7 ms·

I don't understand. I read about half of the article and it doesn't explain how that works. I mean money has to come from somewhere, I assume the tens of milli

• pbreit 10y ago
  The banks pay the airlines for miles cardholders earn.
  • fizixer 10y ago
    Yes. But how do banks make money? Surely they're not paying airlines for miles and distributing the miles free-of-charge to their card holders out of the goodness of their hearts. What are they getting in return? Either what I said above or something more/different (annual fees is another possibility?).
    • ajdlinux 10y ago
      Interchange fees charged per-transaction by Visa/MC/Amex.
      • pbreit 10y ago
        Correct. Merchants pay about 2% on credit card charges. The other big earnings stream for banks are finance charges on cardholders who carry a balance (ie, borrow money from bank).
        • dragonwriter 10y ago
          Every cardholder who uses their card borrows money; carrying a balance is a matter of not paying it back within the grace period, but you are borrowing money either way.
          • peteretep 10y ago
            Most attempts at pointless pedantry are incorrect. In this case, I have at least one credit card where I've put down a deposit of twice the spending limit of the card. At no time am I in debt to the bank, or borrowing money to them. Yes it's a credit card, not a debit card.
            • nommm-nommm 10y ago
              That's called a "secured card." Anyways, you were still borrowing money they just had you put up collateral first. You were still in debt to the bank, the fact they were holding collateral for the debt is irrelevant. It's like if I had a fedora collection worth $30,000 and I go to the pawn shop and they give me a $10,000 loan and hold my Fedora collection as collateral for that loan.
              • ajdlinux 10y ago
                Forgive me if I'm missing something obvious, but what exactly is the point of a secured credit card - how is it really different from just paying in cash? (I'm from .au, where secured credit cards apparently don't exist, but I've read about the concept on the internet in the American context)
                • peteretep 10y ago
                  My card was issued somewhere I have no credit history. The point of the card is to have access to a credit card -- with its benefits -- without needing to borrow from the bank.
                • nommm-nommm 10y ago
    • nommm-nommm 10y ago
      Annual fees, interchange fees, misc fees (late payment, etc), and interest. Same way banks make money off the rest of it's cardholders.
      • jessriedel 10y ago
        To be clear: the interchange fees (~2.7%) paid by the merchants are the cost that is always there and completely covers the kickbacks to the consumer. The other things are certainly money makers, but they may or may not be negligible depending on the card and the consumer.
        • sitepodmatt 10y ago
          Interchange fees dont go directly to bank providing the card afaik. Visa/Mastercard network take a cut, I recall reading 0.25% on CC in Europe? Then the merchant bank takes a cut (merchant services and shouldering last man standing chargeback/fraud risks - hence why sometimes merchants pay 4%+) and then hmm anyone else?? I doubt any more than 1% is remitted to the bank providing the card given I know some physical retailer (small) paying ~1.4% in UK. In the UK they also market you for $. They ain't sending you that exclusive "loyal VIP customer" introduction/bonus offer for virgin wine, or some fitness club, or breakdown out the goodness of their heart..Which is probably another nice earner on top of everything else
          • nommm-nommm 10y ago
            >anyone else?? Credit card partners! So if you get your favorite sports team's credit card, they get a cut. http://www.doctorofcredit.com/everything-you-ever-wanted-to-know-about-credit-card-partners-how-much-they-make-more/ http://www.doctorofcredit.com/everything-you-ever-wanted-to-... There's even a Linux credit card (not kidding) https://www.linuxfoundation.org/offerings/linux-credit-card https://www.linuxfoundation.org/offerings/linux-credit-card
          • Symbiote 10y ago
            The European rules to limit transaction fees seem to have removed almost all cashback cards from the UK. There are still some [1] with introductory cashback, or very limited cashback, but nothing like the 2-3% ones that used to exist. I'm not sorry to see them go -- charging all customers an extra 1.5% (or whatever) in order to give a savvy few cashback isn't fair. [1] http://www.moneysavingexpert.com/credit-cards/cashback-credit-cards#bestbuys http://www.moneysavingexpert.com/credit-cards/cashback-credi...
• vmarsy 10y ago
  One way normal credit card companies makes money is this way: They charge the merchant a fee (1 to 4%), and in exchange they give a 1-2% cashback to the customer. They make profit on the difference. With a deal with an airline, the company doesn't have to do the 1-2% cashback, instead they give 0 to the customer. The airline company will give them miles though. Now the airline company can say to the credit card company: "look these thousands of customers you have them only thanks to me, so let's split your profits from the merchant 50/50 (or at least give me that 1% cashback you don't have to pay the customer), plus at some point I'll have to actually offer a plane ticket to those customers who earn enough miles" What a customer gets usually is something like 7 miles per dollar. Consumer website estimate[1] that in the best of case, a mile is equal to ~$0.01, so they're also saving money there. (Plus the money the credit card company give them is today, whereas the plane ticket might be in one year or more, so the present discounted value of that ticket is even less) [1] https://thepointsguy.com/2017/04/april-2017-monthly-valuations/ https://thepointsguy.com/2017/04/april-2017-monthly-valuatio...
  • fizixer 10y ago
    So in the end: - more customers - buying more useless stuff (to collect miles) that they would otherwise won't buy. - making outrageous travel plans (using those miles) that they otherwise won't make (e.g., fly to europe over the weekend if you're feeling bored; or world tour for honeymoon). on top of the usual: - annual fee - interest on credit card (missed monthly payments and/or lower-than-full payments)
    • kalleboo 10y ago
      And of course a bunch of those miles will expire, or some customers will never reach enough miles to make a flight. And at least in the past some airlines have had pretty high fees for redemption flights ("fuel surcharge") that might even cover most of the cost
      • zwily 10y ago
        Haven't most programs switched to miles not expiring? I know Delta has.
• rsync 10y ago
  "I mean money has to come from somewhere, I assume the tens of millions of credit card holders." No, the money comes from merchants. When you charge something at a merchant (the seller) with a rewards card, the merchant pays a higher percentage fee to the card issuer for that transaction. So when you sell things, and you accept credit cards, there is actually a fairly large variance in cost between different cards that your buyers might use ... it might be quite cheap for you if your buyer used a plain old visa card with no rewards ... and it might be 3-4x that fee if they use some crazy cash rewards super bonus miles card ... That is where the money comes from.
  • robotresearcher 10y ago
    The merchant takes this cost into account when setting prices. The money comes from the buyers.
    • gozur88 10y ago
      It comes from the buyers as a group. But not everyone pays with a credit card, and not every card has the same fee to the merchant.
    • keerthiko 10y ago
      In that case the cost burden is primarily from the buyers using non-rewards credit cards or cash with those merchants, since they are typically paying the same $ price without getting the utility of the credit card cost factored into whatever they are paying. I guess a lot of people pay the same price for a product or service and don't use every aspect of it.
      • robotresearcher 10y ago
        That's right. But the merchants tolerate it because the people with high-end cards tend to spend more money per person compared to a bare-bones cardholder. On the miles cards, the merchant hopes to make out by getting larger sales, albeit keeping a smaller percentage.
      • 10y ago
• goflyapig 10y ago
  I found it very confusing, too. In particular, the headline makes no sense at all -- ultimately the "miles" they sell are for the very same "seats". Framing it as though the "miles business" is distinct from the "flying business" is nonsensical. What I think it's getting at is: airlines are increasingly selling their services (i.e. seats on planes) indirectly, via loyalty programs instead of directly, via ticket sales. Selling via the loyalty programs has benefits probably because consumers over-value the miles they receive, because (a) some portion of the miles will expire or never be redeemed, and consumers don't internalize that fact, (b) the airline collects from from the bank as soon as the issue the miles, but they don't have to pay for the seats until some point in the future, and (c) they can take advantage of some psychological factors/gamification by encouraging people to earn "gold" or "platinum" status, etc.
  • peteretep 10y ago
    > ultimately the "miles" > they sell are for the very > same "seats" No figure to support the following claim, but I'd expect 50% of miles to expire without being redeemed. But also: I recently stayed at the Conrad Rangali "for free" having accumulated enough points. Food, a small upgrade, transfer to the island, etc conspired to add an extra $5,000 of spend on a five night stay. Don't underestimate the upsell!
    • saryant 10y ago
      Well, yeah. It's the Maldives. I've used points for five-night stays at the Conrads in Seoul and Tokyo without having a single dime on my invoice at checkout.
      • peteretep 10y ago
        I have not escaped any points stay without additional spend, and I suspect that makes me the much more typical case than you.
        • saryant 10y ago
• elastic_church 10y ago
  its just arbitrage. airlines sell a mile at an average of 1 cent, banks charge merchants 3.5 cents for every dollar. consumers can win if they pay their credit card off on time. many of them are able to churn by putting business travel from their employer on their credit card and getting it reimbursed in time. banks can win double and triple if consumers don't pay their credit card balance completely one time, just once. since the credit card aspect was already there whether there were good loyalty programs in existence or not, its actually a decent ecosystem!
• golergka 10y ago
  It's not about the amount of the money. It's more about the nature of the money, liquidity and risk. One of the ways to look at it is that banks pay to attract stable, low-risk customers. They're losing money on each individual cards, but they gain money in the long run buy attracting high-income people who will continue to spend during an economic downturn. Most of the modern economic system is not about making money out of thin air, but about managing risk.