The Business of Credit Cards - Part I

Anyone familiar with online affiliate marketing knows that credit card programs offer some of the more lucrative payouts for signing up new users; with some companies offering $30 for a completed application or $160 for a new signup, it is readily apparent that these companies really value new customers. Next, factor in credit card rewards programs; we as consumers love them, since we’re essentially getting paid to spend money using a card from bank XYZ! With all the money that these institutions are throwing at us, how do these companies stay in the black?

How do credit cards end up being a profitable business for the issuers?

Monetization Strategy #1: Annual Fees

Perhaps the most transparent and obvious monetization strategy is the annual fee. It’s worth noting that not all credit cards have an annual fee associated with using them. Those that are most likely to have such a fee attached to them are charge cards from American Express and those credit cards which are marketed to those with poor or flat-out bad credit. Annual fees can range anywhere from $15 per year to thousands of dollars per year, as is the case with the black card from AMEX. For many cardholders that don’t use their card very frequently, the annual fee more than pays for the total costs attached to maintaining that individual’s account, as there simply isn’t that much to do in order to do so! For the more prodigious users of plastic, the annual fee only covers part of the costs for that consumer’s use of credit, and must be combined with one of the other two monetization strategies to yield profits.

Monetization Strategy #2: Transaction Fees

The “bread and butter” of ethically palatable credit card revenues is found in the transaction fees. Did you know that credit cards make the issuer a little bit of money each time they are used? As consumers, we don’t often see this cost, but merchants are very familiar with it. Essentially whenever you use your credit card to make a purchase, the merchant accepting the card pays a percentage or fixed amount (depending on the processing gateway and other factors) of the sale to the company whose card you are using.  These tiny amounts of money can really add up over time, and is the price which merchants pay to have access to the convenience of accepting credit cards. This is why when you go to smaller service stations you will occasionally see signs that state credit cards aren’t accepted for purchases amounting to $X or less, or that an additional fee is assessed to credit card transactions of $Y or less. If the business doesn’t put such measures in place, they actually stand to lose money from such transactions!

Next time we’re going to take a look at what is often considered the most nefarious monetization strategy; finance charges. We’ll take a look at some specific examples to see how much the credit card company really makes from someone’s financial desperation or irresponsibility.