Ever wonder how it all works? I do. I am trying to figure out how CC Co.'s make money here.
The way I see it, your average personal Visa/MC rewards card gets about a 2.6%+/- discount swipe rate and the business gets aboout 2.8%+/-. Amex is different.
Now, Visa and MC get a chunk of that. How much? I don't know. But it's obviously a portion of it. Then, what's left over goes to the CC issuer.....Cap1, Chase, Citi etc. etc.
So, you have obviously something less than the swipe rate going to the card issuer. Now, when they give 1% to 1.5% cash back, it's clear that there's something left over for the issuer. But at 2% there's probably very little.
A telling example is Cap1 with the Spark and Cash Rewards. The Spark business card gives a flat 2% cash back. But they are dealing with a swipe rate around 2.8%. So, there's some net for Cap1 at 2%. But the Cash rewards has a lower swipe rate...probably in the 2.2-2.5% range. Not sure exactly. But it gives 1% cash back and then a 50% bonus at the end of the year. Obviously holding that 50% over the course of the year has its perks for Cap1. They earn interest a little longer before paying it out.
Now, I'm assuming that people getting into trouble or accruing interest is a large factor in making money with these cards. But without knowing the percentage that does this on average, it's hard to gauge the risk incurred by the issuer.
But what really makes me wonder is when they pay 3-6% cash back on some categories. They are obviously losing money to some extent. I am assuming it gets written off as marketing or something to that effect. However, even for the segment that pays in full every month (not sure how big that group is) is the assumption that people use the card for more than just the bonus categories? What if they don't?
I mean, in the end, how many are like me? Someone who uses cards only for the bonus categories and pays in full every month. I have to be a loss.
I only use my Chase Ink for the 5% stuff. I only use US Bank for the 5% stuff and I only use PenFed Platinum for 5% gas and 3% groceries. And I never pay interest. How can they be making money off me? Or, is it that my profile is the exception and they "put up" with people like me to make money from others?
I suppose if more people used rewards like I do, they'd probably shrink down rewards and just beef up the non-rewards cards with better interest rates.
Any thoughts?
Start (Sept 2011): low-mid 600s. NOW: TU FICO: 801, EQ FICO 808, EX FICO 798 (PSECU). Goal: Achieved! Now Maintain!
trumpet_205
"Actually, a lot of cardholders end up paying interest and associated fee. Just to give you a picture take First Premier for example. Even though FP has extremely high fee/interest they are still the 10th largest credit card issuing bank in US. Capital One who specialized in subprime lending is the 4th largest issuing bank in US. I once watched a video that says ~60% of cardholders in US are subprime.
Then there is also the fact that a lot of cardholders forgot to redeem rewards. There is also a lot of cardholders use non-reward CC. Those who PIF and redeem rewards are a small fraction of the pie."
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Well, that MUST be the case. US Bank, just today, is already on the hook for over $111 cash back with me with a $25 dollar bonus prepaid card to come as well because I charged $2231.31 at 5% cash back. The remainder of my current balance, about $125, is also 90% at 5% cash back and the rest is 2% cash back. That's how this card, and the others that pay out that much, work with me.
For some perspective, JPM pulls in about $12B per year in credit card interest and another $4B-ish in noninterest items like fees and swipe revenue from a portfolio of about $125B in outstanding CC loans... Needless to say, there are plenty of folks out there who are paying interest on their credit cards, and yes, they subsidize the PIF rewards-chasers you tend to find on sites like myFICO. 
ajh5408,
Yes. Points well taken. However, it all just begs the question:
If the traditional non-rewards cards are so lucrative, why even bother with generous rewards cards?
The answer must be that even generous rewards cards holders wind up making the CC issuers enough money to be worthwhile. Obviously, I don't have any market research numbers on your typical rewards card holder and what the tendencies and trends are.
But as to your points on JPM Chase, how much of that revenue comes from cards like the Freedom and CSP, for example?
CribDuchess,
I took Bill Pay and Restaurants (non-fast food) as my 5% categories. And Bill Pay was 100% of the reason I got the card. I was very thorough in peppering the CSR's with questions before being sufficiently satisfied to apply.
Restaurants was a no-brainer for me on my other category. We eat out at least twice per month.
As for Bill Pay, as long as the transaction is coded as an accetable category for Bill Pay, it works. For example, today I paid a portion of my commercial electric bill with the Cash+. I called US Bank and literally had the CSR wait on the phone while I paid a portion of the bill through my electric utility company's third part payment processor for credit cards. When the transaction went through (with a $4.95 fee), I had the CSR tell me how it was coded. She said it came through as "electric utility" and that it was acceptable as a 5% bonus category. I was very happy. That $4.95 fee was more than offset by the $30 I got on my $600 payment. Now whether I get 5% of the fee as well remains to be seen. Anyway, I did this 3 times and paid $1800. At least $90 cash back....$75.15 net after the fees. I also paid my home owners insurance on my new rental property in full for $431. That's another $21.55. Next month, I'll be adding my Gas Bill. Whether you pay over the phone or online makes no difference. It works.
Keep in mind that some of these, like Electric and Gas, will likely have fees associated with the transaction. But at 5%, the fee is always more than offset. Also keep in mind that sites like ChargeSmart are expensive and not always the best way. My electric utility was eligible to pay through them and it would have cost double. Luckily I was aware of Bill Matrix as another payment processor for my electric. They, as it turns out, are also the processor for my gas utility. The fee is a flat $4.95 per $600. So, it can happen that I get screwed if my bill is $650 because I pay $4.95 twice. But I can always pay small balances seperately through my checking.