Most credit cards have reward programs. How are they making a profit while giving me “free” stuff?
In: Economics
They are banking (… no pun intended) on you not paying off your balance on a regular basis so that you wind up paying interest. Because 12% interest on a $100 balance is going to give them more than 1% cash back points on a $100 purchase. The rewards are incentive to get you to spend more on your card. Plus they make money off of transaction charges (every time you swipe a card, there’s a charge that usually the merchant pays). So even if you do pay the balance off it’s a win-win for you and them.
By giving away less free stuff than they make on the profit. Banks have been doing it for ages, giving you interest to incentivise you to use their service, but always giving you less than they make in fees and from other ventures.
You buy something on a credit card and merchant pays 3% of purchase in processing fees. The credit card company basically gives you 1/3 to 1/2 of that. They also hope your earning points, etc. will compel you to spend more, hopefully carry a balance that accrues huge interest payments. And the higher rewards programs have annual fees. So you pay $95 to then get 2% back, meaning the first $5k is basically them giving your money back to you.
People say interest, in practice merchant fees are more interesting/the more important reason.
As others have said, every time you swipe your card, the merchant has to eat a small fee for swiping said card, known as the interchange fee. Some of this fee goes to the card processing company (Mastercard/Visa for example) but most goes to the from the bank from which the money is pulled. Visa and Mastercard do set limits as to how high this fee can be for banks but nonetheless each bank sets its own fees based on a few different rules that Visa and Mastercard set. Merchants however sign clauses with Visa and Mastercard that they have to honor all banks/cards running that system.
This means a few things:
1. if you are using a debit card or something that doesn’t offer rewards, you are paying more than someone who does, and you are essentially paying for the other person’s benefits. Additionally, these cards also have a lower interchange fee typically, hence why some stores will more readily accept debit cards over credit.
2. There has been a recent pushback against this whole system since the increasing amount of credit card rewards pushes the cost onto merchants generally. Visa and Mastercard generally have a lot of subdivisions for type of merchant and card type. In recent years, banks have lobbied them to add new card types with higher interchange fees to pay for their rewards to entice customers to go with their cards, and they generally have to agree to this because if say Visa doesn’t then they go to Mastercard, which will. Merchants have responded in many different ways, increasing prices for instance, some are seeing if they can challenge the “honor all cards” clause, or for instance, one of Kroger’s child companies made a rustling last year by refusing to accept Visa all together because of this.
Because they’re making such insane profits that they can afford to give you a small kickback.
For the same reason you’re still getting poor even though “free stuff”, let Andy explain
https://www.youtube.com/watch?v=TI59NU-q5YA
They are charging you for it as interest and fees.
Cards with reward programs generally have higher fees and interest.
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