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I am aware of two income sources: interest and merchant transaction fees. But it doesn't quite add up.

For example, Citi Double Cash pays total 2% cashback. And considering balance is paid off every month, no interest income for Citi. As far as I know merchant pays about 2.5% which is shared between card network, merchant bank and acquiring bank.

It looks like there is no room for Citi make money in this situation. So valid question - why they offer such product at all?

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    What about annual card fees? – JB King Feb 27 '15 at 0:14
  • Have you paired a specific cashback offer to a specific merchant transaction fee? – DJohnM Feb 27 '15 at 0:14
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Not everyone pays their balance in full every month. They may not make interest off of you or me but they do make interest off of a lot of cardholders. In many cases, the interest is variable and the larger your (running) balance, the higher your rate. If you're close to your limit and making minimum payments, you can literally take decades to pay off $2,000 or so.

Some people don't pay at all every month and end up paying late fees. Some people use their cards overseas and pay foreign transaction fees. Ever take a cash advance? Me neither but they charge you interest right away for that instead of waiting until your statement. The list of fees and charges is as long as my arm and in tiny print. That's how they make money.

The points/bonus/cash back and other rewards programs are to get you in the door. It's like when you see a luxury car advertised for a "too good to be true" price and you get to the lot and find out that the one they are selling for that price is a manual transmission without AC or a radio, they only had one and they sold it an hour before you got there. It got you on the lot though. The rewards programs function in much the same way (minus the disappearing part), they get you interested in their offering among a sea of virtually identical products but rest assured, if the card issuers were losing money because of them, they wouldn't exist for very long.

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  • Fair enough, but for my card, a no fee 2% cash back card, you did quite answer how they make money off a customer like me. No interest, no fees in 15 years I've had the card. – JTP - Apologise to Monica♦ Feb 27 '15 at 0:40
  • why they will not plain close this card then? it looks like they either not making money on it at all, or most likely losing (if you include fair share of customer service required) – pavel_karoukin Feb 27 '15 at 0:43
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    You aren't their only customer. They may never make a penny from you but they have millions of less responsible customers out there who are more than happy to give them money month after month – geewhiz Feb 27 '15 at 0:43
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    @pavel_karoukin Fairness and or PR as well as risk. No one would want to do business with a bank that only wanted customers who ran balances and the bank would quickly get a bad reputation for closing accounts that were in good standing. From a risk standpoint, the good accounts help balance the bad ones. If you pay your balance every month and I'm maxed out making minimum payments, which of us is more likely (realistically) to make a payment next month and which of us may declare bankruptcy soon and make the bank eat the debt? It's good to have customers that pay their bills. – geewhiz Feb 27 '15 at 1:01
  • They also charge merchants quite a lot, and if you're a smaller business you're likely paying extra for not being PCI compliant. It's a wonderful business model based on lack of information. If you knew what the average customer like you paid for their card you'd never do it. – Steve Clay Feb 28 '15 at 12:41

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