fees. Interchange fees are charged by the merchant's
acquirer to a card-accepting merchant as component of the so-called
merchant discount fee. The merchant pays a merchant discount fee
that is typically 2 to 3 percent (this is negotiated), which is
why some merchants prefer cash, debit cards, or even checks. The
majority of this fee, called the interchange fee, goes to the issuing
bank, but parts of it go to the processing network, the card brand
(Visa, MasterCard, etc.), and the merchant's acquirer. The interchange
fee that applies to a particular merchant is a function of many
variables including the type of merchant, whether the cards are
physically present and the card's magnetic stripe is read, the
specific type of card, etc. For a typical credit card issuer, interchange
fee revenues may represent about fifteen percent of total revenues.
Charging interest on outstanding balances. Customers
who do not pay in full the amount owed on their monthly statement
by the due date (that is, at the end of the "grace period")
owe interest ("finance charges"). These customers are
known in the industry as "revolvers". Those who pay in
full (pay the entire balance) do not. These customers are known
in the industry as "transactors". Interest charges vary
widely from card issuer to card issuer. Often, there are "teaser" rates
in effect for initial periods of time (as low as zero percent for,
say, six months), whereas rates for those with poor credit can
be as much as 29.74 percent (annualized). In the U.S. rules governing
interest rates are set at the state level; some banks have chosen
to establish their credit card operations in states such as South
Dakota that have less restrictive limits on interest rates.
Fees charged to customers. The major fees are
for (1) payments received late (past the "grace period");
(2) charges that result in exceeding the credit limit on the
done deliberately or by mistake); (3) cash advances and convenience
checks (often 3 percent of the amount); and (4) transactions in
a foreign currency (as much as 3 percent of the amount; a few financial
institutions charge no fee for this).
Credit card companies generally do provide a guarantee the merchant
will be paid on legitimate transactions regardless of whether the
consumer pays their credit card bill. However, credit card companies
generally will not pay a merchant if the consumer challenges the
legitimacy of the transaction and will fine merchants who have
a large number of chargebacks.
Credit Card Company Risks
In recent times, credit card portfolios have been exceedingly profitable
to banks, largely due to the booming economy of the late nineties.
However in the case of credit cards, such high returns go hand
in hand with risk, since the business is essentially one of making
unsecured (uncollateralized) loans, and thus dependent on borrowers
to not default in large numbers.
In some areas, such as Ireland, governments profit from credit
cards through the imposition of a stamp duty or credit card tax.
This is usually done where a cheque tax previously existed.