I recently received a snail mail letter from my bank thanking me for being a 30 year customer. In it was the number of checks I’ve written, and other somewhat fun trivia, and they also noted that I’ve never paid a finance fee at any point on my credit cards.
Knowing that there is still a fee paid by the retail outlets to use the credit card my question is this: Has my bank made money off me being a credit card customer receiving only that 1 to 3% and potentially only an annual fee? Or do they need the finance charge to turn a profit?
(Googled this but didn’t find a definitive answer.)
Probably. The interchange fees are enough to make the account profitable if you use the cards regularly, lets say charging at least a few hundred dollars per month. Even if you get incentives, like cash back on purchases or airline miles, the interchange fees are high enough to finance those benefits and still make the account profitable. The bank may also get a bit of extra revenue by advertising to you, like sending you solicitations to refinance your mortgage or to buy insurance.
1% for a max of 30 to 60 days ( 60 If you buy just after the last bill was issued) at say, more typically 2%? How can the bank not make money? A lot of the processing and handling is done by computer with no human intervention, especially if you pay online too.
The cards with rewards - air miles, cash back, etc. - apparently charge higher merchant premiums, I’m told.
Credit card companies’ interest income is significantly larger than their interchange income, and their non-interest expenses are greater than their non-interest income.
So I think the answer is probably no. The average customer that never directly pays any fees or interest is a net loss for credit card companies. If you pay an annual fee, then the answer could easily be yes, depending on the fee. Look at the income per user table.
But I would think “non-interest expenses” likely includes things like credit approval process, chasing down delinquent customers, addressing fraud problems, other overhead, dealing with merchants, etc. Most of these are to address outliers. The average “nice” customer who pays off every month may not generate 28% income on outstanding balance (i.e. license to print money) but they would be a trouble-free source of steading income rather than an expense burden.
In the past, I worked in collections and fraud for a major bank credit card operation. I saw the bad debt loss numbers and let’s just say they were quite significant when compared to revenue.
You bank may not make money off of your credit card, but they may make money off of businesses that take credit cards.
The only time I ever carry a balance is when they want me to get a new credit card, and give me 18 months no interest. Then I just use that card till it’s at its max, and sit on that fee money until it comes time to pay it off.
And yet, they keep wanting to give me more and more credit. They are certainly making money off me somehow.
If banks didn’t make money on credit card customers who pay in full every month, they’d change the structure of the credit card agreement so that they did make money.
Right, when regulations around overdraft fees changed, a lot of banks quit offering “free” checking accounts and started charging monthly maintenance fees for them.
Well someone’s not cut out to be a bank executive, thinking that it’s acceptable for anyone to have any relationship with the bank that doesn’t generate profit for the bank.
I’ve never paid interest on my credit card, but, if I were to mess up and miss a payment just once, that’d be a decent payday for them.
How many people never miss a payment? They may well be banking (heh) on a number of those who pay off every month just missing a couple over their lifetime, and that being enough profit to make it worthwhile.
I’ve worked in credit cards for almost 20 years. There are exceptions to everything, but if you have been using your card even moderately, your bank has almost certainly been making money from you. As a whole, customers who behave like you, spend on their card every month and pay it off, are a very profitable group. The revenue per account is lower than folks who revolve a balance, but much (and sometimes all) of that is offset by the fact that the “pay off each month” crowd is very low risk and has very low loss rates.
I have read many comments over the years saying that banks hate people who pay off their balance every month and that they are called “Deadbeats” (they are not). If you do this, your bank loves you. I spent much of the last five years trying to build a portfolio with as many people like you as I could get.
At interchange fees for the issuing bank of around 2 per cent, even moderate credit card use of a few hundred dollars a month will translate into a stream of a few dollars’ worth of revenue to the bank each month. Not an awful lot, but it’s steady, easy, risk free, and at low expenses - the marginal cost to a bank of keeping an account for the always-paying-in-time customer somewhere in its IT is practically zero.
Correct me if I am wrong, American Express was always a “charge card” rather than a “credit card”. As in you were required to pay off the balance every month. And they seemed to make money.
I think they did charge merchants more than visa/Mc. And now Amex does offer “credit cards”. but the basic green Amex is still a “charge card” as far as I understand.
Back in the 1980’s I took a bus service to a ski resort out of town. The driver said they took Visa and MC but not Amex. When I asked why, he said that it could take up to 3 months to get their money out of Amex.
So presumably, that’s their angle. Back then, Amex was the go-to card for the rich who spent like drunken sailors. (Hence the “no limit” angle) Not sure if it still applies today, but 35 years ago, they had high-rollers paying the full balance and then they had that “float” for a month or two earning interest in the bank or wherever until they paid it out. I suppose they could get a percent or two in a month off your full payment which would almost match getting 2% from the merchant.
That’s us! We’ve had a credit cards for 40+ years, never with an annual fee, and have always paid them off every month.
We also buy cars with cash.
ps: my car just died, and I found a $3000 car (a manual from '99), because that’s how much money I had in my checking account.
The way it started wasn’t that you had to pay it off every month, but rather that you have to pre-pay.
American Express’s foray into financial services started as money orders and traveler’s checks. The idea behind a traveler check was to keep you from having to carry large amounts of cash. If lost or stolen, they could be replaced. They could be cashed in at nearly any bank, and many businesses would accept them as well.
They were very useful before the advent of credit cards being more or less universally accepted.
At a certain point, they started offering a card that did much the same thing, but, like a traveler’s check, had to be pre-paid.
They do still offer traveler’s checks, but I don’t know why anyone would actually get one anymore. Last time I saw one was the late 90’s, and that was quite the rarity.
They still do.
Back in the 80’s, a business had to take a carbon copy of your card, and then actually send it in to the credit card company, then wait for them to send back a check.
Amex may have just been slower at processing, or may have lower priorities towards small businesses like a bus service in a ski resort.
Today, funds can be deposited the same day as the charge is made. Many still don’t take Amex, as they do have a higher processing fee.