How do some rewards cards make money?

[Allen123]

I have the Charles Schwab card, and get 2% back on every purchase I make each month.  I PIF and pay no annual fee or other fees whatsoever.  How can they make money on me with the Visa merchant fees being around 1.5%?

[Anonymous]

I am new to the forum but I imagine they make money on those who do not PIF.

[Anonymous]

educatedconsumer is right.  Reward CC's have higher interest rates then regular CC's.  So they bank on the people who don't PIF and all the interest they earn off of them.

[MojaveMoon]

Also, since those who're approved for a credit limit of $ 5,000 or over (link) receive the Visa Signature version of the Schwab card, merchants either generally or always have to pay a higher fee for accepting Visa Signature cards and World Mastercards.

In my personal opinion, this higher interchange fee is likely the reason that USAA started offering a World Mastercard version of the Mastercard

Message Edited by MojaveMoon on 04-27-2009 05:46 AM

[Anonymous]

And, visa merchant fees are not 1.5%.  Some big box corporations get that rate, many smaller companies pay upwards of 3% AND a PER TRANSACTION FEE...AND a monthly fee. Oh and all merchants are charged a higher % fee if the customer is using a rewards credit card.

Message Edited by UpUpUp on 04-27-2009 11:33 AM

[Anonymous]

Reward cards have a variety of income sources.

1.  Merchant discount. This fee can be low like the 1.5%, but may be higher depending on the merchant and how they run the transactions (swipe vs. online/phone, etc.)

2.  Merchant bonus (pays bonus to CCC for encouraging cardmembers to shop there).  Typically certain vendors and merchant categories may effectively pay a higher discount in order to participate in this program where the CCC encourages those types of purchases or purchases with that merchant.  This is where the 5-20% deals come in or the 2-5% in certain categories, while lower in other categories which do not participate in the bonus categories.

3.  Annual Fee.  Some reward cards charge annual fees.

4.  Interest.  If you don't PIF or take cash advances, they charge interest.

5. 

[Anonymous]

It's likely Schwab doesn't make any money off of the card and just uses it as a relationship product; they let FIA Card Services take the profits.