topic Re: Swipe fees in Credit Cards

Swipe fees

Anonymous — Tue, 06 Oct 2015 21:24:45 GMT

I'm curious about learning about Swipe Fees. I have some basic questions that I actually feel like I know the answer to, but asking anyway for confirmation, and then some others I'm genuinley curious about.

1) Who gets the swipe fee....the bank, or the network? I.E. Chase Freedom..does Chase get a cut or does Visa?

2) If it's the network...how does the issuing bank make profits on CCs? Or are PIF customers non-profitable?

3) Are swipe fees 'per swipe' or are they a percentage of the transaction? Is a single $5 charge worth the same as a single $5000 charge to the group receiving the fees?

4) Do the different levels have different swipe fees? IE Visa vs. Visa Sig, WMC vs. WEMC, etc?

5) Are Amex/Discover higher in swipe fees which is why they aren't as accepted as Visa/MC?

Re: Swipe fees

Anonymous — Tue, 06 Oct 2015 21:49:02 GMT

1) Who gets the swipe fee....the bank, or the network? I.E. Chase Freedom..does Chase get a cut or does Visa?

The issuing bank, the processor, and acquiring bank all take their cut of the fee.

2) If it's the network...how does the issuing bank make profits on CCs? Or are PIF customers non-profitable?

Issuers make money through fees, interest, and a portion of the swip fee. Customers who PIF, transactors, aren't as profitble as revolvers, but the issueiing bank still makes money through their portion of the swip fees.

3) Are swipe fees 'per swipe' or are they a percentage of the transaction? Is a single $5 charge worth the same as a single $5000 charge to the group receiving the fees?

Fees are per swipe, some are a percentage of the transaction, while others are a flat fee. Larger merchants typically negotiate their fees, but smaller merchants usually have to pay what the processor charges.

4) Do the different levels have different swipe fees? IE Visa vs. Visa Sig, WMC vs. WEMC, etc?

Different cards incur different fees, WEMC/Visa Sigs/rewards cards incur larger fees than plain ol' cards, this helps pay for the benefits associated wit the cards.

5) Are Amex/Discover higher in swipe fees which is why they aren't as accepted as Visa/MC?

Amex usually charges the highest fees; however, each card type charges their own fees. I read somewhere there are over 100 different fees based on the type of card.

Re: Swipe fees

ojefferyo — Tue, 06 Oct 2015 21:52:54 GMT

@Anonymous wrote:
I'm curious about learning about Swipe Fees. I have some basic questions that I actually feel like I know the answer to, but asking anyway for confirmation, and then some others I'm genuinley curious about.

1) Who gets the swipe fee....the bank, or the network? I.E. Chase Freedom..does Chase get a cut or does Visa?
2) If it's the network...how does the issuing bank make profits on CCs? Or are PIF customers non-profitable?
3) Are swipe fees 'per swipe' or are they a percentage of the transaction? Is a single $5 charge worth the same as a single $5000 charge to the group receiving the fees?
4) Do the different levels have different swipe fees? IE Visa vs. Visa Sig, WMC vs. WEMC, etc?
5) Are Amex/Discover higher in swipe fees which is why they aren't as accepted as Visa/MC?

I beleive the card issuer gets the swipe fees and the processor gets the percentage fee. The fee is per swipe and a percentage of the amount so a single $5 is not the same as $5000. Debit transaction charge 1 flat fee for whatever the amount is. And Amex/Disocver does charge different fees. Amex being the highest for us. We routinely pay Amex around $4500/month in their fees

Re: Swipe fees

CH-7-Mission-Accomplished — Tue, 06 Oct 2015 23:30:19 GMT

@ojefferyo wrote:
@Anonymous wrote:
I'm curious about learning about Swipe Fees. I have some basic questions that I actually feel like I know the answer to, but asking anyway for confirmation, and then some others I'm genuinley curious about.

1) Who gets the swipe fee....the bank, or the network? I.E. Chase Freedom..does Chase get a cut or does Visa?
2) If it's the network...how does the issuing bank make profits on CCs? Or are PIF customers non-profitable?
3) Are swipe fees 'per swipe' or are they a percentage of the transaction? Is a single $5 charge worth the same as a single $5000 charge to the group receiving the fees?
4) Do the different levels have different swipe fees? IE Visa vs. Visa Sig, WMC vs. WEMC, etc?
5) Are Amex/Discover higher in swipe fees which is why they aren't as accepted as Visa/MC?
I beleive the card issuer gets the swipe fees and the processor gets the percentage fee. The fee is per swipe and a percentage of the amount so a single $5 is not the same as $5000. Debit transaction charge 1 flat fee for whatever the amount is. And Amex/Disocver does charge different fees. Amex being the highest for us. We routinely pay Amex around $4500/month in their fees

I think it would be the oppositve. The processor would get a flat fee for processing and the credit card company would get their percentage - 3% or whatever. Since the credit card companies are now paying up to 2% cash back, they have to collect 3% to cover costs, pay cash back, and made a small profit on those who don't carry a balance.

Re: Swipe fees

mitchblue — Tue, 06 Oct 2015 23:40:15 GMT

How about using a card online? I know this is a dumb question but is there a swipe fee if I buy something on Amazon?

Re: Swipe fees

CH-7-Mission-Accomplished — Tue, 06 Oct 2015 23:48:46 GMT

It's the same. You can bet that Amazon has negotiated the lowest imaginable CC fees/discounts though due to their size. There is still a credit card processor to be paid and the bank needs to make a little bit off those who pay in full.

Re: Swipe fees

mitchblue — Tue, 06 Oct 2015 23:49:59 GMT

@CH-7-Mission-Accomplished wrote:
It's the same. You can bet that Amazon has negotiated the lowest imaginable CC fees/discounts though due to their size. There is still a credit card processor to be paid and the bank needs to make a little bit off those who pay in full.

Thanks.

Re: Swipe fees

Anonymous — Tue, 06 Oct 2015 23:50:34 GMT

@mitchblue wrote:
How about using a card online? I know this is a dumb question but is there a swipe fee if I buy something on Amazon?

Of course. Think of the whole charge to the merchant as "cost of accepting credit cards", nothing to do with a physical swipe. And card-not-present transactions will usually have a higher fee (before taking into account Amazon volume) because of the greater risk of fraud.

Re: Swipe fees

mitchblue — Tue, 06 Oct 2015 23:51:58 GMT

@Anonymous wrote:
@mitchblue wrote:
How about using a card online? I know this is a dumb question but is there a swipe fee if I buy something on Amazon?
Of course. Think of the whole charge to the merchant as "cost of accepting credit cards", nothing to do with a physical swipe. And card-not-present transactions will usually have a higher fee (before taking into account Amazon volume) because of the greater risk of fraud.

Like I said, dumb question. I was thinking physical swipe. Thanks.

Re: Swipe fees

Anonymous — Tue, 06 Oct 2015 23:56:31 GMT

There is a breakdown of charges, from a merchants point of view, all over the web, see, for example

http://www.cardfellow.com/credit-card-processing-fees/

Re: Swipe fees

Anonymous — Wed, 07 Oct 2015 02:21:33 GMT

@Anonymous wrote:
There is a breakdown of charges, from a merchants point of view, all over the web, see, for example

http://www.cardfellow.com/credit-card-processing-fees/

Wow, great link! Thanks for that. Really interesting breakdown. Did not realize so many fees went into it!

Re: Swipe fees

Anonymous — Wed, 07 Oct 2015 02:22:57 GMT

@Anonymous wrote:
There is a breakdown of charges, from a merchants point of view, all over the web, see, for example

http://www.cardfellow.com/credit-card-processing-fees/

Great link! Thanks for that. Lots of good info here. Didn't realize there were so many fees!

Re: Swipe fees

TheConductor — Wed, 07 Oct 2015 15:35:39 GMT

@Anonymous wrote:

2) If it's the network...how does the issuing bank make profits on CCs? Or are PIF customers non-profitable?
Issuers make money through fees, interest, and a portion of the swip fee. Customers who PIF, transactors, aren't as profitble as revolvers, but the issueiing bank still makes money through their portion of the swip fees.

This is totally true. However, I would add that without the PIF customers, the profits on the revolvers would not be possible without significant changes to the terms of most credit cards.

A credit card product with its portfolio of borrowers is very much like an investment portfolio - it needs diversity to provide stable income.

If everyone in the portfolio is a revolver, you're constantly having to borrow money to cover payments to merchants for their purchases, and that is not an infinite supply. You need PIF customers to provide cash flow and liquidity, and to guard against the risk that your revolving customers will default.

Having the Barclaycard Ring has been a very educational and eye-opening experience, since they provide detailed reporting about the card's financial performance to cardmembers. Two things are immediately apparent when you look at their reporting:

Interest is by far the largest source of income, but
Outstanding unpaid balances are by far the greatest expense, followed by bank borrowing as the second greatest expense

For most non-sub-prime cards on the market, a balance has to be maintained between these two facts, and the two kinds of borrowers, to maintain profitability.

Technically you can run a profitable card that is almost entirely revolvers, but that's how you get the kinds of cards we see at the sub-prime level: annual fees, little-to-no rewards, absolute minimum cost and quality of customer servicing, and extremely high interest rates.

Technically you can also run a profitable card that is almost entirely transactors, and that's how you get Amex charge cards: higher swipe fees (plus you keep more of those fees by being both the bank and the network), higher annual fees, and even though it's a charge card, behind the scenes you are offering selected cardmembers the "pay over time" option to get some revolvers in the mix.

For most other cards, a healthy mix is what makes the whole operation work. It's more about a profitable portfolio of customers than it is about how profitable any one customer is.

Re: Swipe fees

CH-7-Mission-Accomplished — Wed, 07 Oct 2015 16:52:03 GMT

@TheConductor wrote:
@Anonymous wrote:

2) If it's the network...how does the issuing bank make profits on CCs? Or are PIF customers non-profitable?
Issuers make money through fees, interest, and a portion of the swip fee. Customers who PIF, transactors, aren't as profitble as revolvers, but the issueiing bank still makes money through their portion of the swip fees.

This is totally true. However, I would add that without the PIF customers, the profits on the revolvers would not be possible without significant changes to the terms of most credit cards.

A credit card product with its portfolio of borrowers is very much like an investment portfolio - it needs diversity to provide stable income.

If everyone in the portfolio is a revolver, you're constantly having to borrow money to cover payments to merchants for their purchases, and that is not an infinite supply. You need PIF customers to provide cash flow and liquidity, and to guard against the risk that your revolving customers will default.

Having the Barclaycard Ring has been a very educational and eye-opening experience, since they provide detailed reporting about the card's financial performance to cardmembers. Two things are immediately apparent when you look at their reporting:
Interest is by far the largest source of income, but
Outstanding unpaid balances are by far the greatest expense, followed by bank borrowing as the second greatest expense
For most non-sub-prime cards on the market, a balance has to be maintained between these two facts, and the two kinds of borrowers, to maintain profitability.

Technically you can run a profitable card that is almost entirely revolvers, but that's how you get the kinds of cards we see at the sub-prime level: annual fees, little-to-no rewards, absolute minimum cost and quality of customer servicing, and extremely high interest rates.

Technically you can also run a profitable card that is almost entirely transactors, and that's how you get Amex charge cards: higher swipe fees (plus you keep more of those fees by being both the bank and the network), higher annual fees, and even though it's a charge card, behind the scenes you are offering selected cardmembers the "pay over time" option to get some revolvers in the mix.

For most other cards, a healthy mix is what makes the whole operation work. It's more about a profitable portfolio of customers than it is about how profitable any one customer is.

There is another concept that has to be considered with revenue from transactors versus revolvers.

The concept is called velocity and is taught in business school. The example is how grocery stores are profitable on very low margin items because they are sold very quickly and sold over and over. So just because the markup is say 3% does not mean that 3% is the store's annual profit level. They are earning 3% on every transaction on items sold many times per month, sometimes many times per day.

With two people with a credit card with a 5K limit, look at the revenue from transactors versus revolvers.

Person A runs up their 5K card to the limit right away and must pay it back over time. Let's say one year. So the revenue is based on 18% interest on the declining balance. So "best case" revenue would be 18% if they customer did not pay off the card at all (which won't happen). And since the card is maxed out, they cannot use it so no more swipe fees.

Person B always pays in full their card every single month. Let's assume it is an AMEX that requires PIF. If the credit card company gets 2% out of the transaction (I am making that up) and the customer charges $5000 every month on the card, the lender would make 2% X 12 months = 24%. So in this example the transactor is more profitable.

To make the two equal you would have to have the revolver's interest rate at 24% to generate the same revenue as the transactor paying in full every month. And the transactor has no borrowing cost to the lender. The lender is using your money for a month on the float.

The revolver requires the lender to borrow from depositors or the credit markets. So if their cost of funds is 3%, they actually earn 18% less 3% = 15%, and that is not counting any bad debt write-offs, which can be very significant.

It is not true that all revolvers are more profitable than transactors if the lender is getting to keep a healthy chunk of the swipe fees.

Re: Swipe fees

Open123 — Wed, 07 Oct 2015 16:27:12 GMT

@CH-7-Mission-Accomplished wrote:

It is not true that revolvers are more profitable than transactors if the lender is getting to keep a healthy chunk of the swipe fees.

When I read mainstream publications quoting the term "dead beats" used by CC insiders to denote transactors, the term is applicable assuming a similar level of spending and near ZERO default risk.

In real world models, high transactions are preferred, since the the velocity of revenue is higher with a near ZERO default risk. This in turn, allows for much lower Bank reserve requirements. Revolving balances carry a much higher default risk with limited onoging transaction revenue. Moreover, big Merchants only care about "transactions," hence the unusually high leverage Amex has with Merchants who sell discretionary merchandise.

A revolving balance at 90% utility with a low or 0% APR would be the worst of both worlds, from the Issuer's perspective.

Re: Swipe fees

Anonymous — Thu, 08 Oct 2015 05:53:40 GMT

@Anonymous wrote:
I'm curious about learning about Swipe Fees. I have some basic questions that I actually feel like I know the answer to, but asking anyway for confirmation, and then some others I'm genuinley curious about.

1) Who gets the swipe fee....the bank, or the network? I.E. Chase Freedom..does Chase get a cut or does Visa?
2) If it's the network...how does the issuing bank make profits on CCs? Or are PIF customers non-profitable?
3) Are swipe fees 'per swipe' or are they a percentage of the transaction? Is a single $5 charge worth the same as a single $5000 charge to the group receiving the fees?
4) Do the different levels have different swipe fees? IE Visa vs. Visa Sig, WMC vs. WEMC, etc?
5) Are Amex/Discover higher in swipe fees which is why they aren't as accepted as Visa/MC?

lol you started this thread because of me, didnt ya?

Re: Swipe fees

Anonymous — Thu, 08 Oct 2015 21:32:32 GMT

Maybe, lol. The post that made me ask this was because I read somewhere that WEMC has higher swipe fees compared to WMC. It was some topic that was talking about WEMC vs WMC.