How Credit Card companies make Money
Once in every day or once in a week, many of us will receive a call asking us to take a credit card free of charge. Many of us got irritated by such calls and most of those numbers are marked as spam. Those calls from banks and other financial institutions bother us to take credit cards and loans. But have you wondered why the companies give free no cost credit cards and how these credit card companies make money by giving us lifetime free credit card?
In this article, we will discuss how these companies will make money and what is the type of business models do these credit card companies have to generate revenue.
The large Credit Card companies in India include HDFC Cards, SBI Cards, ICICI Cards and others. These companies are on a continuous look for new customers to provide large offers on credit cards. They jump to provide all the possible offers in all possible eCommerce sales, Office store purchases and so on. They wanted to aggressively increase their base. They even provide good credit limit with less annual fees and most of the companies waive the annual fees if the spends in a particular financial year exceed a certain threshold.
Now How these Credit Card Companies Make Money at the end by providing such large offers an also credit with no interest if you pay before the due dates to the users. Below are the methods by which credit card companies make money.
1. Interest rates and Other fees.
When you are taking a credit card after using the limit you are supposed to pay the fees when the credit card statement gets generated at the end of the billing cycle. But many of the times when you are out of cash, you can pay the minimum due and can pay the rest of the amount in the next billing cycle.
In such case, you will be charged interest for that period of time for which you have not paid the dues. This interest is so huge that sometimes the interest rate will be around 3-4% per month which comes out to be around 40% per year.
In addition to the interest fees, you also have to pay late payment fees in case you don’t pay before the due date mentioned in the Credit card statement.
Remember when you pay late, your credit sore will also be affected
2.Customer Base
Increasing brand awareness and generating the customers for the business is a costly process. For the banks and financial institutions, credit cards help to gather a large amount of data about the individual and also make them useful for the future business.
Like an individual holding an SBI credit card can be contacted by the bank with the details provided while availing the credit card to ask if there any requirement of loans and thus generate a potential lead for the business.
Credit card companies also have the access to the financial behaviour of the customer. what is the spending of the customer and how frequently they do the online transaction and offline transactions and others. And based on these data, suitable offers and products can be provided to the users. Generating and gathering such data outside is very costly and unreliable but credit cards offer authentic and reliable data for the business.
3. Merchant fees
Credit cards companies have another important revenue model which is not known to the general customer is the charges it levies on the merchants. Most of the credit cards charge the merchants a certain percentage of the transaction when a customer uses the bank’s credit card to pay to the merchant. This will be around 1.5-2%
And also credit card companies charge payment gateway fees for online transactions.
There charges constitute a large percentage of revenue for the credit card companies.
Bottom line – How Credit Card companies make money
Credit card business is a booming business in India with double-digit growth in the last few years. The business is expected to grow and the customer base is expected to increase many folds in the coming decade. The credit card companies will also start looking for new revenue gerations.
