5 min read · Sep 6, 2019
Ever wonder why Indian banks sell credit card aggressively(with lucrative offers) and not any other service of theirs? In fact, they give lots of offers to the customers to get a credit card. Do you know why? Read till the end to find the answer.
First, let's understand a typical credit card transaction flow.
Whenever you swipe a card the above transaction flow happens. So between you and your bank, there is a set of mediators who help in fulfilling the transaction. No surprise that all the mediators get paid(interchange rate)for the work they do. The percentage of interchange rate changes from company to company. The commission on a global average would be 1.76% of the transaction value. Below is a snippet of major global companies with the interchange income between January 2017 to September 2017
The above process is the same for both credit card and debit card.
The answer is simple. Banks earn more from credit cards rather than debit cards. But how?
Let's look at the ways bank get money through credit cards:
Interest Rates:
- The primary way that banks make money is interest from credit card accounts. When a cardholder fails to repay their entire balance in a given month, interest fees are charged to the account. Credit card interest rate is the costliest in the world. Banks can charge up to .1% a day which goes to 36% a year, which is more than what many unregistered finance people lay.
But very few people fail to repay the amount within the stipulated time. So the amount that is earned from interest rate is cumulatively small when compared to offers they provide and money they put in to sell credit cards. Then how do they make big money?
Fee Structures:
- In addition to interest revenue, credit card issuers often collect additional fee-based revenue from cardholders that are not associated with any type of expenditure, allowing the bank to realize a pure profit on these amounts. These fees will be collected on a yearly basis and the amount varies between banks.
But nowadays banks provide free credit cards in order to make people buy it even if they don't need it. Providing credit card for free and giving away lucrative offers to make purchases is a common norm Indian banks using in recent times. Not to forget they provide credit points for all the purchases that the user does. There is definitely going to be a cost associated with this. So this is also not a valid reason to sell credit cards aggressively. Then how do they make big money?
Retailer Fees:
- Every business that accepts credit/debit cards must pay either a regular fee or a commission on sales to the issuing bank. This revenue is associated with the cost of the technological infrastructure necessary to process charges from business customers, allowing the bank to realize a profit here as well.
This is one of the lesser-known information to many. It has a common term called swipe fees. Is the swipe fees a key differentiator? Let's analyze…
Swipe fees are common for all cards. Be it your food card, entertainment card, credit or debit card, etc.
But swipe fees for credit cards can be slightly more than that of debit cards.
Because, when you swipe a debit card, money is moved from your account to the retailers' account.
But when you use a credit card, the bank is giving you a loan while it is depositing real cash in retailers account.
To prove the above point, there may be instances where if you pay with a credit card, the merchant will ask for an extra 2%
But still, there is only a slight change in the swipe fees between cards. Then what would be the crux?
After demonetization in November 2016, the central government of India, in order to promote digital transactions, made policy with the banks saying that “There should not be any swipe fees for debit card payments below 2000 rupees”. Here comes the fact. This was the primary reason for the aggressive marketing of credit cards. The reason is below
The above graph clearly depicts that, by giving offers for debit cards there is going to be a loss for the bank as they won't yield them any swipe fee.
Suppose you are kind of person who hates debt. Your bank sells credit card to you free of cost without any verification. And you make payments through the card and repay it within the first 5 days of the month. There is no way the bank is profitable by giving you the credit card. The only way they make money is by making you purchase more. More you purchase, more swipe fee the bank earns. That is the reason you get so many offers and credit points for the transaction you do. Hope you all understood the fact behind the question. Cheers!!!
