I feel like folks like us, that never miss a payment, and max out our rewards, are net-losses for most credit card issuers. It's not clear why they don't just fire us as customers.
I express no strong opinion on whether you personally are contribution margin negative for your issuer. On a portfolio level though, this is extremely well studied and extremely clear: that archetype is staggeringly contribution margin positive. It's actually one of the best performing ones at some issuers, principally because the archetype spends a lot per account, has negligible defaults for non-fraudulent users, and therefore earns lots of interchange at favorable margins.
It is possible, given the design of individual products, that a user with close-to-optimal spending decisions is contribution margin negative on individual products and potentially on all accounts with a particular issuer. People outside the credit card ecosystem believe this is much more common than it actually happens. A lot of thought goes into the design of products to decrease the likelihood of adverse use, cap the damages, and encourage users who are very skilled at gamesmanship to game their way to being contribution positive.
I feel like that user is typically the sort who enjoys telling anyone who will listen about how they managed to get great rewards from their card. With all that free marketing, the credit card issuer is probably happy to have them as a customer, even if they lose a little bit of money on them.
It is a curious, curious belief in the engineering community that we are better at trivial math than banks are. That is not a bet I would encourage people to make.
"I bet they do it for free marketing" doesn't mean "I bet they didn't do the math". It means "I bet their marketing department measures everything and is good at math too."
The first stage was: these anti-vaxxers don't have a degree in immunology, what makes them qualified to even attempt to interpret scientific papers on the subject?
The second stage was: wait, I don't have a degree in immunology either, why am I pretending to be "following the science" when I don't have even the vocabulary or the context to properly grasp immunology papers?
Accepting that I am a functional ignoramus with regards to Covid, viruses, immunology, vaccine development etc. is very freeing. I'm basically knowledgeable on very few things, and am not an authority on (vaccines|economics|law|history|basically everything). Being good at software engineering doesn't make me an expert at everything I read two articles on.
> The entire fintech sector rules because it’s tech ppl looking at a 500 year old sector that accounts for 10% of the economy and employs some of the smartest and most ruthless people in the world and saying “You know what, I bet these guys are leaving a lot of money on the table” [0]
[0] https://twitter.com/quantian1/status/1447705628521152517
Although sometimes people are right on that bet, disrupts an entire industry and becomes billionaires. Entire industries can turn a blind eye to problems that are obvious to some, and later it turns out the industry experts were wrong.
So I wont stop making simple back of the envelope calculations and discuss and judge industries based on that. In most cases you are wrong when you do it (which you'll realize when you dig down a bit further), but sometimes the industry is wrong and you really don't want to miss those cases.
Or, for example, why do so many banks give several-hundred-dollar "direct deposit" bonuses to people who just do a normal ACH transfer to themselves, despite explicitly claiming that they only allow employment income. Surely that's unintentional rather than being some kind of customer acquisition reverse-psychology tactic?
[1] https://www.doctorofcredit.com/paypal-key-will-stop-allowing...
[2] https://www.doctorofcredit.com/paypal-key-no-longer-working-...
[3] https://www.doctorofcredit.com/rumor-plastiq-to-stop-allowin...
I imagine all the other banks were not impressed, and ever since then, you can get a few hundred dollars here and there but nothing like the initial Sapphire Reserve promotion came out since.
If I'm not wrong, cashing out Chase Ultimate Rewards points wasn't that lucrative until recently, when they introduced Pay Yourself Back — it was 1 cent per point before, and is much higher now for certain categories (groceries, restaurants) with Pay Yourself Back.
> The Amex ones are rewards points, and you have to play a lot of games to get the value.
For US residents, cashing out at 1.1 cents per point would be opening a Charles Schwab brokerage account and the linked Amex Platinum card, then "investing" the points. That doesn't sound too complicated.
(Speaking as a non-US resident playing the game myself: I do have extreme difficulty trying to get good cash value for my points, since Schwab refuses to open a brokerage account for me.)
Then they made it so you had to use ultimate rewards via Expedia, and they bumped up all the prices, so effectively your UR points lost a ton of value. Searching the same flight on Expedia UR website was more expensive that directly going to the airline.
Then I stopped following because I had already canceled all my UR cards, but I assume they downgraded it even further because I heard they raised fees and substituted some benefits with door dash or lyft credits or something.
> For US residents, cashing out at 1.1 cents per point would be opening a Charles Schwab brokerage account and the linked Amex Platinum card, then "investing" the points. That doesn't sound too complicated.
I did not know this, but that seems okay. However, I have experience with AmEx being strict on people who constantly open cards for sign up bonuses.
I found this out (and the term) after discovering my credit score was lower than I expected. With some investigation, it was low because it showed I had a lot of credit card debt. Paying it off each month did not factor into the credit score.
While there are legitimate tracking concerns, the data the credit card companies capture and disseminate is incredibly fascinating. You've got spending data, layered with market segments, layered with location data (both on the cardholder and the business side), and even time of day. Overlay all that with very accessible data from the Census or ESRI, and they can really tell a significant story of how money flows through the modern economy. This is what's feeding the internal fraud detection engines (which have gotten a lot better), but there are also private institutions that are more than willing to pay the credit cards a hefty sum to get access to all this data.
Out of curiosity, what names does that archetype go by?
And if you actually are spending, as you suggest, they make enough from the merchants who are eating the 3% transaction fee.
You're the data product, like every other cool free thing over the last decade, and they have a sustainable business model.
And if you ever do have a disruption in your earnings while you are floating a balance on the credit card, you've just become their whale customer that is paying for the whole operation with interest. By the time you default they really don't care about collections because they've already made so much, they're very ready to sell off the debt to some collections agency for pennies. You can be the most meticulous and responsible user of debt, and still have this happen to you eventually. They're just the house in their credit casino and all they have to do is wait.
You mean, the customer eating the 3% fee? The merchant isn’t going to take the hit to their margins, the interchange fee is built into the price of what you are buying.
It's just a long standing habit of mine.
Merchants pay interest with the increased interchange. This is why debit cards have reduced interchange. ~2% vs 0.05%
How on earth can it make sense for us to get issued two $95/year CCs, as happened this year. I can use the 20% AirBnB bonus to cash in $1200, each card, as happened once. We're waiting on passports for the second. Edit: I've also cashed in points for 12 transatlantic flights over the last 15 years, on other CCs.
We haven't missed a CC payment in decades. I can cancel at any time. We don't have that many accounts to switch, might take an hour.
We're puzzled. But ok, we do it.
Edit2: Ok, after reading more comments, the profit from us would seem to come out of spend. Some more details then. We make net slightly less than 6 figures, and save 50% of that for retirement. House payment is $800, and nearly done. Travel is our vice, but we do eg a week in Paris for maybe $1500, and we do everything we want to. A big chunk of that is AirBnB, and... the CC typically pays that.
I'm not denying that the super solid big spenders aren't super profitable for the issuers. I am puzzled why we get issued the cards. I mean, 2 cards from the same vendor just splits the pie between the two accounts, and increases the spend zero.
If you think you are winning on rewards, you might also believe you can win long-term playing in a casino.
The card networks told merchants they are risking losing any and all chargeback for non chip purchases a few years ago. If a merchant is taking mag stripe still, that is their risk.
> If you think you are winning on rewards, you might also believe you can win long-term playing in a casino.
I am definitely earning more via cash back rewards than I am paying in fees. A 2% cash back card which can be had for free, gets you pretty close. At 5% cash back, you’re clearly earning more than however much prices are inflated to pay for the card processor fees.
And at the end of the day, I don’t have the option of paying 5% less at most places. So any percent cash back is a win.
I suspect that the bank is winning much more than you think on your business, even if you are getting a good reward. They are getting other people to pay them even more than they are paying you.
Maximizing credit card reward can be a hobby that leads to minor ROI- like investing in individual stocks it might be lucrative and if you enjoy it more than golf definitely pursue it. But don't think you are fleecing Bank of America or Chase or whomever.
I pay $550 annually for one card, but I easily pay for that (and then some) through statement credit and redeeming points. The net value I get out of the card is well over $1k per year. But it's not clear to me whether or not the issuer makes that back via other means. Just they aren't making that back from me. I expect card issuers are very very much aware of customers just like me, and are able to financially justify my existence.
They can also earn money from retailers to promote them to you. Point hunters often end up spending extra to reach a rewards threshold, which can be very profitable for the retailer. It's also common to sign up for a card with great introductory rewards and then keep using it for years, because you get busy and forget to switch card every few months.
Only a handful of their cards - the Green/Gold/Platinum - are charge cards, and they all now have "Pay Over Time" (allowing a month-to-month balance on charges over $100) and "Plan It" (allowing one or more charges to be put on a 3-24 month payment plan with a fixed finance fee).
https://www.americanexpress.com/en-us/benefits/payment-flexi...
https://www.americanexpress.com/us/credit-cards/features-ben...
Citibank did just that with me.
They do. When they do it aggressively, it results in bad PR, though.