay it off later, but they’re also lining the wallets of the credit card companies.

The second source of profit are the people who pay in full, all of the time. The credit card companies don’t make their money from the cardholder. Instead, they make their money by charging the retailer 1 – 3% as a transaction fee.

These types of customers aren’t a huge source of profit, but they add up. Like anything, there are people who exploit the system for free stuff. Some people will never pay anything.

Who do these companies seek out the most?

Who are they trying to lure in the most?

• Uneducated population

Firstly, there is the uneducated population. Members of this group typically have little idea how the card or system works. They treat the card as if it was not real money being spent. Credit card companies love them because they end up owing a lot of interest.

• Unused credit card users

The second group that is targeted includes people who stopped using the cards. They had credit card problems in the past. The companies give them lucrative and special incentives to try and bring them back.

Bottom Line

Ultimately, a credit card company is a business. It is just like a restaurant, grocery store, or manufacturer. As long as people keep using their services, they will more than make money. And a lot of it too.

That’s all for this article on how do credit card companies make money. I hope this article helps and until next time, thanks for reading.