Credit card companies make money from several streams that together cover issuing, processing, and merchant payments. Here’s a concise breakdown of the main sources:
- Interest income
- From card balances carried month-to-month when cardholders carry a balance. This is often the largest single revenue source for many issuers, especially for cards with promotional offers or low introductory rates that later revert to higher rates.
- Fees charged to cardholders
- Annual fees on premium or specialized cards. Late payment fees, over-the-limit fees, and other penalty fees also contribute to revenue.
- Interchange and network-related fees
- Interchange (or swipe) fees paid by merchants, a portion of which goes to the issuing bank; networks also collect fees for processing and licensing. Merchants pay these processing costs whenever a card is used.
- Merchant-processor and network payments
- Payment processors charge merchants a processing fee, and networks may collect licensing and transaction-related fees. These are separate from what the issuer earns directly but are part of the overall revenue ecosystem.
- Merchant discounts and services
- Banks and networks may earn from merchant account setup, monthly maintenance, and related services. Some revenue is shared among issuing banks, acquiring banks, and networks.
- Co-branded and loyalty programs
- Merchants sometimes partner with issuers on co-branded programs; issuers earn fees or commissions related to these programs, which can influence cardholder incentives and card usage.
Key players and how they fit:
- Issuing banks (the lenders that actually issue cards)
- Earn interest, annual fees, penalties, and a share of interchange. Their profitability heavily depends on cardholder behavior and average balances.
- Acquiring banks and merchants
- Earn from merchant discount fees and related services; they facilitate the processing of transactions for merchants.
- Payment networks (Visa, Mastercard, American Express, Discover)
- Do not typically lend money themselves (with some exceptions like AmEx/Discover), but earn from transaction fees and licensing fees related to using the network.
- Payment processors (e.g., PayPal, Stripe, Square)
- Collect processing fees and may provide additional fraud protection and services.
- Merchants
- While they pay fees to accept cards, the broader value proposition (increased sales, improved conversion, etc.) can justify the cost and help sustain the ecosystem.
If you’d like, I can tailor this to a specific region or provide a simple example calculation showing how a typical card transaction yields revenue for each party.
