Have you ever thought about why banks issue so many cards? How exactly do they make money from it? Many cardholders believe that the profit of their bank is highly dependent on the amount of interest paid by customers over the time they use the loan. But even if all loans are repaid on time, banks still make money on their customers. Because their earnings are formed not only on the basis of interest paid on loans.
According to the National Bank, the total number of transactions using payment cards for nine months of 2018 amounted to 2.8 billion, and their volume is more than 2 trillion UAH. These indicators compared to the same period in 2017 increased by 27.2% and 38.5%, respectively. At the same time, the number of cards issued by banks exceeded 60 million.
You have probably met more than once an ad in which banks offer you to get a Gold or World card, enticing you with additional discounts, high cashback or VIP service. First of all, let’s try to figure out what is the general reason for banks to issue such a number of cards. Is it really profitable for them to serve so many expensive premium cards, while issuing them absolutely free? So, in the long run, their income from such cards grows at an incredible rate only due to the fact that you make everyday purchases in stores and on sites.
To provide you with safe and fast payments, banks spend huge amounts. At the same time, the development of the payment infrastructure of banks and the introduction of innovations require investments. Therefore, commission fees paid by merchants for the goods that you purchase from them are one of the key sources of income for banks. This process is necessary, first of all, in order to improve payments and make them as comfortable as possible for you. Today, let’s dive a little into the topic of how banking institutions, in principle, earn money by issuing cards.
Earlier in our blog, we wrote about such a concept as interchange fee and its components, which directly affect the performance indicator of your company. Recall that this is the fee that the issuing bank (that is, the one issuing the card) receives from the acquiring bank when processing payments by credit or debit card. The purpose of the commission is to cover the issuer’s expenses related to the acceptance, processing and authorization of card transactions.
In other words, this is the so-called incentive system for the issuing bank in order to maintain and develop its payment infrastructure. If it weren’t, then the monetary losses incurred by the bank would be transferred to customers in the form of additional commissions or, for example, the high cost of servicing cards.
It is worth noting that the cost of transactions also greatly depends on the category of card: the cost of interchange for a “premium” card will be higher than for a “classic” one. Moreover, credit card processing will cost even more than premium. And sales made through an offline pos-terminal will be identical to online sales, but will vary significantly depending on the business niche and the Merchant Category Code. We wrote more about this earlier.
Other types of commissions
As we wrote above, in order to maximize our own profit, credit companies also charge a number of other types of commissions. We suggest you consider them in more detail.
Annual Payment Rate (APR)
This is probably the commission that is most familiar to you. That is, this is the amount that the borrower must pay if he uses the loan during the year. This interest rate is the rate of return on loans on an annualized basis if interest on debt is accrued more often than once a year. For example, microfinance organizations lend to customers at 1% per day, while the state obliges MFIs to indicate annual interest in the contract – approximately 365%.
Credit Card Limits Fees
With credit cards with a credit limit, the situation is slightly different: in case of withdrawal from the grace period, which usually ranges from 55 to 62 days, a symbolic percentage of 0.1-0.001% per annum is charged. For example, in Privat Bank, a universal fee will be charged at a rate of 3.6% per month for the amount of debt (43.2% per annum). On a Monobank card – 3.2% per month or 38.4% per annum.
But still, you should be extremely careful when drawing up a contract for a card with a credit limit. As a rule, the grace period ends on the 25th day of each month, so for some borrowers it can last for not promised 60 days, but for example 45, since quite a few banks start the countdown from the date the debt arises. If you do not have time to pay off the amount before the date specified in the contract, then the increased commission for using credit funds comes into force.
There are a couple of so-called “traps” of the grace period. In most banking institutions, the commission for using the credit limit is equal to the commission for using your own funds. But if cash is withdrawn at the ATM, the usual loan rate (3% – 5%) starts to operate. And when you consider that many are used to taking a decent amount, the commission can be prohibitive.
Thus, we advise you to carefully study all the conditions for providing a credit limit, so as not to get into a mess and avoid excessive commissions.
Late payment fees
If you do not manage to make a payment on the credit limit on time, you will usually receive a fine. For example, on the website of Privat Bank it is indicated that in case of delay in obligations in the amount of from 100 UAH for one month, a fine of 50 UAH will be charged. In this case, if the borrower answered the representative of the contact center within a period of 30 days, then the amount of the fine is returned, which is usually reported by SMS.
Foreign transaction fee
Sometimes in stores abroad you may be charged a double conversion fee. To avoid this, always choose to pay with the currency of the host country. In this case, if you need to pay for the goods in euros, but you have a hryvnia card, the conversion fee will be charged at the rate of the issuing bank. This will help you avoid double conversion.
Recall that we wrote earlier that Ukrainians were 26% more likely to use bank cards outside of Ukraine.
Functions of banking
This is an example of unforeseen costs that may arise in front of a cardholder with a credit limit. An unauthorized overdraft is a withdrawal of funds without the approval of a cardholder with ultrahigh interest from a card without a credit limit or if it has been exhausted. Each bank has a separate list where it determines which payment can be debited as an “unauthorized overdraft”. For example, most often the cardholder may go beyond the overdraft if the bank withdraws a monthly commission for servicing or because of a currency conversion fee. More rare cases are payment for mobile banking, then the service of SMS notifications about “spending” and receipts to the card. As a rule, the cost of such unauthorized withdrawals exceeds the interest for a regular credit limit by almost two times.
With the world on a string
As we see, issuing banks are incredibly profitable to issue such a number of cards. Interchange fees are probably their main sources of income, but other types of trading commissions allow them to earn even more. Today we tried to describe the most common commission fees and we hope that this material helped you better understand why it is beneficial for banks to give out free credit and debit cards.