How Credit Card Companies Make Money

How Credit Card Companies Make Money

New York City. 1949. A man by the name of Frank McNamara is out
at dinner with his clients, when he realizes he left his wallet in another suit. His wife pays the tab but he comes up with
an idea. What if nobody had to carry around cash or
cheques, but instead, the bill could be charged to their name using a card. At the same meal, McNamara talks this over
with the restaurant owner. The next day, he returns to the same restaurant
and pays using a piece of cardboard with a signature. Diners Club, the first credit card is created. The Diners Club card was good for a few restaurants
and other establishments, and cardholders had to pay their bill at the end of the month. But the guys at Bank of America had a better
idea. Instead of making people pay their balance
off at the end of the month, why not give them “free money”, at least for the time
being. They’ll have to pay it off eventually. And by the way, you’ll have to pay more
later, but enjoy yourself for the time being. This card was called BankAmericard, but later
became its own company: Visa. How do these credit card companies make money. Well, there are two types of credit card companies. On one hand you have the issuers: the banks
who essentially hand out the cards. You also have the networks, who process these
transactions, such as Visa or MasterCard. American Express and some others act as both
issuers and networks. One way these companies make money is by charging
the retailer in the form of a transaction fee. This number is usually between 1 and 3%. Suppose at a given store, this number is 3%,
that means if someone buys $100 worth of items using a credit card, the store keeps $97 and
$3 is paid to the issuer and network. These few dollars may not seem like much,
but over time they add up. But why would a store do this? Why would they give up precious revenue? Two reasons. Number 1: customer convenience. Stores are in competition with one another
and need to make their experience as easy and hassle-free as possible, or else customers
will shop somewhere else. Secondly, impulse shopping. When not paying in cash, people tend to spend
more since the money spent does not feel real. This of course is good for the store. More spending=more revenue. This is especially true if the money doesn’t
even need to be paid back right away. This brings us to the other way these companies
make money: interest. This is additional money paid when the balance
owed is not paid at the end of the month. The other way they make money is through fees. Fees for having the card. Fees for cash advances. Fees for paying late. What kinds of customers are they targeting. How do they make the most money. Their main source of profit are the customers
with revolving debt. For the most part, they only make minimum
payments, allowing interest to be charged and build up. They’ll pay it off later, but they’re
also lining the wallets of the credit card companies. The second source of profit are the people
who pay in full, all of the time. The credit card companies don’t make their
money from the cardholder but instead make their money here from charging the retailer
1 – 3% as a transaction fee. These types of customers aren’t a huge source
of profit, but they add up. Like anything, there are people who exploit
the system for free stuff, and there are even some people who will never pay anything. Who do these companies seek out the most. Who are they trying to lure in the most. Firstly, there is the uneducated population. Members of this group typically have little
idea how the card or system works and treat the card as if it was not real money being
spent. Credit card companies love them because they
end up owing a lot of interest. The second group that is targeted is composed
of people who no longer use the cards because of credit card problems in the past. The companies give them lucrative and special
incentives to try and bring them back. Ultimately, a credit card company is a business,
just like a restaurant, grocery store, or manufacturer, and as long as people keep using
their services, they will more than likely make money. And a lot of it too. And until next time, thanks for watching.

15 thoughts on “How Credit Card Companies Make Money

  1. THank you for the realy good video, it was very informative. If i may give you a sugestion, it would be nice if thare wherent so many pauses in your speech, i know you are trying to set a mood or feeling to the video but i realy could do without it.

  2. I learnt so much. The history of the Credit Card is so amazing and i didn't know that the credit card companies made money, I only thought it was the banks by making debt. Thank you, you have started the year with a bang!

  3. Good video and great research. Money makes the world go around. Credit cards makes it happen. Thanks mr cognito

  4. Your content. Amazing. I've noticed when talking about the diners club creator, he was eating from a tagine, and there's a song China p – Morocco, are you Moroccan or have transitioned to become one? Jk of course, keep up the outstanding work lad, idk how the hell you aren't getting more views.

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