Q:

How do credit card issuing banks make money?

A:

Banks that issue credit cards make money from the interchange fees charged on each credit card transaction. If a business pays a 3.5 percent fee on credit card transactions, more than 75 percent of that fee goes to the issuing bank. These banks also make money from penalties, interest and annual fees.

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Full Answer

Interchange rates charged by banks vary depending on the type of card, the type of transaction and the location where the card is used. Member banks hire third-party credit card processors, such as Global Payments, to process the actual credit transactions between a customer and the bank. Independent sales organizations negotiate fees with the card brands, such as Visa and MasterCard, then acquire merchants to resell their services.

The interchange is the biggest percentage of a credit transaction fee. This rate is set by Visa and MasterCard and applies to every bank that uses these brands. Assessments and the processor's mark-up rates constitute the rest of the credit card fees. Businesses looking for credit card processors should look for those with the lowest effective rate and a competitive pricing model.

Banks that target high-risk customers who rarely pay their credit card debt on time typically profit from penalties and high interest rates. Banks that target customers who pay their credit card debt on time make money from the interchange fees, because such customers typically make numerous transactions.

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