I've always wondered: is the data the reason why credit card companies are willing to give cash back as high as 5% even to customers who carefully operate them at a clear loss for them?
The reason credit card companies are willing to give customers rewards/cashback is that they’re competing, primarily for interchange revenue. Most cards are guaranteed to be profitable for the issuer (ex-credit risk); some models (5% rolling category up to $75 back, etc) are not strictly guaranteed to be profitable, but they’re running a portfolio strategy.
You don’t need to make money on every account. You need to make money on every pool of, say, 100,000 accounts. One could conceive of rebate schemes poorly designed enough to not do that, but the industry broadly doesn’t ship them.
There are people who make hobbies off of attempting to get the financial industry’s sweet sweet marketing dollars. The financial industry can afford an infinite number of business analysts and geeks. The marketing dollars are still on offer. What does this suggest to you as to the portfolio-wide impact of hobbyists who exploit the offers?
The credit card issuer fees can be the worst because of these high reward credit cards.
I'm very aware of this when shopping at a local small business. I'll pay either in cash or with my debit card, because the credit card fees are seriously squeezing small merchants.
I'm also not aware of any across-the-board 5% rewards cards, and most have an "up to $x,000 annual spend" on the categories that are that high.
Some rewards cards let you select "online shopping" as your high rewards category. You can extend that to in-store shopping at Walmart by enrolling that card in Walmart Pay and then paying in-store via that.
For a lot of people, "online shopping" and Walmart together will cover 95+% of their credit card use.
The base card is 3% in your selected category (online shopping; gas; dinning; travel; drug stores; or home improvement and furnishing), 2% in grocery and wholesale clubs, 1% everything else. The 3% and 2% are limited to $2500 per quarter.
The base rate is multiplied by 1.25, 1.5, or 1.75 if your total at BofA and Merrill Lynch is at least $20k, $50k, or $100k, respectively.
Yes. I understand this. I'm asking, why do they keep the others' accounts open?
> I'm also not aware of any across-the-board 5% rewards cards
I'm not either, but many people just rotate to a different card instead of using the same card for less cash back. And who never miss a payment or rack up interest. Meaning they always use those cards at a loss for the company. I'm asking why do these peoples' accounts get kept open.
It's a loss leader.
These sites are mostly blogspam that push referral links.
On the flip side, Mint has all the rest of the credit card data for the person (across potentially many different cards and card networks), savings and checking accounts, brokerage accounts, mortgages, car loans, student loans, and tax returns if you use TurboTax.
I think that balances out the equation pretty handily - that amount of linked, collated data should easily be worth more than a single CC can garner.
Intuit's a public company, making both their revenue and the number of Mint users publicly available. They're not making anywhere near what they'd need to make off their extensive data holdings to make your theory work.
https://squareup.com/guides/credit-card-processing-fees-and-...
"The card that’s used
Debit cards with PINs are lower risk than credit cards, so they typically have a lower interchange rate. And rewards cards (travel, triple points, etc.) and business cards typically have have higher interchange rates."
Of course the badly implemented EU changes which in theory should have benefited the consumer did not - the merchants just took the reduction in interchange fees and didn't cut prices at all for the end consumers
I would imagine the number of people who only purchase things that are in the 5% category on their card is extremely small.
That's the answer to the question "why are these cards offered at all", which was not my question.
My question was, "why are even the accounts of people who consistently cause them a loss still kept open?", which this doesn't answer.
These companies have very, very smart people working for them, analyzing all the data they have to come up with a product and its limits. They know x% will not be profitable, and they include that in the profit calculations.
Why dont they simply cut off the non-profitable customers? Because people don't like this and they'll quickly tell their friends "Don't sign up for Discover, they cancel your account if you don't make them money." It wound be all over Slickdeals and blogs. No credit card is going to survive cancelling accounts for using their credit line in totally normal ways.
Just like a store could say "for every 10 sale priced items you buy you must buy a full priced item" - but then nobody would shop there.
Think about an all-you-can-eat buffet. Some poor soul is gonna starve themselves so they can splurge and have a "good deal" on a lot of food. Most people will not, and the business would be in trouble otherwise. They still have to serve the patron who's eating a lot, because what kind of buffet would it be if it was "all you can eat, until you're eating so much that we're no longer making enough money"?
Or, some retailers sell items at a very low price, just to get people into the store in hope of them starting to buy more. Nothing stops you from getting into the store, getting the deal on those items and not buying anything else. The store may be losing money on you but they can't stop you from purchasing the item at the advertised price.
People who choose to spend their time and energy chasing deals to hyper-optimize the benefits on their credit card savings are entitled to their savings. Companies (credit cards or otherwise) are just interested in the total outcome of their operations anyway, not on making money off of every single customer. (Besides, even just defining what is a "profitable customer" is a hairy problem.)
2. I bet government regulators might be a bit peeved by a company that systematically cancels customer accounts for behavior which is within the advertised terms of the agreement. Usually regulators frown upon luring customers in with an advertisement for a product/service and then purposefully sidestepping said product/service.
3. It’s probably such a small number of customers that’s it’s just not even worth their time.
2. It need not be against their terms though? They could easily specify hyper-optimized usage in their agreements as something that might result in account closure. This is already done in a lot of other cases; they could do the same here.
3. I don't know about that. Just look at the sheer number of sites that explain how to maximize your credit card rewards/cash back/bonuses. They wouldn't seem to be there if the audience for them was so vanishingly small?
If you believe so strongly that it is worthwhile for them to do this, then perhaps you have an idea for a lucrative career.
But as long as credit card fraud in the US is measured in billions, I’m going to guess that any manpower which can be assigned there is way more lucrative than any manpower assigned to demonizing their honest customers.
The people churning enough to actually cost the issuer money are extremely rare and there are a lot of people making sure it stays that way.
And then there are folks who get hit with interest and late fees that subsidize the big churners.
Because, churners, are a very small portion of the 20B in revenue Visa generated last year, of which it generated a ~50% profit margin.
The system works so well already, why rock the boat by closing the accounts of a few thousand individuals? It would probably cost more to enforce any such rule than they lose in revenue.
I was sure this couldn’t be right... but it absolutely is.
https://s1.q4cdn.com/050606653/files/doc_financials/2018/q4/...
They don’t even take any risk lending money, just a % fee for owning the network, that one has to be on to do business with most people with money nowadays.
Also, a lot of folks end up carrying a balance in spite of their best intentions.
I suspect this happens relatively often even for folks with a long history of not doing so - e.g. maybe you get fired for the first time and start running up a balance, not long before you've run up some significant interest charges.
And then there's huge credit card bonuses like $150 for Chase Freedom which is like $7.5k of spending's worth...
But again, that doesn't really answer my question. I very much realize lots of people do pay interest. But there are also people who don't, and possibly never have, for many years. I'm asking why do they keep those people around as customers if they're literally losing money on them? To me the obvious answer is they're still bringing value, and the only realistic form that can take as I see it seems to be their transaction data.
https://www.magnifymoney.com/blog/best-of/10-best-5-cash-bac...
This way they'll make money after the limit takes effect. My assumption is that they are hoping the consumer will forget there's a hard limit to the amount they can save and always go with their "5% cash back card" when making purchases.
And that assumption is exactly what I'm saying isn't universally true. My entire point is there are customers who just rotate cards instead of still using it for lower cash back. Who do this for years. Without racking up any interest. Why do those customers' accounts get kept open?
If that's the case, and you can't predict who exactly that subset is going to be, you keep all of them around.
Fun fact: you can pay your US tax return with a credit card for a ~1.5% fee.
So, by encouraging the use of credit cards for smaller and smaller transactions, the credit card companies take a bigger and bigger bite from the merchant.
That's all on top of any annual fees and interest charges that the credit card companies hit the customer with.
https://www.investopedia.com/articles/personal-finance/04071...
> When merchants accept payment via credit card, they are required to pay a percentage of the transaction amount as a fee to the credit card company. If the cardholder has a participating cash back rewards program, the credit card issuer simply shares some of the merchant fees with the consumer
And some is paid by interest being paid by other customers
http://www.bos.frb.org/economic/ppdp/2010/ppdp1003.pdf
> Because credit card spending and rewards are positively correlated with household income, the payment instrument transfer also induces a regressive transfer from low-income to high-income households in general. On average, and after accounting for rewards paid to households by banks, the lowest-income household ($20,000 or less annually) pays $21 and the highest-income household ($150,000 or more annually) receives $750 every year
I also have a vague memory that some cards from the same issuer (mostly American Express) charge the merchants more for the higher-level cards, and prevent the merchant from treating those customers any differently. I can't find a source for that, but some starting points might be https://www.washingtonpost.com/business/economy/supreme-cour... and https://about.americanexpress.com/press-release/american-exp...