5 ms·

I've always wondered: is the data the reason why credit card companies are willing to give cash back as high as 5% even to customers who carefully operate them

I've always wondered: is the data the reason why credit card companies are willing to give cash back as high as 5% even to customers who carefully operate them at a clear loss for them?

TylerE 7y ago
No. They make money on the swipe, and more money on the interest, if people don’t pay them off every month, and most don’t.
- mehrdadn 7y ago
  But that's only like 2%. Why still keep around people who are clearly taking advantage of higher rates of cash back like 5% and not paying anything in interest though? What's the benefit of keeping them as customers?
  - mandelbrotwurst 7y ago
    It's closer to 3%, and I don't think there's a way to beat that on the cash back except on a per category basis. Also, a lot of folks end up carrying a balance in spite of their best intentions. I suspect this happens relatively often even for folks with a long history of not doing so - e.g. maybe you get fired for the first time and start running up a balance, not long before you've run up some significant interest charges.
    - mehrdadn 7y ago
      It's around 2% https://www.valuepenguin.com/what-credit-card-processing-fees-costs https://www.valuepenguin.com/what-credit-card-processing-fee... And then there's huge credit card bonuses like $150 for Chase Freedom which is like $7.5k of spending's worth... But again, that doesn't really answer my question. I very much realize lots of people do pay interest. But there are also people who don't, and possibly never have, for many years. I'm asking why do they keep those people around as customers if they're literally losing money on them? To me the obvious answer is they're still bringing value, and the only realistic form that can take as I see it seems to be their transaction data.
      - porpoisemonkey 7y ago
        It looks like most 5% cash back cards have a hard limit ($1500/quarter seems to be common limit) to the amount you can get back and offer an "unlimited" cash back at a rate at or lower than 2%. https://www.magnifymoney.com/blog/best-of/10-best-5-cash-back-credit-cards/#CashBackCreditspecial https://www.magnifymoney.com/blog/best-of/10-best-5-cash-bac... This way they'll make money after the limit takes effect. My assumption is that they are hoping the consumer will forget there's a hard limit to the amount they can save and always go with their "5% cash back card" when making purchases.
        mehrdadn 7y ago
        > This way they'll make money after the limit takes effect. My assumption is that they are hoping the consumer will forget there's a hard limit to the amount they can save and always go with their "5% cash back card" when making purchases. And that assumption is exactly what I'm saying isn't universally true. My entire point is there are customers who just rotate cards instead of still using it for lower cash back. Who do this for years. Without racking up any interest. Why do those customers' accounts get kept open?
        mandelbrotwurst 7y ago
        What I was saying above is that I wouldn't be surprised if a high enough percentage of even the customers who "beat the system" so to speak for many years eventually slip up that it makes up for the rest. If that's the case, and you can't predict who exactly that subset is going to be, you keep all of them around.
      - gnaritas 7y ago
        They do bring value, the same value a lottery winner brings to the lottery; that it's possible and people do win (or can always avoid interest paying off balance) keeps everyone else trying thinking they'll be the lucky one (they'll always pay off their balance). If you refused these people, then there's less incentive to play their game. People don't like games that can't be won, but they appear to like games with terrible odds in favor of the house that can be won.
  - waynesonfire 7y ago
    You also end up spending more, apparently--12 to 20% more. https://www.youtube.com/watch?v=MFkBoXhl5SU https://www.youtube.com/watch?v=MFkBoXhl5SU
    - mehrdadn 7y ago
      They keep around customers who operate at losses for them because then they spend more? So they want these customers to operate at even larger losses?
      - ilikehurdles 7y ago
        I’m not aware of any card that gives flat out unconditional 5% cash back. You sometimes have these elevated award rates but for very specific merchant partners, limited periods of time, with some cap on the total amount received, or limits on how the reward can be redeemed. The base cash back on reward cards hovers between 1 and 2 percent, even ones with high yearly fees (another area where the margin for the issuer is further elevated). The high yearly fee incentivizes card holders to “get their money’s worth” by using the card more.
        mehrdadn 7y ago
        Nobody said unconditional. You just rotate the cards in your wallet and use whatever 5% category fits your purchase. You might not do this, but there are people who do, and never pay interest. They clearly operate at a loss for the company year after year. I'm asking why their accounts aren't closed.
        kube-system 7y ago
        Because for every person who signs up and causes them a loss, there’s dozens of others enticed by the same rewards programs who make them a profit. Credit card companies aren’t having any problems being profitable. I would imagine the number of people who only purchase things that are in the 5% category on their card is extremely small.
  - bsder 7y ago
    The merchants have to pay a percentage. So, by encouraging the use of credit cards for smaller and smaller transactions, the credit card companies take a bigger and bigger bite from the merchant. That's all on top of any annual fees and interest charges that the credit card companies hit the customer with.
ketralnis 7y ago
Some of it's paid for by the merchants https://www.investopedia.com/articles/personal-finance/040715/how-cashback-profitable-credit-card-companies.asp https://www.investopedia.com/articles/personal-finance/04071... > When merchants accept payment via credit card, they are required to pay a percentage of the transaction amount as a fee to the credit card company. If the cardholder has a participating cash back rewards program, the credit card issuer simply shares some of the merchant fees with the consumer And some is paid by interest being paid by other customers http://www.bos.frb.org/economic/ppdp/2010/ppdp1003.pdf http://www.bos.frb.org/economic/ppdp/2010/ppdp1003.pdf > Because credit card spending and rewards are positively correlated with household income, the payment instrument transfer also induces a regressive transfer from low-income to high-income households in general. On average, and after accounting for rewards paid to households by banks, the lowest-income household ($20,000 or less annually) pays $21 and the highest-income household ($150,000 or more annually) receives $750 every year I also have a vague memory that some cards from the same issuer (mostly American Express) charge the merchants more for the higher-level cards, and prevent the merchant from treating those customers any differently. I can't find a source for that, but some starting points might be https://www.washingtonpost.com/business/economy/supreme-court-sides-with-amex-in-lawsuit-over-rules-for-merchants/2018/06/25/c6118978-7887-11e8-80be-6d32e182a3bc_story.html https://www.washingtonpost.com/business/economy/supreme-cour... and https://about.americanexpress.com/press-release/american-express-agrees-settle-class-action-litigations https://about.americanexpress.com/press-release/american-exp...
andrewferk 7y ago
Credit card issuers don't pay for the cash back, it's the merchant. The merchant's are charged a credit card transaction fee that includes a fixed/percent fee determined by the negotiated contract with their bank (the acquirer), a small fixed/percent interchange fee that goes to the credit card payment networks (Visa, MasterCard, etc.), and finally a fee to the credit card issuer that provided the credit card to the consumer. The credit card issuer fees can be the worst because of these high reward credit cards. I'm very aware of this when shopping at a local small business. I'll pay either in cash or with my debit card, because the credit card fees are seriously squeezing small merchants.
- mehrdadn 7y ago
  Citation? It seems pretty crazy to me that every merchant would have to pay the difference when a customer decides to use a 5% cash back card. They can't even know the full list of cards out in circulation, and I doubt their contract says "the fee is whatever portion of the card's cash back we can't pay for" or something like that. It could work for a closed subset of cards they know about and might want to negotate separately, but I don't see how it can work for every card out there.
  - kalenx 7y ago
    They do not pay the whole cash back, but they do pay more for "premium" cards (that they cannot refuse, also). See for instance this https://www.cfib-fcei.ca/sites/default/files/pdf/5513.pdf https://www.cfib-fcei.ca/sites/default/files/pdf/5513.pdf (in Canada, but the same thing applies to the US)
    - mehrdadn 7y ago
      Right, these are just Visa/MC/etc. card classes, which don't determine the cash back on them. And so if that doesn't make up the difference, then the card companies paying the rest, right? My point is that for high-cash-back cards there are easily customers who consistently make more in cash back than whatever fees these folks get and who don't rack up interest, meaning they're costing money, so why should they still be kept as customers?
patio11 7y ago
Ask a simple question, get a simple answer: no. The reason credit card companies are willing to give customers rewards/cashback is that they’re competing, primarily for interchange revenue. Most cards are guaranteed to be profitable for the issuer (ex-credit risk); some models (5% rolling category up to $75 back, etc) are not strictly guaranteed to be profitable, but they’re running a portfolio strategy. You don’t need to make money on every account. You need to make money on every pool of, say, 100,000 accounts. One could conceive of rebate schemes poorly designed enough to not do that, but the industry broadly doesn’t ship them. There are people who make hobbies off of attempting to get the financial industry’s sweet sweet marketing dollars. The financial industry can afford an infinite number of business analysts and geeks. The marketing dollars are still on offer. What does this suggest to you as to the portfolio-wide impact of hobbyists who exploit the offers?

I've always wondered: is the data the reason why credit card companies are willing to give cash back as high as 5% even to customers who carefully operate them at a clear loss for them?

TylerE 7y ago

No. They make money on the swipe, and more money on the interest, if people don’t pay them off every month, and most don’t.

mehrdadn 7y ago
But that's only like 2%. Why still keep around people who are clearly taking advantage of higher rates of cash back like 5% and not paying anything in interest though? What's the benefit of keeping them as customers?
- mandelbrotwurst 7y ago
  It's closer to 3%, and I don't think there's a way to beat that on the cash back except on a per category basis. Also, a lot of folks end up carrying a balance in spite of their best intentions. I suspect this happens relatively often even for folks with a long history of not doing so - e.g. maybe you get fired for the first time and start running up a balance, not long before you've run up some significant interest charges.
  - mehrdadn 7y ago
    It's around 2% https://www.valuepenguin.com/what-credit-card-processing-fees-costs https://www.valuepenguin.com/what-credit-card-processing-fee... And then there's huge credit card bonuses like $150 for Chase Freedom which is like $7.5k of spending's worth... But again, that doesn't really answer my question. I very much realize lots of people do pay interest. But there are also people who don't, and possibly never have, for many years. I'm asking why do they keep those people around as customers if they're literally losing money on them? To me the obvious answer is they're still bringing value, and the only realistic form that can take as I see it seems to be their transaction data.
    - porpoisemonkey 7y ago
      It looks like most 5% cash back cards have a hard limit ($1500/quarter seems to be common limit) to the amount you can get back and offer an "unlimited" cash back at a rate at or lower than 2%. https://www.magnifymoney.com/blog/best-of/10-best-5-cash-back-credit-cards/#CashBackCreditspecial https://www.magnifymoney.com/blog/best-of/10-best-5-cash-bac... This way they'll make money after the limit takes effect. My assumption is that they are hoping the consumer will forget there's a hard limit to the amount they can save and always go with their "5% cash back card" when making purchases.
      - mehrdadn 7y ago
        > This way they'll make money after the limit takes effect. My assumption is that they are hoping the consumer will forget there's a hard limit to the amount they can save and always go with their "5% cash back card" when making purchases. And that assumption is exactly what I'm saying isn't universally true. My entire point is there are customers who just rotate cards instead of still using it for lower cash back. Who do this for years. Without racking up any interest. Why do those customers' accounts get kept open?
        mandelbrotwurst 7y ago
        What I was saying above is that I wouldn't be surprised if a high enough percentage of even the customers who "beat the system" so to speak for many years eventually slip up that it makes up for the rest. If that's the case, and you can't predict who exactly that subset is going to be, you keep all of them around.
    - gnaritas 7y ago
      They do bring value, the same value a lottery winner brings to the lottery; that it's possible and people do win (or can always avoid interest paying off balance) keeps everyone else trying thinking they'll be the lucky one (they'll always pay off their balance). If you refused these people, then there's less incentive to play their game. People don't like games that can't be won, but they appear to like games with terrible odds in favor of the house that can be won.
- waynesonfire 7y ago
  You also end up spending more, apparently--12 to 20% more. https://www.youtube.com/watch?v=MFkBoXhl5SU https://www.youtube.com/watch?v=MFkBoXhl5SU
  - mehrdadn 7y ago
    They keep around customers who operate at losses for them because then they spend more? So they want these customers to operate at even larger losses?
    - ilikehurdles 7y ago
      I’m not aware of any card that gives flat out unconditional 5% cash back. You sometimes have these elevated award rates but for very specific merchant partners, limited periods of time, with some cap on the total amount received, or limits on how the reward can be redeemed. The base cash back on reward cards hovers between 1 and 2 percent, even ones with high yearly fees (another area where the margin for the issuer is further elevated). The high yearly fee incentivizes card holders to “get their money’s worth” by using the card more.
      - mehrdadn 7y ago
        Nobody said unconditional. You just rotate the cards in your wallet and use whatever 5% category fits your purchase. You might not do this, but there are people who do, and never pay interest. They clearly operate at a loss for the company year after year. I'm asking why their accounts aren't closed.
        kube-system 7y ago
        Because for every person who signs up and causes them a loss, there’s dozens of others enticed by the same rewards programs who make them a profit. Credit card companies aren’t having any problems being profitable. I would imagine the number of people who only purchase things that are in the 5% category on their card is extremely small.
- bsder 7y ago
  The merchants have to pay a percentage. So, by encouraging the use of credit cards for smaller and smaller transactions, the credit card companies take a bigger and bigger bite from the merchant. That's all on top of any annual fees and interest charges that the credit card companies hit the customer with.

ketralnis 7y ago

Some of it's paid for by the merchants https://www.investopedia.com/articles/personal-finance/040715/how-cashback-profitable-credit-card-companies.asp https://www.investopedia.com/articles/personal-finance/04071... > When merchants accept payment via credit card, they are required to pay a percentage of the transaction amount as a fee to the credit card company. If the cardholder has a participating cash back rewards program, the credit card issuer simply shares some of the merchant fees with the consumer And some is paid by interest being paid by other customers http://www.bos.frb.org/economic/ppdp/2010/ppdp1003.pdf http://www.bos.frb.org/economic/ppdp/2010/ppdp1003.pdf > Because credit card spending and rewards are positively correlated with household income, the payment instrument transfer also induces a regressive transfer from low-income to high-income households in general. On average, and after accounting for rewards paid to households by banks, the lowest-income household ($20,000 or less annually) pays $21 and the highest-income household ($150,000 or more annually) receives $750 every year I also have a vague memory that some cards from the same issuer (mostly American Express) charge the merchants more for the higher-level cards, and prevent the merchant from treating those customers any differently. I can't find a source for that, but some starting points might be https://www.washingtonpost.com/business/economy/supreme-court-sides-with-amex-in-lawsuit-over-rules-for-merchants/2018/06/25/c6118978-7887-11e8-80be-6d32e182a3bc_story.html https://www.washingtonpost.com/business/economy/supreme-cour... and https://about.americanexpress.com/press-release/american-express-agrees-settle-class-action-litigations https://about.americanexpress.com/press-release/american-exp...

andrewferk 7y ago

Credit card issuers don't pay for the cash back, it's the merchant. The merchant's are charged a credit card transaction fee that includes a fixed/percent fee determined by the negotiated contract with their bank (the acquirer), a small fixed/percent interchange fee that goes to the credit card payment networks (Visa, MasterCard, etc.), and finally a fee to the credit card issuer that provided the credit card to the consumer. The credit card issuer fees can be the worst because of these high reward credit cards. I'm very aware of this when shopping at a local small business. I'll pay either in cash or with my debit card, because the credit card fees are seriously squeezing small merchants.

mehrdadn 7y ago
Citation? It seems pretty crazy to me that every merchant would have to pay the difference when a customer decides to use a 5% cash back card. They can't even know the full list of cards out in circulation, and I doubt their contract says "the fee is whatever portion of the card's cash back we can't pay for" or something like that. It could work for a closed subset of cards they know about and might want to negotate separately, but I don't see how it can work for every card out there.
- kalenx 7y ago
  They do not pay the whole cash back, but they do pay more for "premium" cards (that they cannot refuse, also). See for instance this https://www.cfib-fcei.ca/sites/default/files/pdf/5513.pdf https://www.cfib-fcei.ca/sites/default/files/pdf/5513.pdf (in Canada, but the same thing applies to the US)
  - mehrdadn 7y ago
    Right, these are just Visa/MC/etc. card classes, which don't determine the cash back on them. And so if that doesn't make up the difference, then the card companies paying the rest, right? My point is that for high-cash-back cards there are easily customers who consistently make more in cash back than whatever fees these folks get and who don't rack up interest, meaning they're costing money, so why should they still be kept as customers?

patio11 7y ago

Ask a simple question, get a simple answer: no. The reason credit card companies are willing to give customers rewards/cashback is that they’re competing, primarily for interchange revenue. Most cards are guaranteed to be profitable for the issuer (ex-credit risk); some models (5% rolling category up to $75 back, etc) are not strictly guaranteed to be profitable, but they’re running a portfolio strategy. You don’t need to make money on every account. You need to make money on every pool of, say, 100,000 accounts. One could conceive of rebate schemes poorly designed enough to not do that, but the industry broadly doesn’t ship them. There are people who make hobbies off of attempting to get the financial industry’s sweet sweet marketing dollars. The financial industry can afford an infinite number of business analysts and geeks. The marketing dollars are still on offer. What does this suggest to you as to the portfolio-wide impact of hobbyists who exploit the offers?