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How Credit Card Companies Make and Earn Money

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Credit card companies make money by collecting fees. Out of the various fees, interest charges are the primary source of revenue. When credit card users fail to pay off their bill at the end of the month, the bank is allowed to charge interest on the borrowed amount. Other fees, such as annual fees and late fees, also contribute, though to a lesser extent. Another major source of income for credit card companies are fees collected from merchants who accept card payments. These average out to approximately 1.75% of each transaction.

Through the fees they get to collect, banks make a profit on their credit card business—approximately 4.04% of quarterly assets.

Income from Credit Card Interest and Merchant Fees

The primary way that banks make money is interest from credit card accounts. When a cardholder fails to repay their entire balance in a given month, interest fees are charged to the account. For any given account, the interest charged is equal to the card's periodic rate multiplied by the average daily balance and number of days in a billing period. The periodic rate is the annual percentage rate (APR) divided by 365. In the United States, the average credit card interest rate paid by interest-bearing accounts is 14.87%.

The second largest source of income for credit card companies are fees collected from merchants. When a retailer accepts a credit card payment, a percentage of the sale goes to the card's issuing bank. This is commonly referred to as the interchange rate. In the US, the average interchange rate is around 1.75%, though it varies from card to card and retailer to retailer.

The table below shows the year-to-date credit card income for eight banks that are classified by the Federal Financial Institutions Examination Council as "Credit Card Specialty Banks". The information is self-reported by banks, and is current as of September 30th, 2017.

Company

Credit Card Interest IncomeInterchange IncomeTotal
American Express$2,315,623,000$3,789,124,000$6,104,747,000
Barclays$2,942,124,000$301,631,000$3,243,755,000
Capital One$10,700,548,000$2,117,202,000$12,817,750,000
Chase Bank$9,818,588,000$1,749,668,000$11,568,256,000
Comenity$3,533,233,000$146,257,000$3,679,490,000
Discover$7,400,423,000$673,422,000$8,073,845,000
Synchrony$8,932,064,000$602,979,000$9,535,043,000

When looking at income, consider a bank's expenses. For example, when credit card issuers offer loans, some consumers never pay them back. These are commonly referred to as "interest expenses". However, these expenses are just a fraction of the interest income. Here is an industry-wide overview:

Percent of Average Quarterly Assets
Total Interest Income10.13
Total Interest Expenses1.06
Net Interest Income9.07

Finally, banks also take in other forms of non-interest income. While large portion of it is made up of the the aforementioned interchange fees, the rest comes from annual, late, cash advance and balance transfer fees. These also have other types of overhead expenses associated with them.

Percent of Average Quarterly Assets
Total noninterest income4.01
Total noninterest expenses6.08
Net noninterest income-2.07

When both net interest and net non-interest incomes are considered together, credit card companies make a sizable profit. In 2016, these income sources accounted for a positive 4.04% of their average quarterly assets.

How Much Do Credit Card Companies Make Per User?

On average, each active account makes $213 for credit card companies per year. There are massive differences between banks. For example, Synchrony and Comenity Bank issue cards to a largely subprime user base—individuals with low credit scores. Statistically speaking, these accounts are more likely to not pay off their full balance each month, and as a result, pay interest. Additionally, subprime accounts tend to have significantly higher interest rates. Therefore, the individual users pay higher interest fees and there is a greater concentration of interest-bearing accounts at these banks.

Company

Active Cardholder AccountsInterest Per AccountInterchange Per AccountTotal
American Express62,700,000$36.93$60.43$97.36
Barclays16,300,000$180.50$18.50$199.00
Capital One62,100,000$172.31$34.09$206.40
Chase Bank82,800,000$118.58$21.13$139.71
Comenity9,589,510$368.45$15.25$383.70
Discover38,700,000$191.23$17.40$208.63
Synchrony36,700,000$243.38$16.43$259.81

How Do Credit Card Networks Make Money?

Visa, Mastercard and American Express earn money from assessment fees, which are assessed for processing a merchant's credit card transactions. These are different from the interchange fees previously mentioned. The card network—the company, which has the logo on the bottom right corner of a card—collects a far smaller fee with each transaction known as the assessment fee. The fee is 0.13% of each credit card transaction through Visa, and 0.12% for Mastercard transactions.

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