Synopsis: Credit card issuers earn revenue from four main channels, the interest on unpaid balances, annual or joining fees, penalty charges, and a share of the merchant fee charged on every transaction. This article breaks down each stream with a hypothetical example.
Every time a credit card is swiped, tapped, or used online, multiple parties, the issuing bank, the card network, and the acquiring bank, earn a fee, whether or not the cardholder ever pays interest. This article explains where that money actually comes from.
The Four Revenue Streams
1. Interchange fee (merchant-funded)– Every card transaction attracts a Merchant Discount Rate (MDR), typically ranging from 0.7% for low-risk categories to 2.2% for high-risk categories in India. A large part of this MDR is passed on as an interchange fee, which averages around 1.81% for credit cards, paid by the acquiring bank to the card-issuing bank.
2. Annual or joining fees– Annual fees in India range from free to ₹15,000 or more, and are often waived if the cardholder crosses an annual spend threshold, typically between ₹1.5 lakh and ₹3 lakh.
3. Interest (finance charges)– If a cardholder doesn’t pay their full statement balance by the due date, interest kicks in. In India, this typically runs between 2.5% and 4.0% per month, working out to roughly 30% to 48% annualised, among the highest rates for any form of consumer borrowing.
4. Penalty and ancillary fees– These include late payment fees of ₹100 to ₹1,300 depending on the outstanding slab, cash advance fees of 2.5% to 3% per withdrawal, and a foreign transaction markup of 1.5% to 3.5% on overseas spending.
How a Single Transaction is Split
When a cardholder makes a purchase, the fee doesn’t go to one party, it’s split three ways between the card network, the acquiring bank, and the issuing bank.
- Card network (Visa or Mastercard or RuPay) – runs the settlement infrastructure connecting the issuing and acquiring banks, and charges a small fixed fee per transaction for this service
- Acquiring bank – processes the transaction on behalf of the merchant and typically retains around 0.1% to 0.25% of the MDR for this role
- Issuing bank – issued the card to the customer and takes home the largest share, roughly 0.57% to 1.84% depending on the card type, which goes toward funding rewards programs and covering fraud risk
Example: Assume a cardholder, Ms. Khushi, holds a mid-tier credit card with a ₹2,000 annual fee, and in one month,
- Spends ₹40,000 across various merchants (fully repaid on time)
- Fails to pay ₹10,000 of her previous month’s bill on time, carrying it forward at 3.5% monthly interest
- Misses the due date, attracting a late fee of ₹500
Also read: 5 Best IDFC FIRST Credit Cards That Offer Airport & Railway Lounge Access with Minimum Monthly Spend
Here’s roughly what the issuing bank earns from Ms. Khushi in that cycle,
After a complete year, if this pattern repeats, the respective credit card company earns roughly more than ₹19,000 from a single mid-spend cardholder, majorly from interest and fees, with interchange fees. Please note that the real-world numbers vary significantly by card type, issuer contracts, and spending category, since interchange and interest rates aren’t uniform across the industry.
All in all
Companies issuing credit cards generate profits from a combination of layers, including merchant fees, interest and cardholder costs, meaning issuers profit even from cardholders who never miss a payment though, the larger profit comes from revolving balances and penalty fees.
