Credit cards allow you to use the money you have to pay for products and services, or utility bills in excess of a pre-determined limit. Instead of paying for the purchase with your own cash immediately it is more like getting a loan for a brief period from the issuer of your card. They are mostly issued by credit unions, banks as well as a select group of non-banking financial corporations (NBFCs). Credit cards are not just used to allow for smooth financial transactions, but also offer a robust and secure ecosystem that includes reward programs, credit-building options, and security measures against fraud. There are many kinds of credit cards including reward cards as well as balance transfer cards secured cards student cards, and many more. Credit cards offer convenience and flexibility, and generate the revenue streams of financial institutions. It is possible that you are using a credit or debit card but you have no clue about how credit card companies operate or how they generate income. Learn more about it here.
Credit Card Ecosystem and Business Model
The credit cards issued are by big national credit unions, banks as well as financial institutions. Examples include HDFC Bank, ICICI Bank, Citi Bank, YES Bank and American Express. They offer credit cards to people in accordance with creditworthiness and other aspects They also establish credit limits, issue bills, take payments from cardholders and profit through the card.
Acquiring banks collaborate with merchants to process credit card transactions. A acquiring bank operates on behalf of the merchant. It offers payment terminals and financial infrastructure the merchant in order to perform transactions and also pay the amount to the seller.
Credit card network are organizations such as Visa, MasterCard, American Express, RuPay and others which serve as bridges between the banks that acquire transactions and banks issuing credit cards. These companies handle, authorize, settle and clear the transactions made with credit cards. The banks that acquire and issue cards cooperate with credit card companies in addition to one another, to fulfill debit and credit card transaction.
Issuers like banks and other banks often offer discounts, cashbacks or rewards, as well as other rewards when using credit cards. The goal is to motivate customers who use credit cards to make the most of their spending with the credit card they have.
The credit card industry is monitored by regulating institutions like the Reserve Bank of India. These organizations set the guidelines for the industry of credit cards and oversee the application of those guidelines.
How Do Issuers Earn Money?
1. Interchange Fees
The exchange fees are charged by merchants for every credit card transaction. The rates vary between 1.51-2.70 percent of the transaction amount. This is the largest revenue stream that credit card providers receive making up 55-70% of their total income.
2. Annual Fees and Revolving Incentives
Issuers make money from interest accrued on balances whose card holders aren’t able to pay their dues.
The annual fees that are charged directly to premium card holders also add to the income.
3. Late Payment Fees, Foreign Transaction Fees
Issuers earn revenue from late payment fees that are charged to cardholders who fail to meet the deadlines to pay their credit card debts.
Foreign transaction fees imposed for purchases that are made outside of the country of the issuer’s home is another revenue source.
How Can Banks Acquiring Create Money?
1. Merchant Discount Fees
Acquiring banks are the ones who pay for transactions to merchants. They also earn money by subtracting a particular amount from the amount of transactions, which is referred to as merchant discount charges. The basic concept behind the fee for merchant discount are paid by the merchant to the bank that acquires the transaction.
MDF is responsible for between 65 and 80 percent of the earnings of an acquirer bank.
2. PoS Terminal Sales and Other Fees
Acquiring banks earn revenue through the sale of terminals at point-of-sales to merchants. Other forms of fees, such as payments through online gateways monthly account fees, PCI compliance fees, statements fees and other types also generate income.
3. Merchant Settlement Cycle Interest
Acquiring banks settle transactions that are processed via its PoS terminals of its merchant partners regularly. In this time, banks that acquire the funds through investments with short-term funds for investment, or bonds.
What is the way that Credit Card Networks Make Money?
1. Assessment Fees/Network Costs
Credit card companies earn money through charging banks who acquire an amount of a specific percentage of each transaction that is processed by the network. Common rates range from 0.11-0.15 percent of volume. The fees are paid for routing and settlement of the transactions.
2. International Transaction Fees
Credit card networks make money through fees imposed on transactions that cross borders and on transactions that convert currencies.
3. Annual Fees
Banks and issuers who acquire banks have to pay an annual fee in order to make use of the network’s technology and the brand name.
