Credit Card Issuer v. Payment Processor
March 23, 2009 by Miranda Marquit
Filed under Finance
One of the more interesting things that people are finding out as credit card issuers start closing accounts of those who are responsible with their credit is that issuers don’t actually want you to pay off your balance every month and use your card only occasionally. I was asked about this recently:
“I don’t understand why credit card companies care,” a friend said. “Don’t they get money on each transaction? Even if I pay off my credit card every month, or use it only occasionally, aren’t they making money even if I don’t pay interest?”
My friend has been caught in the common misconception that the company whose logo you see issues the card. While this is true of American Express and most Discover cards, the fact of the matter is that Visa and MasterCard are actually processing payments, not issuing credit cards. The card issuer — the bank or the credit union that set up your credit card account — earns money from the interest.
Payment processing fees
That 3% to 5% of the transaction that stores and other talk about when they say that part of your purchase is deducted actually goes to the payment processor. Visa and MasterCard have agreed to let certain issuers use their logos, and credit cards can easily be used around the world. But Visa and MasterCard do not get interest from your payments; they make money on the transaction fees they take for facilitating the transaction.
The only way for the actual issuers to make money, then, is to charge interest and fees. If you are not carrying a balance, the bank or credit union doesn’t make money off the loan it provides you. Discover and American Express are exceptions, because they have their own payment processing systems and issue their own credit cards.
Visa and Mastercard are toll booths with no credit risk. Amex, Discover collect all the toll plus assume the credit risk of the purchaser; right now they are writing off 7-8% of their loan balances as people overextend themselves and can’t pay. Banks collect a small part of the toll from Visa or Mastercard and assume all the credit risk.
This article is flat-out wrong. In actuality, most (almost 90%) of the revenue from what the author refers to as “payment processing fees” goes to the banks issuing the cards. It’s Visa and MasterCard that gets the small slice of the pie at less than a tenth of 1% of the transaction amount.
Think about it; if the banks aren’t making any money off of transactions, why would they offer incentives like rewards and cashback that are based on spending (versus say, interest paid)? Banks make money hand over fist everytime you use your card, and these interchange fees, as they’re technically called, are actually one of the biggest controversies surrounding credit cards, as it’s the banks that are setting the percentages on these fees!
For more info, just google “interchange fees”.