Cashback credit cards, how do the companies make money?

Legacy_user

I have a cashback credit card that should earn me around £200 per year. I pay the balance in full each month so never pay any interest. Is the lender (asda credit card in this occassion) making a loss?

grumbler

No. All cards charge retailers; CCs charge more than debit cards.

Herbalus

Asda gives 0.5% cashback on purchases (1% in Asda, but if £200 is 1% then you're spending £20,000 in Asda every year and I don't think that's likely...).

Credit cards charge retailers a fee for the transaction. Not sure if anyone actually knows how much it is but usually people say 1-3%. It's the reason why it can be more expensive to pay with a credit card - car dealerships for example, airlines, occasionally ticket purchases online etc.

Plus your 0.5% gain is dwarfed by the 14.9% APR if someone doesn't pay in full. They only need one person to not pay in full for 29 people who do and a profit is made (though strictly in monetary terms, obviously processing and administration costs are on top)

Gels

Stumbled across this the other day, seems a fairly explanatory article:

http://www.thisismoney.co.uk/money/cardsloans/article-2363930/Why-pay-use-credit-debit-card.html

grumbler

Herbalus wrote: »

...Plus your 0.5% gain is dwarfed by the 14.9% APR if someone doesn't pay in full. They only need one person to not pay in full for 29 people who do and a profit is made

You arithmetic is flawed as it assumes that those who don't pay in full don't pay anything at least for a year after making a purchase.

Herbalus

Interesting article. The last point though, about how £100 in cash means £100 to the retailer with no fee, isn't exactly spot on. You have to factor in risk (theft by staff, miss-counting), counting and checking the cash at the end of the day, and then taking the cash securely to the bank.

rabbit_burrow

grumbler wrote: »

You arithmetic is flawed as it assumes that those who don't pay in full don't pay anything at least for a year after making a purchase.

Not only that but it also makes the assumption that the 1 person who doesn't pay runs up the same bill as those who don't pay, which is unlikely

Herbalus

grumbler wrote: »

You arithmetic is flawed as it assumes that those who don't pay in full don't pay anything at least for a year after making a purchase.

Yes it does assume that. But if I assume that someone doesn't pay in full for 12 months, I also assume that the other 29 people pay in full for 12 months. There only needs to be one person out of the 30 that doesn't pay each month.

Herbalus

rabbit_burrow wrote: »

Not only that but it also makes the assumption that the 1 person who doesn't pay runs up the same bill as those who don't pay, which is unlikely

It's an example. I have to make some assumptions......

reclusive46

The main money maker is interchange (Although that could be capped soon, reducing rewards), World MasterCard Credits in particular makes a lot of extra interchange, like the Capital One and RBS/Natwest (Even more than Amex).

w211

Herbalus wrote: »

(1% in Asda, but if £200 is 1% then you're spending £20,000 in Asda every year and I don't think that's likely...).

Though unlikely, it is very possible if you're a self-employed minicab/taxi driver, and spend £10,000 a year on diesel at their petrol stations, and £10,000 on other business expenses and groceries.