FT on reward credit cards

lon_don

https://www.ft.com/content/0b3349c2-0019-43c3-85ec-fbc6bcbf86b5

WillPS

lon_don said:

https://www.ft.com/content/0b3349c2-0019-43c3-85ec-fbc6bcbf86b5

You might be able to read this without a sub by copying the address to google.com and clicking the first result on there.

The crux is that even in the US the banks disproportionately make their money from rewards credit cards by customers paying interest and fees. And that's with Interchange rates up to 4% compared with the cap of 0.3% (on Visa/Mastercard/co-branded Amexs) within the UK.

I'm going to point back to this the next time somebody suggests in the UK reward card issuers are making money out of individual transactions, it is total nonsense.

eskbanker

WillPS said:

The crux is that even in the US the banks disproportionately make their money from rewards credit cards by customers paying interest and fees. And that's with Interchange rates up to 4% compared with the cap of 0.3% (on Visa/Mastercard/co-branded Amexs) within the UK.

I'm going to point back to this the next time somebody suggests in the UK reward card issuers are making money out of individual transactions, it is total nonsense.

Can you clarify what within the article is supporting that point of relative profits from interest/fees versus transaction charges, as I don't see it?

It seems to be making the unsurprising point that the less 'sophisticated' will be contributing to profits via interest and fees, while those better off will be generating profit via transaction charges, but I can't see any reference to the relative profits of these streams at a corporate level, as the article simply seems to be looking at the matter from the perspective of the consumer? 

With naive users, banks earn money primarily via interest charges. For sophisticated cardholders, which are often transactional, banks’ profits come from the high purchase volumes, which generate high swipe fees — every time you pay with a credit card, the merchant must pay a small percentage of the value of the purchase to the bank.

[Deleted User]

eskbanker said:

WillPS said:

The crux is that even in the US the banks disproportionately make their money from rewards credit cards by customers paying interest and fees. And that's with Interchange rates up to 4% compared with the cap of 0.3% (on Visa/Mastercard/co-branded Amexs) within the UK.

I'm going to point back to this the next time somebody suggests in the UK reward card issuers are making money out of individual transactions, it is total nonsense.

Can you clarify what within the article is supporting that point of relative profits from interest/fees versus transaction charges, as I don't see it?

It seems to be making the unsurprising point that the less 'sophisticated' will be contributing to profits via interest and fees, while those better off will be generating profit via transaction charges, but I can't see any reference to the relative profits of these streams at a corporate level, as the article simply seems to be looking at the matter from the perspective of the consumer? 

With naive users, banks earn money primarily via interest charges. For sophisticated cardholders, which are often transactional, banks’ profits come from the high purchase volumes, which generate high swipe fees — every time you pay with a credit card, the merchant must pay a small percentage of the value of the purchase to the bank.

Whilst it's probably quite similar setup regarding the naïve i.e. poorer UK users. Sophisticated UK users are no where near as profitable with domestic interchange fee caps and S75 costs.

artyboy

It's always nice to be reminded that shrewd MSErs are only benefiting at the expense of the financially disadvantaged or illiterate.

Shame on us all 

eskbanker

Deleted_User said:

eskbanker said:

WillPS said:

The crux is that even in the US the banks disproportionately make their money from rewards credit cards by customers paying interest and fees. And that's with Interchange rates up to 4% compared with the cap of 0.3% (on Visa/Mastercard/co-branded Amexs) within the UK.

I'm going to point back to this the next time somebody suggests in the UK reward card issuers are making money out of individual transactions, it is total nonsense.

Can you clarify what within the article is supporting that point of relative profits from interest/fees versus transaction charges, as I don't see it?

It seems to be making the unsurprising point that the less 'sophisticated' will be contributing to profits via interest and fees, while those better off will be generating profit via transaction charges, but I can't see any reference to the relative profits of these streams at a corporate level, as the article simply seems to be looking at the matter from the perspective of the consumer? 

With naive users, banks earn money primarily via interest charges. For sophisticated cardholders, which are often transactional, banks’ profits come from the high purchase volumes, which generate high swipe fees — every time you pay with a credit card, the merchant must pay a small percentage of the value of the purchase to the bank.

Whilst it's probably quite similar setup regarding the naïve i.e. poorer UK users. Sophisticated UK users are no where near as profitable with domestic interchange fee caps and S75 costs.

On the face of it, customers paying interest and fees on top of transaction charges would naturally be expected to generate more revenue than those paying off in full, but presume that the interest payers would also account for all the collection and bad debt costs, so the bottom line profit situation may not be quite so simple.  However, my point wasn't necessarily about challenging that, it was that I don't see the article actually supporting the previous poster's assertion that there's no profit to be made from transaction charges.

jbrassy

The FCA looked into the credit card business models a few years ago. In the UK at least, customers who pay interest are not cross-subsidising customers who receive cashback. The cashback is paid from the interchange fees that the credit card companies charge to retailers.

WillPS

eskbanker said:

Deleted_User said:

eskbanker said:

WillPS said:

The crux is that even in the US the banks disproportionately make their money from rewards credit cards by customers paying interest and fees. And that's with Interchange rates up to 4% compared with the cap of 0.3% (on Visa/Mastercard/co-branded Amexs) within the UK.

I'm going to point back to this the next time somebody suggests in the UK reward card issuers are making money out of individual transactions, it is total nonsense.

Can you clarify what within the article is supporting that point of relative profits from interest/fees versus transaction charges, as I don't see it?

It seems to be making the unsurprising point that the less 'sophisticated' will be contributing to profits via interest and fees, while those better off will be generating profit via transaction charges, but I can't see any reference to the relative profits of these streams at a corporate level, as the article simply seems to be looking at the matter from the perspective of the consumer? 

With naive users, banks earn money primarily via interest charges. For sophisticated cardholders, which are often transactional, banks’ profits come from the high purchase volumes, which generate high swipe fees — every time you pay with a credit card, the merchant must pay a small percentage of the value of the purchase to the bank.

Whilst it's probably quite similar setup regarding the naïve i.e. poorer UK users. Sophisticated UK users are no where near as profitable with domestic interchange fee caps and S75 costs.

On the face of it, customers paying interest and fees on top of transaction charges would naturally be expected to generate more revenue than those paying off in full, but presume that the interest payers would also account for all the collection and bad debt costs, so the bottom line profit situation may not be quite so simple.  However, my point wasn't necessarily about challenging that, it was that I don't see the article actually supporting the previous poster's assertion that there's no profit to be made from transaction charges.

The article's key thrust is that the main way money is made off the back of poorer users, in spite of the fact that transactions are individually profitable for issuers in the States, even lucrative.

It's simple maths that dictates it isn't in the UK. The maximum Visa or Mastercard can take from a transaction in the UK (for a UK issued credit card) is 0.3% of the transaction value. The card issuer gets a cut of that - Visa and Mastercard won't lose money so you can safely assume the value is no greater than 0.3%.

In the case of cashback cards, like those offered by Lloyds and Halifax, the amount paid is typically in the region of 0.25-0.5%. Even if you take the lower end 0.25% payout and assume all 0.3% of that interchange money goes to the issuer (which it most certainly will not as otherwise Visa/Mastercard would make 0), that leaves a whopping 0.05% as a net gain on a transaction for the issuer. 5p in every £100 spent.

To put that in to perspective, in order to cover the cost of issuing a plastic contactless card (widely thought to be ~£5) the customer would have to spend £10,000 in order for this overestimated interchange to cover it.

It's nonsense.

With rewards the picture is made a little fuzzier by the fact that the amount the issuer pays for the reward is not known, but the point stands - for example you can safely assume Jaja are paying most of £1 for every £s worth of Asda credit they issue.

The only exception is for transactions where a specific comission is paid by the merchant, usually in exchange for promotion. The most obvious example of these is the 'on card cashback' which many issuers push now, where cashback is paid at specific retailers for certain periods of time. Issuers will earn a 1+% themselves too. Also, co-branded cards such as the Asda/Jaja one mentioned above are likely to get a comission from the co-brand themselves for brand spend, as they are supposed to incentivise loyalty. That, in part, is how the issuer can then afford a more generous rate for the brand.

eskbanker

WillPS said:
The article's key thrust is that the main way money is made off the back of poorer users, in spite of the fact that transactions are individually profitable for issuers in the States, even lucrative.

I think you've missed something out of that sentence, as it seems incomplete?

As per the extract I quoted above, they're asserting that poorer users generate profit via interest and fees, while more sophisticated ones do so via transaction charges, but I still don't see them going as far as comparing the overall profits from one group versus the other, to support your claim that the former are 'disproportionately' more significant?  Which part of the article are you thinking of?

grumbler

jbrassy said:

 The cashback is paid from the interchange fees that the credit card companies charge to retailers.

So, is the information about 0.3% cap in UK incorrect? I have two cards paying flat 0.5% cashback.

WillPS

eskbanker said:

WillPS said:
The article's key thrust is that the main way money is made off the back of poorer users, in spite of the fact that transactions are individually profitable for issuers in the States, even lucrative.

I think you've missed something out of that sentence, as it seems incomplete?

It isn't incomplete. The article's headline indicates someone pays for ones rewards, and the thrust is that it is customers who end up paying interest and fees as well as transaction fees.eskbanker said:

As per the extract I quoted above, they're asserting that poorer users generate profit via interest and fees, while more sophisticated ones do so via transaction charges, but I still don't see them going as far as comparing the overall profits from one group versus the other, to support your claim that the former are 'disproportionately' more significant?  Which part of the article are you thinking of?

Perhaps start with the headline I'd say.