Where do credit cards companies make most of their money?

[Fayd]

mastercard, visa, discover, etc all take 2% of all sales, as well as interest payments. American Express takes 6% of all sales, which is why alot of places hesitate to take it. (but also why they can give like 3-4% cashback on some sales...)

 

[RossMAN]

Originally posted by: BEL6772
My wife worked in collections for Discover Card several years ago. The center she worked at housed collections, customer service, and payment processing. She told me after one of her department meetings that the cost of operating the entire center was covered by late fees.

Makes you wonder what if everyone paid their bill on time in full, no bounced checks, no over the limit ... what would these cc companies do?

 

[PottedMeat]

Originally posted by: RossMAN

Originally posted by: BEL6772
My wife worked in collections for Discover Card several years ago. The center she worked at housed collections, customer service, and payment processing. She told me after one of her department meetings that the cost of operating the entire center was covered by late fees.

Makes you wonder what if everyone paid their bill on time in full, no bounced checks, no over the limit ... what would these cc companies do?

Lobby congressmen for a new way to fsck you in the ass?

 

[TheTony]

Originally posted by: zerocool1
the issuers make a percent from interest.
the networks like visa make money off of interchange rates. So they charge for the transaction

:thumbsup:

 

[krotchy]

It really amazes me how many people dont pay their cards in full every month. They are funding the credit card companies.

How someone can get 20k in debt through credit cards is astounding to me.

 

[BEL6772]

Originally posted by: RossMAN

Originally posted by: BEL6772
My wife worked in collections for Discover Card several years ago. The center she worked at housed collections, customer service, and payment processing. She told me after one of her department meetings that the cost of operating the entire center was covered by late fees.

Makes you wonder what if everyone paid their bill on time in full, no bounced checks, no over the limit ... what would these cc companies do?

They'd all end up being more like the classic American Express charge cards, which weren't set up to allow revolving credit ... they'd charge a higher % transaction fee and an annual membership. Most would probably ditch the grace period and start charging interest from the date of each transaction, too.

 

[LegendKiller]

ok ok. enough bs. I just left one of the largest cc issuers, one that has 30bn+ in outstanding balances. they make their money the following ways. consider that the total yield on a cc portfolio is 24%.

17% comes from interest
2% comes from interchange (netwoek use)
5% comes from late, overlimit...etc fees

now, to finance those receivables most companies create massive trusts and issue bonds backed by the assets (securitization, which is what I do). here is how the math breaks down.

7% direct funding costs to investors
8% net losses (gross losses net of recoveries)
.75% servicing fee paid to the servicer (cc companies either service the debt themselves or outsource)
.25% issuance costs, trustee fees...etc

so that is 16% funding costs. the remainder is excess spread, what they get to keep. apply that to 30bn, that is what they make.

float isn't huge since all funds that are applied to accounts in the trust have to be in the trust within 2-4 days usually. considering clearing times, even for ach, processing...etc, float isn't huge.

they also make money on other products, not to mention funfing by deposits rather than unsecured or secured debt. deposits are always cheaper after a certain point where regulatory capital relief is already had.

anyway, monoline or pure cc companies don't exist mostly anymore. mbna, the last pure monoline is now boa and capital one has purchased two large deposit/retail banks now.

I just had to chime in despite typing all of that on a ppc-6700 kb, which isn't easy. way too much fudd out there

 

[Platypus]

They make their money off people who don't understand how to manage their money.

 

[rudder]

They make a load of money off people like this...

 

[Skeeedunt]

Wow... certainly a lot of conflicting information.

Originally posted by: LegendKiller
ok ok. enough bs. I just left one of the largest cc issuers, one that has 30bn+ in outstanding balances. they make their money the following ways. consider that the total yield on a cc portfolio is 24%.

17% comes from interest
2% comes from interchange (netwoek use)
5% comes from late, overlimit...etc fees

I'm sure the breakdown can change a lot depending on customer tendencies, etc, but this sounds like a pretty believable average.

Originally posted by: akshatp
http://en.wikipedia.org/wiki/Credit_card

... probably would have been a good place to start. This seems to confirm that interchange fees are generally only a small portion of their income:

For a typical credit card issuer, interchange fee revenues may represent about fifteen percent of total revenues, but this will vary greatly with the type of customers represented in their portfolio. Customers who carry high balances may generate low interchange revenue due to credit line limitations, while customers who use their cards for business and spend hundreds of thousands of dollars a year on their cards while paying off balances every month will have very healthy interchange revenues.

 

[rh71]

nvm

 

[dullard]

Originally posted by: Skeeedunt
... probably would have been a good place to start. This seems to confirm that interchange fees are generally only a small portion of their income:

Look through the financial statements of the credit cards. Those statements clearly show revenue, costs, and profits broken down into the categories you are asking about. I've been posting links to Discover Card's financial statements for years on ATOT(because the statements are easilly linked online), with analysis (if you can find the ATOT links, you might find them interesting).

Result? In just over half of the years, Discover's profit came nearly all from the merchant fees. In just under half of the years, Discover's profit came more from the interest/fees part of their business. When the economy does well, there aren't many chargeoffs and thus, the interest more than covers the lost money. Therefore interest brings in more profit. When the economy is ok or does poorly, people don't pay their CC bills and thus the interest just barely covers the lost money for chargeoffs and in those years the merchant fees bring in all the profit.

Conclusion: Either merchant fees or interest, depending on the economy that year.

 

[miri]

Originally posted by: Skeeedunt
I assume it's mostly from interest, but don't they also take a percentage cut of sales? Or is this just a trivial amount?

They make far more from charging a percentage of sales than they do on interest and annual fees by far.

More and more people use credit cards for purchases. I am going to guess maybe 70% of consumer purchases are credit cards. Now imagine 2-5% of that going to the credit card companies. That is a ton of money.

 

[dainthomas]

Originally posted by: miri

Originally posted by: Skeeedunt
I assume it's mostly from interest, but don't they also take a percentage cut of sales? Or is this just a trivial amount?

They make far more from charging a percentage of sales than they do on interest and annual fees by far.

More and more people use credit cards for purchases. I am going to guess maybe 70% of consumer purchases are credit cards. Now imagine 2-5% of that going to the credit card companies. That is a ton of money.

Retail sales for 2006 was around $360 billion I believe. With the percentages you threw out, their cut would be roughly eight billion.

I'm not sure if retail sales counts things like food and gasoline. If not that would add a significant chunk.

 

[miri]

Originally posted by: dainthomas

Originally posted by: miri

Originally posted by: Skeeedunt
I assume it's mostly from interest, but don't they also take a percentage cut of sales? Or is this just a trivial amount?

They make far more from charging a percentage of sales than they do on interest and annual fees by far.

More and more people use credit cards for purchases. I am going to guess maybe 70% of consumer purchases are credit cards. Now imagine 2-5% of that going to the credit card companies. That is a ton of money.

Retail sales for 2006 was around $360 billion I believe. With the percentages you threw out, their cut would be roughly eight billion.

I'm not sure if retail sales counts things like food and gasoline. If not that would add a significant chunk.

You also have to add things like airfare, hotels, college tuition, medical bills, dental bills, utility, rent and car payments that are done more and more by credit card now a days.

 

[intogamer]

Originally posted by: RossMAN

Originally posted by: BEL6772
My wife worked in collections for Discover Card several years ago. The center she worked at housed collections, customer service, and payment processing. She told me after one of her department meetings that the cost of operating the entire center was covered by late fees.

Makes you wonder what if everyone paid their bill on time in full, no bounced checks, no over the limit ... what would these cc companies do?

They become debit cards