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Valued Contributor
trumpet-205
Posts: 2,505
Registered: ‎11-11-2010
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Re: Whoa. Banks make a ton of money from interchange fees.

[ Edited ]

Razeus wrote:

My math isn't adding up.  How can they give 5% cash back when only collection 2-3% swipe fees?  Are they banking on most people to pay interest?


Couple factors behind it

 

* A lot of people simply forgot, don't know, or don't want redeem rewards on their cards.

* A lot of people use no reward, barebone credit card.

* Those who pay their bill full and on time allows lenders to issue more cards, since lenders can keep up with the cash flow.

* Approx. 65% of credit card revenue comes from interest and fee assosicated with credit card.

--------> A lot of people don't pay their bills full.

--------> A lot of people pay balance transfer fee.

--------> A lot of people missed their payments, and incured late fee.

 

 

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Established Contributor
Koop10010
Posts: 731
Registered: ‎02-15-2012
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Re: Whoa. Banks make a ton of money from interchange fees.

[ Edited ]

trumpet-205 wrote:

Razeus wrote:

My math isn't adding up.  How can they give 5% cash back when only collection 2-3% swipe fees?  Are they banking on most people to pay interest?


Couple factors behind it

 

* A lot of people simply forgot, don't know, or don't want redeem rewards on their cards.

* A lot of people use no reward, barebone credit card.

* Those who pay their bill full and on time allows lenders to issue more cards, since lenders can keep up with the cash flow.

* Approx. 65% of credit card revenue comes from interest and fee assosicated with credit card.

--------> A lot of people don't pay their bills full.

--------> A lot of people pay balance transfer fee.

--------> A lot of people missed their payments, and incured late fee.

 

 




+1  If everyone paid in full and only used the cards for bonus categories, then yes, the lenders would lose a lot of money.  But, over half of credit card users don't pay in full all of the time and most people don't only use a card for the bonus categories.

FICOs (2/24/12): EX 752, EQ 740
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Established Contributor
Jlu
Posts: 922
Registered: ‎06-12-2012
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Re: Whoa. Banks make a ton of money from interchange fees.

The corporate preferred swipe rate that I currently get at my car dealership is 2.7%.

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ComputerWizMaster
Posts: 76
Registered: ‎05-26-2011
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Re: Whoa. Banks make a ton of money from interchange fees.


Razeus wrote:

I was reading up on fees and how this cc companies are paying for all these cash rewards/points.

 

So for a example, a $100 charge creates, assuming a 2% swipe fee a $2 fee of which, the bank keeps $1.75, VISA/MC/AMEX/DISC get $.20, and the rest goes to the other bank on the merchant side.

 

No wonder people are always ragging on banks.  And here I was thinking banks don't make money off of me because I don't pay interest.


Why shocking? Banks are in the business of making money, not giving it away. There is no "free lunch" as they say. The bank can offer you rewards because of the interchange fees they charge. No matter how you cut it they will make money if you use a card, period. This isn't limited to Credit Cards and also covers Debit cards as well. Banks make a lot more on interchange fees if you use your debit card as "credit" and not "debit" (this is why they offer rewards and other incentives for you to choose "credit").

 

The banks make less money off of your account if you don't carry a balance, but there is still money to be made...

 

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Valued Contributor
trumpet-205
Posts: 2,505
Registered: ‎11-11-2010
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Re: Whoa. Banks make a ton of money from interchange fees.


ComputerWizMaster wrote:

This isn't limited to Credit Cards and also covers Debit cards as well. Banks make a lot more on interchange fees if you use your debit card as "credit" and not "debit" (this is why they offer rewards and other incentives for you to choose "credit").


Unfortunately, most merchants now days are very smart when it comes to debit card. Walmart, Target, or any other reputable merchants will force "debit", not "credit", when you use debit card (you will be forced to use PIN instead of signature). On top of that debit card interchange fee is capped at 21 cents. Hence why 99% of debit cards in US no longer offers rewards, since interchange fee banks earn is capped.

In My Wallet:
Citi Forward (12/2010) | Citi Dividend (05/2011) | Chase Freedom (11/2011) | GECRB/PayPal (05/2012)
Discover it (07/2012) | AMEX BCP (09/2012) | TD/Target REDCard (10/2012) | Chase Ink Classic (11/2012)
BofA BBR (04/2013) | FNBO/Overstock.com (02/2014) | Barclaycard Arrival (04/2014) | FIA/Fidelity AMEX (04/2014)
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ComputerWizMaster
Posts: 76
Registered: ‎05-26-2011
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Re: Whoa. Banks make a ton of money from interchange fees.


trumpet-205 wrote:

ComputerWizMaster wrote:

This isn't limited to Credit Cards and also covers Debit cards as well. Banks make a lot more on interchange fees if you use your debit card as "credit" and not "debit" (this is why they offer rewards and other incentives for you to choose "credit").


Unfortunately, most merchants now days are very smart when it comes to debit card. Walmart, Target, or any other reputable merchants will force "debit", not "credit", when you use debit card (you will be forced to use PIN instead of signature). On top of that debit card interchange fee is capped at 21 cents. Hence why 99% of debit cards in US no longer offers rewards, since interchange fee banks earn is capped.


Yes, but the only caveat to that is that the card be used in "debit" mode. You'll find many cards offering rewards if you use "credit" and the merchant hasn't locked you out of the option.

 

Feb. 2012: TU: 677 EQ: 647 EX: 666
Aug. 2013: TU: 729 EQ: 726 EX: 697
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Valued Contributor
Crashem
Posts: 3,096
Registered: ‎01-26-2012
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Re: Whoa. Banks make a ton of money from interchange fees.

From what I understand with Card act and change in consumer behavior, less of banks revenue coming from fees and interest.  Interbank fees driving profits.  Although it think op math is a little off.  Amex has higher fees than visa/mc for the most part.  Visa sig and reward card get higher rate.  Amex is like 1-2% higher usually.  Basically with high rate cash back, they are depending on you to use card not in bonus categories.  So if you only use for 5% categories, they are losing money on you.  Obviously lender to lender have different strategies.  First premier lives off fees.  Amex been pretty much using interbank fees to drive their profit model.  Why do you think Amex doesn't like you keeping balance even though they give you 0% bt.  They aren't used to that model.  More banks trying to emulate Amex model like chase (who is run by former Amex guy) for the initial reasons I listed.

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Regular Contributor
HenryJumbo
Posts: 143
Registered: ‎07-21-2012
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Re: Whoa. Banks make a ton of money from interchange fees.

The banks are betting on you accruing a fee. They make a fee on each purchase (about 2.5% or higher) and they kick you back a penny (0.01) for each dollar you spend. You need to push $10,000 through a card offering 1% cash back to get $100. Most people won't spend $10,000 in a year, but are more likely to get a $35 late fee, or over the limit fee or carry a balance and accrue interest, which negates any cash back reward you would have. Very simple math.

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ACsteel
Posts: 237
Registered: ‎08-19-2012
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Re: Whoa. Banks make a ton of money from interchange fees.

It's all about those annual fees I tell ya ! lol wth do I know.


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