74 ms·

How credit cards make money

615 points by gregnavis 5y ago

nwatson 5y ago
Here's an SDK from Solid Finance you can use to put a bank, bank accounts, customer individuals and organizations, and credit cards (create cards and transact on behalf of your customers) inside your app: https://www.solidfi.com/dev https://www.solidfi.com/dev ... complete with KYC and KYB and other regulatory concerns incorporated.
otterley 5y ago
Flagging to remove unnecessary author name in title.
- blyvocalfrylish 5y ago
  but... i like this author? when i see patio11 or Patrick McKenzie's name in a submission title or submitter field, i know that i am going to be reading some good writing today.
  - spaetzleesser 5y ago
    I think there is a risk of developing a superstar cult if the authors name is in the title. I also don’t like titles like “Harvard scientists have found X”. Suddenly the article gets more credibility because if “Harvard”. Although in reality the big name institutions are putting out as much BS as everybody else.
  - patio11 5y ago
    The HN convention is for titles to generally very closely track original titles unless those are misleading/clickbaity/etc, and assume that HNers have the domain name to author map reasonably cached. (Thanks for the praise! Hope to continue earning it.)
  - sokoloff 5y ago
    Me too. However, including some author's names and not others is inherently an editorializing decision and I'd prefer to keep the editorializing out of headlines. I didn't flag it, but do prefer that the original headline stays (which is "How credit cards make money", not "Credit cards make money" anyway) In this case, the domain is a clear cue to me.
  - jimbob45 5y ago
    HN's staying power comes from its highly conservative approach to website design but I agree that there are some articles that would greatly benefit from having their author's names attached to them.
  - telotortium 5y ago
    1. It's not general practice at HN to put the author in the title, unless it really changes how you interpret the title. For example, you might submit Principia Mathematica (Bertrand Russell) if you think there's a real risk people might confuse it with Philosophiæ Naturalis Principia Mathematica by Issac Newton. 2. kalzumeus.com is patio11's personal domain, so it's even less necessary to put the author in the title.
  - area51org 5y ago
    Really? I find him self-important and full of dubious ideas. I know that's not the conventional wisdom about him here, but take a long look at what he actually says about things. He's often wrong, and is rarely open to the possibility that this is the case.
teej 5y ago
> It’s often forgotten, but prior to credit cards, many Main Street retailers like e.g. pharmacies maintained hundreds or thousands of credit accounts for customers individually, necessitating their own back offices, accounting, and collections headache. This article is a great history of how the modern credit card came into being https://www.washingtonpost.com/archive/lifestyle/magazine/1994/11/04/the-day-the-credit-card-was-born/d42da27b-0437-4a67-b753-bf9b440ad6dc/ https://www.washingtonpost.com/archive/lifestyle/magazine/19...
- edgyquant 5y ago
  I find this ironic since now days it seems every store has its own credit card. I even have a card from pep boys (and was given a free oil change just to sign up.)
  - ishjoh 5y ago
    It's because there are white label credit cards that are extremely easy to setup if you're a business and they're so profitable. Not only does the store get a sale upfront which a customer might not have been able to afford without it, they get additional revenue when folks are slow to repay their bill.
    - gowld 5y ago
      The store gets money when customer pays the bank interest?
      - jasode 5y ago
        Yes, the retailer gets a portion of the interest payment. Example story mentioning it: https://www.nytimes.com/2017/05/11/business/dealbook/retailer-credit-cards-macys-losses.html https://www.nytimes.com/2017/05/11/business/dealbook/retaile... https://archive.md/kuW2K https://archive.md/kuW2K
    - morpheuskafka 5y ago
      Do you know if these first part transactions also bypass Visa/MC and interchange? It seems like they should have it so the affiliated merchant can just send the charges over to the issuer directly and bypass everyone else.
patio11 5y ago
I'm happy to answer any questions or take suggestions for future issues if you have them, HN. Repeating something I've said before: this is the 3rd issue of a weekly newsletter, and its going to come out on every Friday for the foreseeable future. As someone who has spent more than 10 years here, I'm keenly sensitive to HN's desire to not have the front page be as predictable as my new shipping cadence. I'd appreciate if folks could be selective in submitting these; in prior years I'd space out my essays to avoid wearing out my welcome but that's difficult to do with a newsletter that is open-to-the-public.
- jiqiren 5y ago
  Is it true top tier customer reward cards (black/platinum/amex business/etc) have interchange fees that push into 3% territory? If so, how do companies like Square make money when they only charge the merchant 2.6% for a POS transaction?
  - amance 5y ago
    No. Aggregate interchange for top-tier Visa and Mastercard personal cards maxes out at ~2.3%. Corporate cards actually earn significantly higher interchange, but even those don't aggregate out above 3%. Actually, the networks spend a lot of time policing banks from trying to arbitrage the difference by issuing corporate cards to individuals. Payment processors like Square just know that their margins will vary by the type of card used by consumers, but aim to have an aggregate positive margin across all cards. Once you get into enterprise contract negotiations with them though, they'll look at your card mix to make a pricing offer.
  - fragmede 5y ago
    Square, by virtue of their business model, get lower interchange fee because charges where the credit card is present, has lower fees. Online-only merchants get no such discount.
- steveklabnik 5y ago
  One thing that might be fun to cover: I got in a twitter discussion today about why Europeans don't use credit cards as much as people do in the US. Researching this question and related ones ("why are wire transfers free in Europe but not in the US") are basically impossible to Google, as similar but not actually good results ("the cheapest way to wire money to Europe") drown out any primary resources.
flerchin 5y ago
I feel like folks like us, that never miss a payment, and max out our rewards, are net-losses for most credit card issuers. It's not clear why they don't just fire us as customers.
- patio11 5y ago
  So credit card issuers are pretty sophisticated with regards to this, and many of them track different user personas and use them to dice up their portfolio by archetypes. The "folks like us" archetype is one which is definitely tracked and goes by different names at different places. I express no strong opinion on whether you personally are contribution margin negative for your issuer. On a portfolio level though, this is extremely well studied and extremely clear: that archetype is staggeringly contribution margin positive. It's actually one of the best performing ones at some issuers, principally because the archetype spends a lot per account, has negligible defaults for non-fraudulent users, and therefore earns lots of interchange at favorable margins. It is possible, given the design of individual products, that a user with close-to-optimal spending decisions is contribution margin negative on individual products and potentially on all accounts with a particular issuer. People outside the credit card ecosystem believe this is much more common than it actually happens. A lot of thought goes into the design of products to decrease the likelihood of adverse use, cap the damages, and encourage users who are very skilled at gamesmanship to game their way to being contribution positive.
  - hammock 5y ago
    It is a tangled tangled web, but if in fact the "folks like us" are actually profitable, due to fees charged to merchants, there is disruption waiting to happen in that arena, perhaps by some huge merchant somewhere (Amazon? Walmart?)
  - jonas21 5y ago
    > It is possible, given the design of individual products, that a user with close-to-optimal spending decisions is contribution margin negative on individual products and potentially on all accounts I feel like that user is typically the sort who enjoys telling anyone who will listen about how they managed to get great rewards from their card. With all that free marketing, the credit card issuer is probably happy to have them as a customer, even if they lose a little bit of money on them.
draw_down 5y ago
Thank goodness the "How" was automatically removed from the title. I was in danger of understanding it.
alberth 5y ago
> "A much smaller portion of interchange goes to the credit card processor, to the acquiring bank, and to the credit card network" That's technically not accurate. Credit card networks do not earn money from interchange [1]. [1] "Visa does not make money from individual transactions." https://revenuesandprofits.com/how-visa-makes-money-understanding-visa-business-model/ https://revenuesandprofits.com/how-visa-makes-money-understa...
- patio11 5y ago
  I would like to reiterate my standard disclaimer for this publication but if you want to bet that I don't understand how scheme fees are calculated that is a poor decision.
  - fragmede 5y ago
    That raises a question though: In your opinion, where/in what subjects would betting against you not be a poor decision?
    - patio11 5y ago
      I'm less good at poker than many people's model of me predicts. (Probably juuuuuust about good enough to do 2/5 profitably in Vegas, though I mostly play tournaments because they're more fun for me.)
  - alberth 5y ago
    I’m not suggesting you don’t understand it, but see my sister comment in this thread. How it’s worded implies issuers are even paying a fee & that fee is derived from interchange. When that’s not always the case.
- the_pwner224 5y ago
  > Visa does not make money from individual transactions. Instead, it earns revenues from the issuers and acquirers based upon the overall payment volumes and number of transactions processed. Which is effectively the same thing.
pc86 5y ago
Title should be "How credit cards make money"
- kentonv 5y ago
  I think HN automatically removes "How" from the beginning of titles, on the basis that it's superfluous or clickbait-y or something. I personally find this confusing, it often changes the meaning of the title IMO.
Bellamy 5y ago
Would be interesting to know if credit card companies sell data and which data exactly?
- gowld 5y ago
  Turn on your ad blocker and then visit https://www.fastcompany.com/90490923/credit-card-companies-are-tracking-shoppers-like-never-before-inside-the-next-phase-of-surveillance-capitalism https://www.fastcompany.com/90490923/credit-card-companies-a...
askingpatio21 5y ago
Hey Patio - what's your current take on Crypto and have you / do you cover that in your newsletter or have a more recent twtr thread to send us to? I know you've been a major skeptic of the gratuitous pyramiding, wash trading, and shaky (or non existent) foundation of Tether etc But w/your depth of knowledge on the current financial system would be very interested in your take on the current market and next gens of defi / staking / shared pools / etc Would love to see you ingest and break that all down https://techcrunch.com/2021/10/13/payments-giant-stripe-says-its-re-entering-the-crypto-market/ https://techcrunch.com/2021/10/13/payments-giant-stripe-says...
morpheuskafka 5y ago
> Debit cards are a very similar product with enough under-the-hood differences that they deserve their own moment in the sun. In particular, due to a quirk of U.S. interchange regulation, they basically fund most of the fintech industry Basically, the Durbin Amendment caps interchange on debit cards at a far, far lower rate than credit cards; they also have different networks (not MC or Visa) that can be run at least for in person transactions. However, the limit does not apply to banks with less than $10 billion in assets. This is why some online banks can offer lower fees and sometimes even debit cash back (1% is the most I've seen though, so not competitive with credit). But its also why ever fintech under the sun pushes debit cards so heavily--the debit card is issued by a (small, non Durbin-covered) partner bank who then shares revenue with the fintech company. At the end of the day, credit cards are still significant better for customers. You can have multiple cards with different benefits while keeping all your money in one place, and you can prevent overdrafts because you don't have random subscriptions taking out unpredictable amounts of money in the middle of the night and causing a check to bounce the next day. You are no longer obsessing over "early payday" features or ACH speeds. Credit cards also provide a nice hack to allow cash deposit for those with only online banks--you can often use a big bank's ATM to make a payment towards the credit card, allowing you to get rid of ordinary amounts of cash.
- ollien 5y ago
  > You are no longer obsessing over "early payday" features or ACH speeds. Timing ACH payments _sucks_. Tangential, but I'm in a renting situation where my landlord demands rent land in their account on the first of the month. Receiving rent on the 26th (i.e. 5 days early, not 26 days late) was deemed "too confusing" for them. I now have to play this awful game of timing ACH transfers to land on their account as close to the first as I possibly can.
  - arcticbull 5y ago
    Agreed, luckily RTP rollout is well under way, and it won't be long before ACH is a thing of the past. [1] [1] https://www.theclearinghouse.org/payment-systems/rtp https://www.theclearinghouse.org/payment-systems/rtp
lnwlebjel 5y ago
Patrick, how much do you read in a given day (eg. hours?) All those words (and the deep knowledge they reveal) must come from somewhere. And what do you read? Not just twitter I suspect. This article of yours is fascinating: https://bam.kalzumeus.com/archive/financial-innovation-is-happening/ https://bam.kalzumeus.com/archive/financial-innovation-is-ha... Thanks
- patio11 5y ago
  Varies wildly by the day (and year); probably two hours at the median. I have an advantage in that this sort of thing was a hobby for me for 20 years and then it became very work-relevant the last 5. Someday I'll try to curate a reading list but in the meanwhile the sort of things I read are generally the sort of things I link to in essays/on Twitter/etc. Everything from WSJ to Byrne Hobart's newsletter to Fed research papers to e.g. almost any book that looks plausibly interesting about financial fraud (best one: Lying about Money, Dan Davies).
  - bradj 5y ago
    Have you read up about the world of commodity trading at all? I imagine you’d be interested in the book The World for Sale if you haven’t already read it. Interesting combination of market structure, fraud and geopolitics.
  - fragmede 5y ago
    As someone who soaks up information as a sponge, there's a wealth of knowledge to be gained from experts in their field, interactively, and access to Slack at a fintech company provides that in piles. I'm curious, how much time would you say you spend on slack/how do you interact with that?
  - AviationAtom 5y ago
    *Lying For Money
_trampeltier 5y ago
Does anybody know excactly what data a store get about me, if I buy it with a Credit or Debit card. Does someone has some example data or so?
- dangrossman 5y ago
  If you're using an EMV chip card, they don't get any personal information about you from the card at all. The card is used to authenticate a transaction, nothing more. The store's payment gateway knows what brand of card it charged, how much money was captured and when, none of which is personal information.
newhouseb 5y ago
If you want to learn more about this space, I'd check out Payment Systems in the U.S. [1] which talks about a lot of the history and parties at play here. It's also fun/interesting to look at the published interchange rates for various classes of commerce. Here's Mastercard's: https://www.mastercard.us/content/dam/public/mastercardcom/na/us/en/documents/merchant-rates-2021-2022-apr-2021.pdf https://www.mastercard.us/content/dam/public/mastercardcom/n... [1] https://www.amazon.com/Payments-Systems-U-S-Third-Professional/dp/0982789742 https://www.amazon.com/Payments-Systems-U-S-Third-Profession...
bob229 5y ago
They make money by taking advantage of fools. They are a shameful product
megablast 5y ago
Why was the title changes from "How credit cards make money"??
mattfrommars 5y ago
The knowledge which the author has been sharing has been my interest for a long time. I gave up because lack of material on it. Any idea how did OP gain all these knowledge? For example, I want to implement a QR payment application, think like transferring money through Venmo using QR code, now Paypal does it, very popular in China -- basically a payment processing application but my local country - think Mexico or Peru. How does one understand all the requirements to make it work? It makes me wonder how did Stripe founder obtains this crucial knowledge to build what they have. Payment processor or integrating with banks. Same thing what Plaid is doing. If I wanted to create an API to interact with a bank for my local city here in the U.S., do I call up a bank teller and ask me to connect me to someone who is interested in integrating their bank with the world? I am certain doing a CFA or master degree in finance will get you no where if your goal is build what Plaid and Stripe have done. Instead, you need to know big shot and have ties with them to achieve success. It kind of make sense this to be true otherwise an developer in India or Ukraine can build APIs ...
- symlinkk 5y ago
  You have to know people.
- Scoundreller 5y ago
  > If I wanted to create an API to interact with a bank for my local city here in the U.S., do I call up a bank teller and ask me to connect me to someone who is interested in integrating their bank with the world? I always wondered this, but when some minor crime seems to get heavily investigated by police. Seems like there are avenues to report something and have it taken seriously that just doesn’t exist for the general public calling the general number.
- somethoughts 5y ago
  I think they were trying to get payments going for a startup idea and were trying to get payments integrated. Or at least that's the founding story. "In early 2010 John and Patrick began working on Stripe together. At the time Patrick was working on several side projects and they debated why it was so difficult to accept payments on the web. They sought to solve the problem and see if it was possible to make it simple - really simple. The next 6-months they played with it, showed it to friends, and saw how people interacted with it, iterating along the way." [1] https://www.startupgrind.com/blog/the-collison-brothers-and-story-behind-the-founding-of-stripe/ https://www.startupgrind.com/blog/the-collison-brothers-and-...
benatkin 5y ago
steal money FTFY
- mst 5y ago
  Cost of handling cash is higher than you might expect, which means that interchange fees aren't nearly as bad a deal for the merchants as people think.
sofixa 5y ago
Generally good article, but this part bothers me: > For another, this ended up being an almost peculiarly American experience. In Europe, regulators were worried about the cost of interchange to businesses (rather than consumers) and capped it. Since issuers didn’t have the margin to compete on rewards paid for by interchange, they instead leaned into branding and convenience, and credit cards became a smaller portion of the payment mix (about 47% of electronic payments, compared to almost 70% in the U.S.). First, the 47% is for all types of cards, debit and credit. Second in the SEPA space (at least the eurozone), wire transfers are free of charge, and are frequently used(for rent, salary, buying a kitchen, even between friends, at least in France), which removes some of the uses for bank cards. Furthermore, bank cards usually have limits, so buying expensive things (like a car or kitchen) isn't necessarily straightforward, unlike a wire transfer. IMHO shit prices and delays are the reason peope in the US often use cheques where in the EU we'd use a wire transfer, and it isn't really true that cards are less used here.
- rsstack 5y ago
  While I agree with your main points, note that none of the specific examples you used include a credit card transaction in the US.
- hocuspocus 5y ago
  Also card usage varies a lot between countries, mostly for cultural reasons. Moreover I'm fairly certain that before the mandatory cap on interchange, countries with relatively high card payments were also the ones with the cheapest PSP fees.
- nottorp 5y ago
  > In Europe, regulators were worried about the cost of interchange to businesses (rather than consumers) and capped it. Hmm not everywhere. I recently went to the Netherlands and was surprised to see not everyone accepted credit cards - while they do accept (local) debit cards. My cards are Romanian, so you can't blame US banks. In one small store they explained to me that accepting Visa/MC would cost them 10%, which looked insane to me.
  - 5y ago
treyfitty 5y ago
One of the under appreciated legal precedents set a couple years ago was the Ohio V AmEx anti trust case. The case predicated against AmEx’s merchant contract forbidding merchants to steer customers away from using their Amex card. This was a common practice for many years, especially at restaurants since AmEx charged restaurants 6%. The Supreme Court ruled that amex was able to keep the anti-steering provision in merchant contracts because they defined credit cards as a two sided market, and the harm to customers couldn’t be proven. In essence, the Supreme Court set a precedent that in any 2 sided market, in order for something to be considered anti competitive, a high bar needed to be met: the government must show that both sides of a 2 sided market be harmed in order for something to be anti competitive. Had the ruling been the other way, almost every industry would have been impacted- Uber, App Stores, Advertising…etc are all 2 sided markets. In essence, Credit cards have had a huge impact to our lives this century for reasons that are not appreciated enough.
- airstrike 5y ago
  I suppose you can multiply that effect by some unknown but really large number and you'll arrive at the total impact caused by favoring Common Law over Civil Law
  - throwawaycities 5y ago
    What does that even mean? Credit card companies exist (and make money) in both common law and civil law countries. Or you could even look within the US and examine the singular state that is a civil law jurisdiction and there is no real impact vs the other 49 states. In fact I’d wager a guess very few people even know 1 of the states is a civil law jurisdiction because it has very little impact in practice.
    - smnrchrds 5y ago
      Court decisions in common law jurisdictions have important and long-lasting effects, not only on the case at hand, but for decades (or centuries) to come on things you wouldn't think can be remotely related to the case. It's not like that in civil law jurisdictions. Had this case been in France, the decision on credit card would not have created a precedent that Uber and AirBnB and App Store could use to their advantage, because the concept of precedent does not exist in the same manner in France. And Louisiana and Quebec are not civil law jurisdiction, they are mixed systems because they are still subject to federal laws and supreme courts, so they have civil and common law both.
contingencies 5y ago
It's 2021 and HN upvotes a primer on credit cards... no comment...
hnburnsy 5y ago
Merchants may get charged a lot for credit card fees but cash handling come with significant costs too such as banks charging for deposits, having to travel to the bank, counterfeiting, security, and leakage. This article says the cost to handle cash is 5 to 15%, more than credit cards. https://www.palmerretailsolutions.com/blog/cash-handling https://www.palmerretailsolutions.com/blog/cash-handling
paradite 5y ago
(For issuer) also via overseas usage, FX fee and spread.
quantified 5y ago
They also drive up prices by a few percent when compared to cash. If you want to support the merchant, spend cash and they don’t lose the 3-5% overhead to the card & network.
- dantheman 5y ago
  There is a cost to dealing with cash, which is why some merchants prefer to be all card/no cash.
  - mgbmtl 5y ago
    I don't know for op, but I assume cash means debit, where the fees are very low. Tangentially, I was happy to be able to use debit to buy a new car. Had to phone my credit union to tell them to raise the limit on the day of the transaction, but it saved me having to go to the bank during their working hours to get a certified cheque.
    - gjs278 5y ago
      cash means someone has to drop it off at the bank and could be robbed of all of it
- makeitdouble 5y ago
  To add to dantheman’s point, a lot of merchants are more than willing to spend 3~5% in fees if it means making a register line 10~15% faster, or reduces the cash stock they need to keep at hand and manage thorough the day. Privileging cash as a customer isn’t universally better for the merchant.
  - quantified 5y ago
    Then, politeness suggests you ask if you’re thinking about it.
    - TulliusCicero 5y ago
p2p_astroturf 5y ago
>You have probably used one [credit card] no >mostly [aware] how it is a complicated bundle of services with a pricing structure strictly more complicated than a venture capital fund’s. yes
sxhunga 5y ago
Interesting discussions about credit card and more!
andsens 5y ago
I would love for an EU law that prohibits sellers from swallowing the cost of transaction fees or marketplace cuts. Imagine the app store having to specify the additional cost a user has to pay for a monthly subscription or a customer balking at the 4%-6% surcharge they have to pay because they want to collect their AmEx points or want to pay with their built-in iPhone ApplePay feature. Those leeches of the financial industry would disappear very quickly.
- graphenus 5y ago
  I would love that too. I remember that there was an opposite movement, i.e., all prices need to have all fees included, which is fare but prevents competition. Exposing credit card fees upfront to customers is the only way to promote real competition between credit cards and their networks.
BiteCode_dev 5y ago
First lines of the article: "Credit cards make money through net interest, interchange, fees, and marketing contributions." I love you.

615 points by gregnavis 5y ago

Here's an SDK from Solid Finance you can use to put a bank, bank accounts, customer individuals and organizations, and credit cards (create cards and transact on behalf of your customers) inside your app: https://www.solidfi.com/dev https://www.solidfi.com/dev ... complete with KYC and KYB and other regulatory concerns incorporated.

otterley 5y ago

Flagging to remove unnecessary author name in title.

blyvocalfrylish 5y ago
but... i like this author? when i see patio11 or Patrick McKenzie's name in a submission title or submitter field, i know that i am going to be reading some good writing today.
- spaetzleesser 5y ago
  I think there is a risk of developing a superstar cult if the authors name is in the title. I also don’t like titles like “Harvard scientists have found X”. Suddenly the article gets more credibility because if “Harvard”. Although in reality the big name institutions are putting out as much BS as everybody else.
- patio11 5y ago
  The HN convention is for titles to generally very closely track original titles unless those are misleading/clickbaity/etc, and assume that HNers have the domain name to author map reasonably cached. (Thanks for the praise! Hope to continue earning it.)
- sokoloff 5y ago
  Me too. However, including some author's names and not others is inherently an editorializing decision and I'd prefer to keep the editorializing out of headlines. I didn't flag it, but do prefer that the original headline stays (which is "How credit cards make money", not "Credit cards make money" anyway) In this case, the domain is a clear cue to me.
- jimbob45 5y ago
  HN's staying power comes from its highly conservative approach to website design but I agree that there are some articles that would greatly benefit from having their author's names attached to them.
- telotortium 5y ago
  1. It's not general practice at HN to put the author in the title, unless it really changes how you interpret the title. For example, you might submit Principia Mathematica (Bertrand Russell) if you think there's a real risk people might confuse it with Philosophiæ Naturalis Principia Mathematica by Issac Newton. 2. kalzumeus.com is patio11's personal domain, so it's even less necessary to put the author in the title.
- area51org 5y ago
  Really? I find him self-important and full of dubious ideas. I know that's not the conventional wisdom about him here, but take a long look at what he actually says about things. He's often wrong, and is rarely open to the possibility that this is the case.

teej 5y ago

> It’s often forgotten, but prior to credit cards, many Main Street retailers like e.g. pharmacies maintained hundreds or thousands of credit accounts for customers individually, necessitating their own back offices, accounting, and collections headache. This article is a great history of how the modern credit card came into being https://www.washingtonpost.com/archive/lifestyle/magazine/1994/11/04/the-day-the-credit-card-was-born/d42da27b-0437-4a67-b753-bf9b440ad6dc/ https://www.washingtonpost.com/archive/lifestyle/magazine/19...

edgyquant 5y ago
I find this ironic since now days it seems every store has its own credit card. I even have a card from pep boys (and was given a free oil change just to sign up.)
- ishjoh 5y ago
  It's because there are white label credit cards that are extremely easy to setup if you're a business and they're so profitable. Not only does the store get a sale upfront which a customer might not have been able to afford without it, they get additional revenue when folks are slow to repay their bill.
  - gowld 5y ago
    The store gets money when customer pays the bank interest?
    - jasode 5y ago
      Yes, the retailer gets a portion of the interest payment. Example story mentioning it: https://www.nytimes.com/2017/05/11/business/dealbook/retailer-credit-cards-macys-losses.html https://www.nytimes.com/2017/05/11/business/dealbook/retaile... https://archive.md/kuW2K https://archive.md/kuW2K
  - morpheuskafka 5y ago
    Do you know if these first part transactions also bypass Visa/MC and interchange? It seems like they should have it so the affiliated merchant can just send the charges over to the issuer directly and bypass everyone else.

patio11 5y ago

I'm happy to answer any questions or take suggestions for future issues if you have them, HN. Repeating something I've said before: this is the 3rd issue of a weekly newsletter, and its going to come out on every Friday for the foreseeable future. As someone who has spent more than 10 years here, I'm keenly sensitive to HN's desire to not have the front page be as predictable as my new shipping cadence. I'd appreciate if folks could be selective in submitting these; in prior years I'd space out my essays to avoid wearing out my welcome but that's difficult to do with a newsletter that is open-to-the-public.

jiqiren 5y ago
Is it true top tier customer reward cards (black/platinum/amex business/etc) have interchange fees that push into 3% territory? If so, how do companies like Square make money when they only charge the merchant 2.6% for a POS transaction?
- amance 5y ago
  No. Aggregate interchange for top-tier Visa and Mastercard personal cards maxes out at ~2.3%. Corporate cards actually earn significantly higher interchange, but even those don't aggregate out above 3%. Actually, the networks spend a lot of time policing banks from trying to arbitrage the difference by issuing corporate cards to individuals. Payment processors like Square just know that their margins will vary by the type of card used by consumers, but aim to have an aggregate positive margin across all cards. Once you get into enterprise contract negotiations with them though, they'll look at your card mix to make a pricing offer.
- fragmede 5y ago
  Square, by virtue of their business model, get lower interchange fee because charges where the credit card is present, has lower fees. Online-only merchants get no such discount.
steveklabnik 5y ago
One thing that might be fun to cover: I got in a twitter discussion today about why Europeans don't use credit cards as much as people do in the US. Researching this question and related ones ("why are wire transfers free in Europe but not in the US") are basically impossible to Google, as similar but not actually good results ("the cheapest way to wire money to Europe") drown out any primary resources.

flerchin 5y ago

I feel like folks like us, that never miss a payment, and max out our rewards, are net-losses for most credit card issuers. It's not clear why they don't just fire us as customers.

patio11 5y ago
So credit card issuers are pretty sophisticated with regards to this, and many of them track different user personas and use them to dice up their portfolio by archetypes. The "folks like us" archetype is one which is definitely tracked and goes by different names at different places. I express no strong opinion on whether you personally are contribution margin negative for your issuer. On a portfolio level though, this is extremely well studied and extremely clear: that archetype is staggeringly contribution margin positive. It's actually one of the best performing ones at some issuers, principally because the archetype spends a lot per account, has negligible defaults for non-fraudulent users, and therefore earns lots of interchange at favorable margins. It is possible, given the design of individual products, that a user with close-to-optimal spending decisions is contribution margin negative on individual products and potentially on all accounts with a particular issuer. People outside the credit card ecosystem believe this is much more common than it actually happens. A lot of thought goes into the design of products to decrease the likelihood of adverse use, cap the damages, and encourage users who are very skilled at gamesmanship to game their way to being contribution positive.
- hammock 5y ago
  It is a tangled tangled web, but if in fact the "folks like us" are actually profitable, due to fees charged to merchants, there is disruption waiting to happen in that arena, perhaps by some huge merchant somewhere (Amazon? Walmart?)
- jonas21 5y ago
  > It is possible, given the design of individual products, that a user with close-to-optimal spending decisions is contribution margin negative on individual products and potentially on all accounts I feel like that user is typically the sort who enjoys telling anyone who will listen about how they managed to get great rewards from their card. With all that free marketing, the credit card issuer is probably happy to have them as a customer, even if they lose a little bit of money on them.

draw_down 5y ago

Thank goodness the "How" was automatically removed from the title. I was in danger of understanding it.

alberth 5y ago

> "A much smaller portion of interchange goes to the credit card processor, to the acquiring bank, and to the credit card network" That's technically not accurate. Credit card networks do not earn money from interchange [1]. [1] "Visa does not make money from individual transactions." https://revenuesandprofits.com/how-visa-makes-money-understanding-visa-business-model/ https://revenuesandprofits.com/how-visa-makes-money-understa...

patio11 5y ago
I would like to reiterate my standard disclaimer for this publication but if you want to bet that I don't understand how scheme fees are calculated that is a poor decision.
- fragmede 5y ago
  That raises a question though: In your opinion, where/in what subjects would betting against you not be a poor decision?
  - patio11 5y ago
    I'm less good at poker than many people's model of me predicts. (Probably juuuuuust about good enough to do 2/5 profitably in Vegas, though I mostly play tournaments because they're more fun for me.)
- alberth 5y ago
  I’m not suggesting you don’t understand it, but see my sister comment in this thread. How it’s worded implies issuers are even paying a fee & that fee is derived from interchange. When that’s not always the case.
the_pwner224 5y ago
> Visa does not make money from individual transactions. Instead, it earns revenues from the issuers and acquirers based upon the overall payment volumes and number of transactions processed. Which is effectively the same thing.

pc86 5y ago

Title should be "How credit cards make money"

kentonv 5y ago
I think HN automatically removes "How" from the beginning of titles, on the basis that it's superfluous or clickbait-y or something. I personally find this confusing, it often changes the meaning of the title IMO.

Bellamy 5y ago

Would be interesting to know if credit card companies sell data and which data exactly?

gowld 5y ago
Turn on your ad blocker and then visit https://www.fastcompany.com/90490923/credit-card-companies-are-tracking-shoppers-like-never-before-inside-the-next-phase-of-surveillance-capitalism https://www.fastcompany.com/90490923/credit-card-companies-a...

askingpatio21 5y ago

Hey Patio - what's your current take on Crypto and have you / do you cover that in your newsletter or have a more recent twtr thread to send us to? I know you've been a major skeptic of the gratuitous pyramiding, wash trading, and shaky (or non existent) foundation of Tether etc But w/your depth of knowledge on the current financial system would be very interested in your take on the current market and next gens of defi / staking / shared pools / etc Would love to see you ingest and break that all down https://techcrunch.com/2021/10/13/payments-giant-stripe-says-its-re-entering-the-crypto-market/ https://techcrunch.com/2021/10/13/payments-giant-stripe-says...

morpheuskafka 5y ago

> Debit cards are a very similar product with enough under-the-hood differences that they deserve their own moment in the sun. In particular, due to a quirk of U.S. interchange regulation, they basically fund most of the fintech industry Basically, the Durbin Amendment caps interchange on debit cards at a far, far lower rate than credit cards; they also have different networks (not MC or Visa) that can be run at least for in person transactions. However, the limit does not apply to banks with less than $10 billion in assets. This is why some online banks can offer lower fees and sometimes even debit cash back (1% is the most I've seen though, so not competitive with credit). But its also why ever fintech under the sun pushes debit cards so heavily--the debit card is issued by a (small, non Durbin-covered) partner bank who then shares revenue with the fintech company. At the end of the day, credit cards are still significant better for customers. You can have multiple cards with different benefits while keeping all your money in one place, and you can prevent overdrafts because you don't have random subscriptions taking out unpredictable amounts of money in the middle of the night and causing a check to bounce the next day. You are no longer obsessing over "early payday" features or ACH speeds. Credit cards also provide a nice hack to allow cash deposit for those with only online banks--you can often use a big bank's ATM to make a payment towards the credit card, allowing you to get rid of ordinary amounts of cash.

ollien 5y ago
> You are no longer obsessing over "early payday" features or ACH speeds. Timing ACH payments _sucks_. Tangential, but I'm in a renting situation where my landlord demands rent land in their account on the first of the month. Receiving rent on the 26th (i.e. 5 days early, not 26 days late) was deemed "too confusing" for them. I now have to play this awful game of timing ACH transfers to land on their account as close to the first as I possibly can.
- arcticbull 5y ago
  Agreed, luckily RTP rollout is well under way, and it won't be long before ACH is a thing of the past. [1] [1] https://www.theclearinghouse.org/payment-systems/rtp https://www.theclearinghouse.org/payment-systems/rtp

lnwlebjel 5y ago

Patrick, how much do you read in a given day (eg. hours?) All those words (and the deep knowledge they reveal) must come from somewhere. And what do you read? Not just twitter I suspect. This article of yours is fascinating: https://bam.kalzumeus.com/archive/financial-innovation-is-happening/ https://bam.kalzumeus.com/archive/financial-innovation-is-ha... Thanks

patio11 5y ago
Varies wildly by the day (and year); probably two hours at the median. I have an advantage in that this sort of thing was a hobby for me for 20 years and then it became very work-relevant the last 5. Someday I'll try to curate a reading list but in the meanwhile the sort of things I read are generally the sort of things I link to in essays/on Twitter/etc. Everything from WSJ to Byrne Hobart's newsletter to Fed research papers to e.g. almost any book that looks plausibly interesting about financial fraud (best one: Lying about Money, Dan Davies).
- bradj 5y ago
  Have you read up about the world of commodity trading at all? I imagine you’d be interested in the book The World for Sale if you haven’t already read it. Interesting combination of market structure, fraud and geopolitics.
- fragmede 5y ago
  As someone who soaks up information as a sponge, there's a wealth of knowledge to be gained from experts in their field, interactively, and access to Slack at a fintech company provides that in piles. I'm curious, how much time would you say you spend on slack/how do you interact with that?
- AviationAtom 5y ago
  *Lying For Money

_trampeltier 5y ago

Does anybody know excactly what data a store get about me, if I buy it with a Credit or Debit card. Does someone has some example data or so?

dangrossman 5y ago
If you're using an EMV chip card, they don't get any personal information about you from the card at all. The card is used to authenticate a transaction, nothing more. The store's payment gateway knows what brand of card it charged, how much money was captured and when, none of which is personal information.

newhouseb 5y ago

If you want to learn more about this space, I'd check out Payment Systems in the U.S. [1] which talks about a lot of the history and parties at play here. It's also fun/interesting to look at the published interchange rates for various classes of commerce. Here's Mastercard's: https://www.mastercard.us/content/dam/public/mastercardcom/na/us/en/documents/merchant-rates-2021-2022-apr-2021.pdf https://www.mastercard.us/content/dam/public/mastercardcom/n... [1] https://www.amazon.com/Payments-Systems-U-S-Third-Professional/dp/0982789742 https://www.amazon.com/Payments-Systems-U-S-Third-Profession...

bob229 5y ago

They make money by taking advantage of fools. They are a shameful product

megablast 5y ago

Why was the title changes from "How credit cards make money"??

mattfrommars 5y ago

The knowledge which the author has been sharing has been my interest for a long time. I gave up because lack of material on it. Any idea how did OP gain all these knowledge? For example, I want to implement a QR payment application, think like transferring money through Venmo using QR code, now Paypal does it, very popular in China -- basically a payment processing application but my local country - think Mexico or Peru. How does one understand all the requirements to make it work? It makes me wonder how did Stripe founder obtains this crucial knowledge to build what they have. Payment processor or integrating with banks. Same thing what Plaid is doing. If I wanted to create an API to interact with a bank for my local city here in the U.S., do I call up a bank teller and ask me to connect me to someone who is interested in integrating their bank with the world? I am certain doing a CFA or master degree in finance will get you no where if your goal is build what Plaid and Stripe have done. Instead, you need to know big shot and have ties with them to achieve success. It kind of make sense this to be true otherwise an developer in India or Ukraine can build APIs ...

symlinkk 5y ago
You have to know people.
Scoundreller 5y ago
> If I wanted to create an API to interact with a bank for my local city here in the U.S., do I call up a bank teller and ask me to connect me to someone who is interested in integrating their bank with the world? I always wondered this, but when some minor crime seems to get heavily investigated by police. Seems like there are avenues to report something and have it taken seriously that just doesn’t exist for the general public calling the general number.
somethoughts 5y ago
I think they were trying to get payments going for a startup idea and were trying to get payments integrated. Or at least that's the founding story. "In early 2010 John and Patrick began working on Stripe together. At the time Patrick was working on several side projects and they debated why it was so difficult to accept payments on the web. They sought to solve the problem and see if it was possible to make it simple - really simple. The next 6-months they played with it, showed it to friends, and saw how people interacted with it, iterating along the way." [1] https://www.startupgrind.com/blog/the-collison-brothers-and-story-behind-the-founding-of-stripe/ https://www.startupgrind.com/blog/the-collison-brothers-and-...

benatkin 5y ago

steal money FTFY

mst 5y ago
Cost of handling cash is higher than you might expect, which means that interchange fees aren't nearly as bad a deal for the merchants as people think.

sofixa 5y ago

Generally good article, but this part bothers me: > For another, this ended up being an almost peculiarly American experience. In Europe, regulators were worried about the cost of interchange to businesses (rather than consumers) and capped it. Since issuers didn’t have the margin to compete on rewards paid for by interchange, they instead leaned into branding and convenience, and credit cards became a smaller portion of the payment mix (about 47% of electronic payments, compared to almost 70% in the U.S.). First, the 47% is for all types of cards, debit and credit. Second in the SEPA space (at least the eurozone), wire transfers are free of charge, and are frequently used(for rent, salary, buying a kitchen, even between friends, at least in France), which removes some of the uses for bank cards. Furthermore, bank cards usually have limits, so buying expensive things (like a car or kitchen) isn't necessarily straightforward, unlike a wire transfer. IMHO shit prices and delays are the reason peope in the US often use cheques where in the EU we'd use a wire transfer, and it isn't really true that cards are less used here.

rsstack 5y ago
While I agree with your main points, note that none of the specific examples you used include a credit card transaction in the US.
hocuspocus 5y ago
Also card usage varies a lot between countries, mostly for cultural reasons. Moreover I'm fairly certain that before the mandatory cap on interchange, countries with relatively high card payments were also the ones with the cheapest PSP fees.
nottorp 5y ago
> In Europe, regulators were worried about the cost of interchange to businesses (rather than consumers) and capped it. Hmm not everywhere. I recently went to the Netherlands and was surprised to see not everyone accepted credit cards - while they do accept (local) debit cards. My cards are Romanian, so you can't blame US banks. In one small store they explained to me that accepting Visa/MC would cost them 10%, which looked insane to me.
- 5y ago

treyfitty 5y ago

One of the under appreciated legal precedents set a couple years ago was the Ohio V AmEx anti trust case. The case predicated against AmEx’s merchant contract forbidding merchants to steer customers away from using their Amex card. This was a common practice for many years, especially at restaurants since AmEx charged restaurants 6%. The Supreme Court ruled that amex was able to keep the anti-steering provision in merchant contracts because they defined credit cards as a two sided market, and the harm to customers couldn’t be proven. In essence, the Supreme Court set a precedent that in any 2 sided market, in order for something to be considered anti competitive, a high bar needed to be met: the government must show that both sides of a 2 sided market be harmed in order for something to be anti competitive. Had the ruling been the other way, almost every industry would have been impacted- Uber, App Stores, Advertising…etc are all 2 sided markets. In essence, Credit cards have had a huge impact to our lives this century for reasons that are not appreciated enough.

airstrike 5y ago
I suppose you can multiply that effect by some unknown but really large number and you'll arrive at the total impact caused by favoring Common Law over Civil Law
- throwawaycities 5y ago
  What does that even mean? Credit card companies exist (and make money) in both common law and civil law countries. Or you could even look within the US and examine the singular state that is a civil law jurisdiction and there is no real impact vs the other 49 states. In fact I’d wager a guess very few people even know 1 of the states is a civil law jurisdiction because it has very little impact in practice.
  - smnrchrds 5y ago
    Court decisions in common law jurisdictions have important and long-lasting effects, not only on the case at hand, but for decades (or centuries) to come on things you wouldn't think can be remotely related to the case. It's not like that in civil law jurisdictions. Had this case been in France, the decision on credit card would not have created a precedent that Uber and AirBnB and App Store could use to their advantage, because the concept of precedent does not exist in the same manner in France. And Louisiana and Quebec are not civil law jurisdiction, they are mixed systems because they are still subject to federal laws and supreme courts, so they have civil and common law both.

contingencies 5y ago

It's 2021 and HN upvotes a primer on credit cards... no comment...

hnburnsy 5y ago

Merchants may get charged a lot for credit card fees but cash handling come with significant costs too such as banks charging for deposits, having to travel to the bank, counterfeiting, security, and leakage. This article says the cost to handle cash is 5 to 15%, more than credit cards. https://www.palmerretailsolutions.com/blog/cash-handling https://www.palmerretailsolutions.com/blog/cash-handling

paradite 5y ago

(For issuer) also via overseas usage, FX fee and spread.

quantified 5y ago

They also drive up prices by a few percent when compared to cash. If you want to support the merchant, spend cash and they don’t lose the 3-5% overhead to the card & network.

dantheman 5y ago
There is a cost to dealing with cash, which is why some merchants prefer to be all card/no cash.
- mgbmtl 5y ago
  I don't know for op, but I assume cash means debit, where the fees are very low. Tangentially, I was happy to be able to use debit to buy a new car. Had to phone my credit union to tell them to raise the limit on the day of the transaction, but it saved me having to go to the bank during their working hours to get a certified cheque.
  - gjs278 5y ago
    cash means someone has to drop it off at the bank and could be robbed of all of it
makeitdouble 5y ago
To add to dantheman’s point, a lot of merchants are more than willing to spend 3~5% in fees if it means making a register line 10~15% faster, or reduces the cash stock they need to keep at hand and manage thorough the day. Privileging cash as a customer isn’t universally better for the merchant.
- quantified 5y ago
  Then, politeness suggests you ask if you’re thinking about it.
  - TulliusCicero 5y ago

p2p_astroturf 5y ago

>You have probably used one [credit card] no >mostly [aware] how it is a complicated bundle of services with a pricing structure strictly more complicated than a venture capital fund’s. yes

sxhunga 5y ago

Interesting discussions about credit card and more!

andsens 5y ago

I would love for an EU law that prohibits sellers from swallowing the cost of transaction fees or marketplace cuts. Imagine the app store having to specify the additional cost a user has to pay for a monthly subscription or a customer balking at the 4%-6% surcharge they have to pay because they want to collect their AmEx points or want to pay with their built-in iPhone ApplePay feature. Those leeches of the financial industry would disappear very quickly.

graphenus 5y ago
I would love that too. I remember that there was an opposite movement, i.e., all prices need to have all fees included, which is fare but prevents competition. Exposing credit card fees upfront to customers is the only way to promote real competition between credit cards and their networks.

BiteCode_dev 5y ago

First lines of the article: "Credit cards make money through net interest, interchange, fees, and marketing contributions." I love you.