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My credit card company gives me 5% cashback on my top eligible spend category up to $500 spent each billing cycle and 1% unlimited cash back on all other purchases. From my reading, credit card companies charge 1.5% to 2.9% processing fee from the merchants.

I currently only spend money on one category using this card, thus this category is always the top eligible category. For my other purchases, I use my other credit cards which give more cashback than 1%.

I do not see how the credit card company makes money here. It charges the merchants 1.5% to 2.9% processing fee and gives me 5% cash back. Is the company not losing money?

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    You're forgetting the interest the bank charges costumers who carry a balance. Merchant fees is not Citi Bank's only source of revenue on their Custom Cash Card. They might be losing money with you, but making money with others. Oct 16 at 2:10
  • Merchants also participate in the bonus categories to attract spending.
    – quid
    Oct 16 at 2:35
  • @quid That's true in certain cases, but not all. In the card in question (Citi's Custom Cash) the categories are too broad - "travel", "groceries", "gas", etc. - for Citi to have arrangements with all of them. Discover's Target/Walmart/Amazon quarter is a lot more likely to involve some sponsorship.
    – ceejayoz
    Oct 17 at 1:25
  • What is the source of your figures of 1.5% to 2.9% processing fee for your specific high reward credit card?
    – DJohnM
    Oct 17 at 17:43
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Lets do some math. If you spend $3,000 a month on the card and the biggest category is always $500 or more, thus maxing out the cashback opportunity. Lets also assume that they charge 2% fee because it is in the range you quote and the math is easy.

Each month they collect $3000 x 2% in merchant fees or $60.

They pay you $500 x 5% plus $2500 x 1% or $25 + $25 or $50

In that case they make $10 a month in the merchant fees even after paying you.

Now if you milk the category perfectly, then you spend exactly $500 on the card and no more, then they would only collect $10 in merchant fees and lose $15 a month.

Most customers will act like the first customer, most of their purchases will be at 1% cashback. Many others will carry a balance and pay a high interest rate that far exceeds their cashback.

Yes every card company has a group of customers that they don't make much money on, they may even lose money on some of them. They still contribute to the company because they are still moving money through the system, and allow the credit card company to use the size of their customer base to set the merchant fees.

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Credit card companies generate revenue from transaction fees, balance interest transfers (3-4%), hefty charges on outstanding balances, and late fees. The majority of their revenue comes from interest payments with the highest rate just over 20%.

5% cashback up to $500 spent each billing cycle is peanuts compared to the aggregate total of revenue from these other sources.

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  • Which makes me wonder why they're so eager to have me as a customer. Since I have always been paying my balances in full every month, it seems that they must be losing money on me :-)
    – jamesqf
    Oct 16 at 4:25
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    @jamesqf Not necessarily. They still get a percentage cut of every charge you make to the card.
    – glibdud
    Oct 16 at 5:25
  • If you're always paying every month, the usual trick is to keep raising your limit to encourage you to borrow. Maybe some day you'll find you need something big (e.g. your car dies or you need to visit a sick relative overseas) and putting it on your card will be the easiest option.
    – Stuart F
    Oct 16 at 12:09
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    @jamesqf And indeed they might be. But they don't care about individual accounts as long as their aggregate income is OK, and the cost of tracking which accounts are losers (and the PR hit that might come from cancelling such accounts) probably outweighs what they lose individually from you.
    – chepner
    Oct 16 at 18:03
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    I think that some of you have gotten lost the minor details of an individual's credit card account. 7/27/21: Visa announces a third quarter a third quarter GAAP net income of $2.6B. 7/29/21: Mastercard announces a second-quarter net income of $2.1 billion. In the big picture, paying out 5% in bonuses here and there is peanuts. Oct 16 at 18:38
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If your credit card company is getting 2.9% from the merchants on your purchases, and if the 5% category is limited to $500, then if you spend at least $550 above that $500 in a month (or have $550 in a different category), then the credit card company out ahead. For the vast majority of people, the company will make a profit, even without considering fees and interest charges. The credit card company will be just fine if they end up losing a few bucks occasionally to you in a given month.

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