The Catch in the Cashback for Credit Card Companies
Credit card providers are in the money-making business, yet they usually put up advertisements for incentives, which feature rewards like cash back on purchases made using the credit card.
There are various customers who get attracted to mailers and online offers that promise amazing incentives, starting from 0 to low introductory rate of interest to welcome bonus rewards to cashback offers on using the card.
Generous cashback deals on credit cards have become a common incentive that the banks offer to the cardholders, even after the end of the bonus introductory period.
For instance, Citibank offers 10% cashback on their cashback credit card whenever it is used.
But, the question is, how does Citibank or any other company for that matter offer these attractive deals for the customers and still end up earning profits?
Let us quickly discuss a few things you may not know about how card providers make money.
- When a merchant accepts any payment through a credit card, they need to pay a portion of the transaction amount in the form of fees to the credit card provider.
- Various cash reward plans have a maximum annual limit. So although they offer a five percent cashback reward generously, there may be a maximum limit or an annual cap above which you can earn no cashback.
- Moreover, credit card providers earn money by levying high rates of interest on the credit and charging late payment fees on the balances, which are carried forward monthly.
Now, that you have at least some idea of the income sources of the card issuers, let’s dive into more information about these cashback programs.
This Isn’t Free Cash
When the merchants accept payments through credit cards, they have to pay a certain part of the amount of transaction as a charge to the credit card provider.
If the card member holds a participating cash back program, the provider will simply share a part of the fees with the card member.
The objective behind this is to attract customers from using credit cards for making payments instead of debit cards or cash, which actually gives no rewards as such.
The more the customer is making use of cashback credit card, the higher amount of merchant fees will be earned by the provider.
Late payment fees and high rates of interest are other forms of income for the card issuer. The more the customers use their credit cards, the higher would be the chances of them missing a payment of carrying a balance for which they will have to pay interest and fees.
If you have been using credit cards for a long time, you must know that the ones that offer the most promising sounding rewards often carry huge amounts of fees and higher interest rates, as compared to the similar cards that have lower rewards, or no rewards at all.
In a Nutshell!
Cashback card sounds pretty enticing, doesn’t it? if appears that the cashback rewards may help the cardholders in saving some money on the purchases they make using the credit card.
However, as soon as you read the qualifications and restrictions in the fine print, that includes limitations on the yearly use of cashback earned, or the maximum limit on the cash back they earn, things may change. These rewards will no longer look as generous as they appear in the advertisements.
Since these programs are incentives for the cardholders for using credit cards over debit cards or cash, they generate higher merchant fees for the card company. It may lead to a rise in the debt of the cardholders, hence, offering another revenue source for their provider.
Therefore, cashback programs are yet another ingenious marketing weapons of the credit card companies to increase their profits.