FT on reward credit cards

WillPS

jbrassy said:

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.

Nonsense. How does 0.3% max interchange fee for Visa and Mastercard somehow cover Barclaycard/Aqua paying 0.5% in cashback on their legacy products?

They make a loss every time a customer uses the card for a straight forward purchase, unless the customer does not clear their statement on time.

jbrassy

WillPS said:

jbrassy said:

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.

Nonsense. How does 0.3% max interchange fee for Visa and Mastercard somehow cover Barclaycard/Aqua paying 0.5% in cashback on their legacy products?

They make a loss every time a customer uses the card for a straight forward purchase, unless the customer does not clear their statement on time.

It's not nonsense, it's a fact. Those are legacy products, the majority of which have been phased out. I know they have closed down most of the cards which used to have higher rates of cash back (>1%). They probably keep those accounts open because they are not making significant losses on those customers and they can try and cross-sell more profitable products like balance transfer cards. Most financial institutions offer products as a loss leader and try to cross sell more profitable products.

WillPS

jbrassy said:

WillPS said:

jbrassy said:

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.

Nonsense. How does 0.3% max interchange fee for Visa and Mastercard somehow cover Barclaycard/Aqua paying 0.5% in cashback on their legacy products?

They make a loss every time a customer uses the card for a straight forward purchase, unless the customer does not clear their statement on time.

It's not nonsense, it's a fact. Those are legacy products, the majority of which have been phased out. I know they have closed down most of the cards which used to have higher rates of cash back (>1%). They probably keep those accounts open because they are not making significant losses on those customers and they can try and cross-sell more profitable products like balance transfer cards. Most financial institutions offer products as a loss leader and try to cross sell more profitable products.

So they are cross-subsidised by other, profitable activities/customers, you say?

DullGreyGuy

Cannot read the article and so meaningful commenting is rather difficult. 

You can look at simple options like 0.5% cashback -v- the 0.3% interchange fee but there are many other options out there... a card that gives Avios... who knows how much AmEx or Barclays are paying BA for each BA Avios point they sell? 

Similarly the commercials between AmEx and Cartier and the 10% rebate for spends over £5,000... who's fund that?

WillPS

DullGreyGuy said:

Cannot read the article and so meaningful commenting is rather difficult. 

You can look at simple options like 0.5% cashback -v- the 0.3% interchange fee but there are many other options out there... a card that gives Avios... who knows how much AmEx or Barclays are paying BA for each BA Avios point they sell? 

You can guess somewhere in the region of 0.5-1p a piece.

DullGreyGuy said:

Similarly the commercials between AmEx and Cartier and the 10% rebate for spends over £5,000... who's fund that?

Cartier.

eskbanker

WillPS said:

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.

That headline is just a question ("Who really pays for your rewards?"), and while it's true that the article is putting forward a case that those who pay interest are likely to make more of a contribution than those who don't, that's not really the same as 'banks disproportionately make their money from' these (assuming you're using 'make money' in the usual sense of profit rather than simply revenue), and then you jump all the way from there to 'it is total nonsense [that] in the UK reward card issuers are making money out of individual transactions'?

Anyway, to a certain extent this is just semantics - I'm not necessarily disagreeing with the overall gist of what you're saying about the obvious mathematical difficulty of generating profit from no more than a 0.3% margin - but just don't see that particular article being something that you can meaningfully 'point back to' to make that case.

daivid

artyboy said:

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 

Luckily the shrewd are benefiting at the cost of the provider not the other consumers. If the more calculating and financially resilient stop taking out these offers then the providers profits will go up rather than costs for other consumers going down.

born_again

WillPS said:

jbrassy said:

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.

Nonsense. How does 0.3% max interchange fee for Visa and Mastercard somehow cover Barclaycard/Aqua paying 0.5% in cashback on their legacy products?

They make a loss every time a customer uses the card for a straight forward purchase, unless the customer does not clear their statement on time.

Loss leader.
Just like many other retailers.
At the end of the day when all income/expenditure is calculated. They make a profit.
So as a customer, all you need to look at is what is in it for me. Not worry about how they are paying more than they make.

Just the same as they chuck a bribe to switch bank accounts.

WillPS

born_again said:

WillPS said:

jbrassy said:

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.

Nonsense. How does 0.3% max interchange fee for Visa and Mastercard somehow cover Barclaycard/Aqua paying 0.5% in cashback on their legacy products?

They make a loss every time a customer uses the card for a straight forward purchase, unless the customer does not clear their statement on time.

Loss leader.
Just like many other retailers.
At the end of the day when all income/expenditure is calculated. They make a profit.
So as a customer, all you need to look at is what is in it for me. Not worry about how they are paying more than they make.

Just the same as they chuck a bribe to switch bank accounts.

100% agree. Another way of describing a loss leader is that the losses are cross-subsidised by profits elsewhere, which is what @jbrassy was claiming had been conclusively proved was not happening.

Even on the most meagre rewards CC the issuer is unlikely to be able to make a profit on that product unless the cardholder does not clear their balance on time. On the more generous ones (Avios Barclaycard) those sorts of card accounts are highly likely to be making a loss, hence why Barclaycard are being quite picky about who they'll give it to (and declining many high earners with "perfect credit records").

Marchitiello

WillPS said:

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.

You are not including in the calculation the card processor… 

just sharing some info I have seen on one of the modern, more competitive processor on the UK market:

they will charge retailers:

0.89% per Visa / MasterCard Credit UK issued 

1.9% per Amex

Plus £0.0385 fix per most transactions .

Visa / MasterCard Debit 0.35% + £0.01 fix

fees are then higher for Business, international cards (up to 3% plus fix fees ) and now EEA issued cards