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If you mean “where do they get their income”, then the merchant generally pays from 2-5% of the transaction to the credit/charge card company. Charge cards usually charge more than credit cards because they have no income from interest charges on outstanding statements.
But they don’t get that ‘income’ until after they have lent out the money…
So, like any investor, they take a risk by giving someone money, and hoping the money is returned, with a little extra.
And this money comes from… ?
Most credit cards are issued by banks.
Their own assets or they borrow it from banks.
Let’s say a credit card company loans you money at 14%, but they might have borrowed it from a bank at 7%. As long as you keep paying them, they can pay back the banks for their loan.
Why is it in a merchant’s interest to accept credit cards if they are charged a fee based on their use? Doesn’t that cut into the merchant’s profit?
Elwood, here’s the way I see it: It’s very rare that I have cash on me. If a merchant wants my business, he/she will have the capabililty of taking plastic. They figure 97% or so of a sale is better than 0%.
To a point but the increase/potential increase in sales makes up for that.
I work for a credit card company. We make our money in merchant fees, cardholder fees and finance charges. When you don’t pay your balance off in full monthly, the finance charges you pay are where we make money.
For example, the bank I work for has approximately 30 million active Visa/Mastercard accounts. Let’s say out of those 30, only 10 million pay their balances off in full monthly. That’s 20 million accounts accruing finance charges, late fees, overlimit fees, etc. The late/overlimit fees alone are 29.00 each. It adds up and adds up quickly.
Mainly because they won’t make the sale otherwise. It also lets other people deal with the problems of extending credit. If you wanted cash or check for things you will probably sell a lot less of them.
Yes it does cut into their profit. Handling cash is also not without its costs so it is not as costly as it seems.
My wife and I used to sell books at science fiction conventions; we did not have a store and when we initially looked into the cost of accepting credit cards the costs were higher than we thought would be justified by the possible loss of sales. After a few years we re-examined this position; we were having too many customers who, when they found out we didn’t take plastic, were making only small purchases or none at all. As JuanitaTech pointed out, people don’t carry as much cash as they used to; they also don’t carry their checkbooks.
Nuh-uh. Cecil talked about this at length, but I’m having trouble finding it in the archive. The credit card companies aren’t huge financial institutions but realtively simple bookkeeping and billing operations with no major assets or holdings of their own. The real source of the loan is the issuing bank, who calls the shots and sets the interest rates. If you want to find cheaper credit, don’t think “Visa” or “Mastercard”; just shop around for an issuing bank with good terms. This table shows a list of low interest/no fee cards. The type (AmEX, Visa, MasterCard) is irrelevant. The banks are competing with each other and take responsibility for covering their clients’ purchases, not the card companies. You can apply for any of these (if you’re American, I guess) but your acceptance and credit limit will be determined by your credit history and is up to the bank itself. If you want a low-rate card, you should keep your credit history as clean as possible, just as if you were applying for a bank loan.
Which is exactly what you’re doing.
For the record, I think AmEX is attached to and owned by a single bank.
Then again, technically AmEX is usually a charge card instead of credit card. So I’m off topic.
On closer examination, Jonathan is right. AmEx is in a different category than Visa or Mastercard, though the differences between Visa and MC are trivial and it’s the issuing banks that matter.
As someone who runs a website that takes credit card transactions, yes, I give a percentage of each sale to the cc companies, but it is worth it because offering payment by cc massively increases the number of people who can trade with me, and who want to.
It’s a win-win: the cc issuing companies spend a lot on promotion and advertising to encourage people to purchase with magic plastic. By announcing that I can accept payment in this way, I get the benefit of all their advertising, plus the speed and convenience of most anyone from wherever in the world being able to purchase from me. The cc companies take a slice of the action on every purchase.
Amex is a charge card, not a credit card. Different rules, different reasons for offering. I don’t (commission too high).
So who funds the credit card companies? The merchants do, every time they make a sale. And you do, every time you pay interest on your overdue account.
There are a number of discount computer stores in Montreal (and elsewhere, I assume) that have one price list for cash/debit card/certified check purchases and another (typically 3% higher) for credit card purchases. They’re simply passing the transaction fee to the customer, which is only fair, I guess, since their margins are very tight. With debit cards accepted almost everywhere, I barely used my credit cards anymore, unless there happens to be some promotional tie-in. If I traveled a lot, I would defintely get a credit card that offered air miles.
These days, though, interest rates are so amazingly low that a chimpanzee with a gambling problem could get an APR of 12%. If there was ever a time to establish or rebuild one’s credit rating with careful purchases and steady payments, this is it.
This would be illegal in Michigan – merchants cannot charge more for the use of credit cards. As soon as I cross the Indiana border, though, all of the gas station prices annouce “price reflects cash discount.” I imagine from the wording, then, that in Indiana it’s illegal to charge MORE for accepting credit cards, but it’s legal to give a discount for cash!
Here the Sams Clubs et al don’t accept credit cards. I think I was at a Sams or competitor in Texas, though, that DID accept credit cards, but at a 3% premium.
Off topic but kind of related: I was at my car dealer yesterday, and said he wanted to make sure my bank-issued check was truly a check, not a bank draft. When I asked why, he said they get charged for drafts, but not checks. What’s up with that? Similarly, here in Michigan it is (or was) illegal for credit unions to have checking accounts; instead they were draft accounts. For all appearances, they worked just like checks. Anyone know the deal? I should point out that this dealership is the ONLY new-car dealer I’ve ever been to that didn’t acccept credit cards of any sort!
An additional layer: issuing banks also make money (discounted, of course, by risk) by reselling their credit-card loans on the secondary market through a process broadly known as securitization. Payments coming in from consumers no longer go to the issuing bank, but to the secondary market investors.
(It’s a little like those old Wendy’s ads making fun of Chicken McNuggets: you take a whole bunch of itty-bitty parts - say, several thousand revolving consumer credit card loans bearing 14.9% interest. You mush them all together into one big part - basically a pool. Then you divvy up the big part into a bunch of itty-bitty new parts - the pool sells shares of itself to investors. Parts is parts.)
AMEX is no longer just a charge card - they have many different products. Along with the familar green, gold and platinum cards, they also offer Blue, Platinum Cash Builder, and Optima (among others). At least some of these are credit cards.