How do Credit Card Companies make Money

How do Credit Card Companies make Money – Analysis

How do Credit Card Companies make Money

Do Credit Card Companies Make Money if you pay full? Many noobs still ask this despite the rise of the Fintech StartUps and Wallets!  Credit Cards is one such thing that many people can not live without and many people don’t even want to use one.  If used right, can save you lot of money in terms of interest on investments (short term) or get you loyalty points and so on, but if used wrong, will spare no horror in your way to mess up your credit life and financial life forever.

Since so many people use it, there is fierce competition in the credit card issuing market and thus customers have a lot of choice when it comes to choose the right credit card for you. Many smart cookies do wonder as to How do Credit Card Companies make Money or What is the Business Model of Credit Card Companies etc etc.  Here is a comprehensive analysis of what I understand from the working of Credit Card Companies.

How do Credit Card Companies make Money

For understanding this, we first need to understand How Credit Cards Work.

How Credit Cards Work

Let’s take an example, You have recently got a credit card and Suppose You Buy 30,000 INR worth of Goods from India (in local currency) and about 100 USD worth of Goods from a US E-Commerce Site with shipping to India.  All these goods are purchased between 2nd and 25th of the month. Following are the facts surrounding your Credit Card:

  • Bill Cycle : 1st of the Month to 31st of the Month
  • Bill Generation Date : 1st of Every Month
  • Bill Payment Due Date : 16th of Every Month
  • Late Payment Interest Charge : 3% pm for Entire Outstanding Amount
  • You get billed for Credit Card Annually : 2000 INR
  • Minimum Amount Due : 20% of Bill

Now the moment we cross 31st of the Month, bill gets generated on 1st, as per above example, the total bill would be 30,000 INR + 100 USD (Converted to INR) + Charges if any + Interest if any + Outstanding payment if any.  Thus the total bill would look like an addition of following amounts:

  • 30,000 INR
  • 100 USD (@ 67 INR Conversion Rate) = 6700 INR
  • Foreign Currency Conversion Charges = 3.0% of 6700 INR = 201 INR
  • Service Tax on Conversion Charge = 14.5% of 201 INR = 29.15 INR
  • Credit Card Charges = 2000 INR
  • Service Tax on Credit Card Charges = 14.5% of 2000 = 290 INR
  • Total Bill = 39,220.15 INR Payable by 16th of Next Month
  • Minimum Amount Due = 7844.03 INR (20% of 39,220.15)

Now there are four scenarios:

  • Either you pay the full amount due – Zero Interest Charges in the Next Bill
  • or You pay partial amount more than minimum amount due – Interest Charges @ 3.0% on outstanding amount for the period till which payment is not made
  • or You pay partial amount less than minimum amount due –  Interest Charges @ 3.0% on complete amount for the period till which payment is not made
  • or You don’t pay at all – Interest Charges @ 3.0% on complete amount for the period till which payment is not made and reduction of credit score.

How do Credit Card Companies make money becomes easier with this information in hindsight.

Here is a Related Article You Must Read: How do Insurance Companies Make Money

How do Credit Card Companies Make Money

Please keep the above example in mind for reading this section out, Credit Card companies have the following revenue streams:

  1. How do Credit Card Companies make money on Credit Card Sign Up Charges
    • Charges at the time of signing up for the credit card.  Fixed non recurring fee.
  2. How do Credit Card Companies make money on Credit Card Renewal Charges
    • Billed to Customer Annually, Recurring Fee.
  3. How do Credit Card Companies make money by Interest Payment on Outstanding
    • Interest is charged to customer on the outstanding amount (full or partial) at varying interest rates per month.  This is the highest contributor to the top line of credit card companies.
  4. Foreign Currency Conversion (while transaction payment) charges
    • When you purchase something outside your country and make payment to the vendor by credit card in the currency of that particular country, the credit card company in your home country while billing to you will convert that transaction rate at a certain conversion rate and levy a foreign currency conversion charge to you.
  5. How do Credit Card Companies make money by Co-Branding Activities
    • The credit card statements that are sent across to you either as a e-statement of a hard copy at your address contains advertisements with names of 3rd parties.  The company charges these 3rd party advertisers
    • Co-Branding can also be done on Credit Cards with the logo of the advertiser (like Citi Jet Miles Card : Citi Bank Credit Card with Jet Airways Logo) – I know this is a cheesy way for Credit Card Companies to make money, but money is honey baby.
  6. 3rd Party Product Sale Commission
    • While you’re buying a credit card, the sales executive may also pitch to you a bank account, mutual fund investment, insurance coverage or any other investment or liability product for which the credit card company makes a commission
  7. How do Credit Card Companies make money by POS Systems (Transaction Discounting Rate – TDR)
    • POS is Point of Sale – The machine on which Credit Cards are Swiped while making a sale
    • These POS systems are sold to the merchant, who is wishing to accept credit cards from its customers, at a fee – One Time Fee
    • Post installation all transactions that are processed through the banks’ POS are discounted by 1-2% at the time of settlement to the vendor (100 Rs swiped at the POS, the vendor will receive 98 INR)
    • This is second highest contributor to the top line of credit card companies
    • See Detailed Post on Payment Gateway Business Model to Better Understand this.   Potentially related business model is that of Structured Settlement Annuity Companies.
  8. Vendor Settlement Cycle Interest Earnt
    • All the transactions at a Vendor POS are settled at regular intervals
    • The time for which the money of the transaction is lying with the issuing bank, it is invested into short terms securities or investment bonds to earn some money out of it.
  9. Reward Point Redemption Revenue
    • Companies wanting to tie up with the credit card company to give bonus points to the sales made via their credit card have to pay up some upfront fee (I’m sure you never realised this is How Credit Card Companies make money)
  10. Inward Integration of Payment Gateways
    • All Payment gateways who have to build a particular banks credit card into their infrastructure have to pay an upfront fee for getting their APIs
    • Post installation all transactions processed via their API is charged at TDR (this TDR is slightly lower since the volumes are high)
  11. Conversion of Outstanding into Easy EMIs
    • Banks offer their customers to convert their outstanding amount into an EMI at an interest rate, thereby earning money on that particular order or entire outstanding

Here is a Related Article You Must Read: How do Banks Make Money

This was it on How do Credit Card Companies make money!  Phew, Never realized that these monster organizations have so many different sources of revenue.

Disclaimer: The understanding of the How do Credit Card Companies make money is of the Author’s himself, neither any credit card company (local or global) or qualified consultants have confirmed or explained the same to the author and the descriptions, stats, facts and figures, if used, are either obtained through secondary web research or interrogation of relevant search professionals or other resources on the web.  Please use your own discretion to use this info when required and by continuing to read, you agree to indemnify the author & Unicornomy from the entire liability arising out of using this info on your own.

Unicorn Economy
Unicorn Economy is your answer to all startup related queries with respect to business strategy, business model analysis and consulting. One stop stop for business plan and financial model development.

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