How do credit card companies earn when we use the credit card in our purchases?
Written By: admin on January 16, 2010
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1. What are the breakdown in percent? Let say I bought 0 using my credit card.
2. Also,why do some small store require a minimum amount of buy, otherwise a minimum fee is charged, is the minimum fee charged finished up to the credit card company?
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Tags: credit card company, Credit Cards, minimum feeTags: credit card company, minimum fee
This fee is called "interchange", and it was meant to be a fee to the merchant in return for the convenience of customers to pay (i.e. sales will theoretically go up if you make it simpler for customers to spend their money – imagine how much less consumers would spend if they had to predict how much cash they needed every time they went to the grocery store or the mall).
The average interchange fee is 3%, but it varies based on the bank (the issuer of your card, i.e. Chase, Capital One, Citi, etc) and the brand (i.e Visa, Mastercard). Quick note: two major institutions that are both bank and brand are American Express and Learn.
The 3% in this example, would be split between the bank, the brand, and the company that makes the machines that allow the transaction to go through. The bank tends to get the largest percentage, since they are taking on the risk (say, 1.5%). The brand gets another 1% because they opened the door for the merchant to accept their form of payment. The transaction machine company then gets the remaining .5%. Another quick note – the 1.5% that the bank takes as its fee is the source of any rewards the cardholder may receive, which is why most rewards amount to approximately 1%. If the bank takes a higher fee, they can pay a higher reward level.
The 3% may vary – and it is up to the contract between the brand and the merchant as to whether or not merchants are allowed to charge a fee to customers using credit – it is not necessarily illegal. This is just another way that the merchant passes the cost of doing business on to the customer (which is exactly what all merchants do – the price of a buy is directly related to what it costs the merchant to do business – this is not unethical).
Some merchants may require a minimum buy because sometimes instead of a % interchange, there is a flat (say $0.50) fee every time a card is swiped. In this instance it is advantageous to the merchant to only accept buys that keep the interchange fee below a certain % of the total – this allows them to maintain their profit margin.
This is pretty complex stuff, and can vary a lot, but these are the general guidelines.