If you are a consumer then chances are you have a credit card account, or at least have had a credit card account in the past.
Do you know how credit card companies make money?
Do you know why credit card companies are so willing to lend via unsecured revolving accounts?
Most people would guess credit card companies such as Visa, Master Card, Discover, and American Express make their huge profits by charging consumer borrowers interest on the money they borrow via their credit card.
Most people are wrong.
It's not the interest on consumer credit card debt, it's the fee from the consumer's card transaction that is charged to the merchant every time the card is used. It is basically the same concept as a sales tax. Except only with card transactions and there is no government involved.
Though some credit card companies lend some of their own money or at least make money off the interest that is charged this typically represents an insignificant portion of their overall revenue. This information may come as quite a surprise. But it is truer then most can imagine.
Common Credit Card Company Revenue Streams and Origins
Transaction Commissions
Transaction commissions are the bread and butter of the credit card industry.
When you pull out that Visa card and make a purchase the merchant pays a portion of the money charged to Visa or whatever credit card or bank applicable. The exact percentage of the charge that is handed over to the credit card company variable. This rate is different from the card company to the card company and from merchant to merchant.
Small merchants pay more. Big merchants pay less. Exclusive and smaller credit card brands charge more. Larger and bigger credit card companies charge less.
For instance, McDonald's pays a small fraction of what a small local business "Mom and Pop" store would have to pay. Having said that the typical merchant is going to end up paying 1%-7% depending on the card.
American Express and Discover typically charge higher rates than the larger companies such as Visa and Master Card.
Borrower Fee's
Many credit card companies charge annual maintenance fee's, late fee's, and whatever fees some guy wearing a tie and Rolex dreams up. These fees are typically 10 - 100 bucks a year per card. That may not sound like so much but take 50 bucks and multiply it by say 50 million accounts. Now we are talking real money.
Advertising and Marketing Revenues
Information. The commodity of all commodities. Credit card companies have found themselves knee deep in consumer information. What population of Visa card holders have made at least one monthly online purchase for the last nine months? Well, you can most likely obtain some pretty accurate answers to that question if you are willing to pay for it. Even if a buyer of such information is unable to buy that info they will still be able to reap the benefits of knowing the answer.
What do I mean by that?
Perhaps the buyer is able to place an email blast to all those card holders, or a direct mailing campaign, or whatever. For a fee per mail-out or phone number or maybe a part of the revenue generated from the mail out. the possibilities are limitless.
The point is that credit card companies have a marketing gold mine of consumer information.
Cross Selling Related Products
Protect your credit score. Buy life insurance. The offers a consumer gets are limitless. many of these offers are through one of your existing credit card companies. these large cross-selling efforts have a similar macro effect as does the annual maintenance fee. If a card issuer is able to generate an average of 18 dollars per credit account via other products and services then these companies are able to generate billions of additional revenue.
These same tactics work great for other outside company products and an affiliate program.
So there you have it. Now you know that your credit card company is not focusing on that interest rate they are focusing on transaction volume, marketing dollars, and consumer information.
No comments:
Post a Comment