How Do Credit Card Companies Make Money?
There is a reason why credit card companies are always looking for their next best client. When people start using their service more, they can make more money based on the usage that is served to you from their side. There are around issuers who advance over millions of purchases made by their customers. And the return can come in billions to the credit card companies.
Credit card companies in India
Recently for the new age foray of digital India, the bank is always looking and scoping out credit cards for their users for the best of interest for their end. When it comes to India, there are mostly banks that issue the credit card to the people. So when it comes to publishing your new credit card, then the bank will be making money. From the bird’s eye point of view, it is like a charitable business here.
This means that when you are asking for a credit card, then the bank will issue the same for you. These credit cards are released from the source of the third parties which are offered to these banks. When it comes to issuing credit cards for the customers, then the bank issues it for the people and provides a credit for it. Then after the same, the customer has to pay the bill for the usage of the card.
Now, when it comes to making money, then the only major fees that the bank gets are by the interest, which is levied on the outstanding amount which is ready to repay. In case of delay of payment through your credit card, the bank will charge a collected rate of interest onto the same.
Anyways, there are also other sources through which the banks and credit card companies make money with the usage of these credit cards that are issued to your name. This will be later discussed with the help of this article.
How Do Credit Card Companies Make Money?
Here are how the credit card companies make more money and earn profit as well with the use of their business.
When it comes to the age of the digital period, then do you know who makes money these days? Anyone who can help your brand or company extend its reach. In this digital world, it becomes difficult for the common man to continue the source of his business, and this is why brand or marketing tie-ups are essential. For example, a lot of brands are spending more on their digital marketing because they need a better reach of the audience from all around. It can help them to gather the clients for their said work.
The credit card companies have direct access to the whole of the customer base, and it can influence the spending as well. Therefore what these credit card companies do is that they help for both types of brand promotion and the generation of sales. To reach new customers, it is a useful tool here. Plus, they get paid for the brand promotion that they are making from here.
For example, let’s take a look at the leading banks here.
As per the RBI data here, HDFC banks have issued around 12 million credit cards, followed by the SBI bank, which has issued around 8.7 million cards. Then comes the banks like ICICI Bank, the Axis Bank, etc. So when it comes to coming or gathering customers from all around, then HDFC Bank, SBI and ICICI bank has direct control over the same and over a crore of customers who have issued their credit cards.
So if the banks are paying around lakhs for winning over the customers with the help of their brand promotion, then they are getting the doubles in return through here. Brands are always ended up in marketing tie-ups with the credit card companies so that they can get cash backs on their set. On the other hand, there are two types of tie-ups that can be tried here. One is the low value, and the other ones are the high value. Plus, there are interest charges levied onto the same too.
Interest gathered onto the balance which is outstanding
It is a universal fact that credit card companies can make money based on the benefits which are charged on your balance amount. Among all form of credit facilities, the interest rate which is loaded onto your card is the highest, and they are even higher than the private lending that you have.
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This means that when we are talking about the higher amounts, then we are speaking as high as 40-42% interest, which is charged annually and which is about 3-3.5 %, which is billed monthly here.
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According to the facts and the stats which are provided by the credit card companies, around 60% of the people or the credit card holders do not pay their levied amount right on time, and this is when the interests on their credit can be charged to them. These customers are the primary source of income for these credit card companies out there.
The amount which is not paid by the customers is always termed to the absolute figure. This means that when we are talking about 60%, this does not mean that 60 people out of every 100 are not able to pay their amount. This means that some even have a higher outstanding than the other, and; this is where their interest is levied.
Cash advance charges also generate payment
Here is another way through which the credit card companies can charge in the amount and get the income for their source. Usually, the cash limit for the credit facility is around 20-40%. This cash limit comes handy in case of the emergency which can be met during the time of shortage of cash, etc.
So if you take an advance payment from the bank, then the bank will charge an interest rate of about the same from you on the amount that they are granting you. This is one of the costliest ways and one of the most prime ways through which credit card companies can make cash.
Another way from where a credit card makes money is merchant fees. Whenever the credit card user makes any payment using their credit card, the entire amount does not go to the retailer. The credit card companies charge a small fee as the percentage of the purchase amount for providing safe and secure payment transactions.
This charge is known as a merchant fee or swipe fee. This merchant fee can be anywhere between 1.5-2% of the transaction value and hence serves as a huge revenue source for the banks.
Although, the credit card user doesn’t have to pay any additional fee, however, the credit card companies take a portion of the profit from the merchants. Therefore, the merchant fee only affects the merchants. Anyways, some merchants may use a ‘credit card surcharge‘ in addition to the cost of products/services that they are selling in order to off-set the merchant fee. This surcharge is waived if the customer prefers cash or debit card payment as the fees on the debit card is comparatively lower for merchants.
Annual and renewal fees
Now comes to the other charges which come with your credit card. When you are issuing credit cards from the bank, then there is an annual fee that you have to pay. And also, for the renewal fee, which means that you have renewed your credit card after it has been extended to a valid period.
These charges may be waived off by the banks if you’re an active spender and cross their pre-specified annual expenditure through credit cards. Anyway, these charges are usually given out through the customer whose value of spending is meager.
In other words, credit card companies will charge you a fee which you eventually have to pay on the annual or during the time of the renewal as well.
Also read: The Pros and Cons of Credit Cards in India
As discussed in this article, you have found out that the credit card companies do have a lot of sources for their salary here. The credit card companies make money by charging interests on the customer’s delayed payment, merchant fees, networking and marketing with branks, annual and renewal fees, etc.
So if you don’t want to levy the heavy-duty and the charges for your late payment, make sure of the financial tracking that is happening with the help of your card. Take notes and understand your credit billing cycle as well so that you can figure out when to pay your fees and to keep the minimum as well.
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