How does Capital One make money off of me?

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ilmartello
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How does Capital One make money off of me?

Post by ilmartello » Tue Apr 24, 2012 2:57 am

I am what the credit card industry calls a deadbeat, in that I don't let balances revolve, I pay of in full every month.

I believe that the standard interchange fee for Visa or Mastercard credit cards is about 1.5 percent. My Capital One card kicks me back 1.5 percent as a reward.

What am I missing?

Do they sell information like my name and spending habits to third parties? Is that that lucrative to them? I always opt out of those whenever I can.

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celia
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Re: How does Capital One make money off of me?

Post by celia » Tue Apr 24, 2012 3:09 am

You will supposedly use your credit card and they charge each merchant you patronize about 3% of your purchase.
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Re: How does Capital One make money off of me?

Post by The Wizard » Tue Apr 24, 2012 3:10 am

Do you have an annual fee?
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ilmartello
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Re: How does Capital One make money off of me?

Post by ilmartello » Tue Apr 24, 2012 3:13 am

celia wrote:You will supposedly use your credit card and they charge each merchant you patronize about 3% of your purchase.
I have checked and Visa cards have an interchange fee of about 1.8 percent and Visa takes their cut before Capital One gets at it.
No the card has no annual fee.

Here is what God, aka Wikipedia says.

For one example of how interchange functions, imagine a consumer making a $100 purchase with a credit card. For that $100 item, the retailer would get approximately $98. The remaining $2, known as the merchant discount [10] and fees, gets divided up. About $1.75 would go to the card issuing bank (defined as interchange), $0.18 would go to Visa or MasterCard association (defined as assessments), and the remaining $0.07 would go to the retailer's merchant account provider. If a credit card displays a Visa logo, Visa will get the $0.18, likewise with MasterCard. Visa's assessment is fixed at 0.1100% of the transaction value and MasterCard's assessment is fixed at 0.0950% of the transaction value. On average the interchange rates in the US are 179 basis points (1.79%) and vary widely across countries; in April 2007 Visa announced it would raise its rate .6% to 1.77%.[11]

http://en.wikipedia.org/wiki/Interchange_fee

I know that Discover and AmEx have considerably higher intercharge fees, hence why a lot of small businesses don't take them.

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SpecialK22
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Re: How does Capital One make money off of me?

Post by SpecialK22 » Tue Apr 24, 2012 6:29 am

I believe rewards cards often have a higher interchange rate than standard cards.

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Remy Winchester
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Re: How does Capital One make money off of me?

Post by Remy Winchester » Tue Apr 24, 2012 6:42 am

^ You may be right, but I would think it doesn't matter if it's a rewards card or not as far as interchange fees goes, only if it's a Visa/MC/AMEX/Discover. I know that rewards cards typically do have higher APR % if you do not pay your balance on time... which is where they may recoup some of the money on rewards loss leaders...

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Re: How does Capital One make money off of me?

Post by alanf56 » Tue Apr 24, 2012 7:03 am

Besides the customers they have that don't pay off the balance every month I think they count on some missing a payment and being able to charge the large fee for that. I guess it all adds up or they wouldn't be in business.

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Re: How does Capital One make money off of me?

Post by edge » Tue Apr 24, 2012 7:15 am

Remy Winchester wrote:^ You may be right, but I would think it doesn't matter if it's a rewards card or not as far as interchange fees goes, only if it's a Visa/MC/AMEX/Discover. I know that rewards cards typically do have higher APR % if you do not pay your balance on time... which is where they may recoup some of the money on rewards loss leaders...

This is wrong, different levels of card have different interchange. E.g. 'Signature Visa' vs plain Visa. That said, Capital One typically targets people who cannot pay in full so you are probably one of their less profitable customers.

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Re: How does Capital One make money off of me?

Post by Grt2bOutdoors » Tue Apr 24, 2012 8:00 am

ilmartello wrote:I am what the credit card industry calls a deadbeat, in that I don't let balances revolve, I pay of in full every month.

I believe that the standard interchange fee for Visa or Mastercard credit cards is about 1.5 percent. My Capital One card kicks me back 1.5 percent as a reward.

What am I missing?

Do they sell information like my name and spending habits to third parties? Is that that lucrative to them? I always opt out of those whenever I can.
Interchange fees - the more you charge the more they make. Think of it as the Wal-Mart of credit cards, Wal-Mart has a low profit margin, but what it lacks in profit margin it more than makes up in volume sales. I have the same thing with Discover, - I don't pay interest, but I do charge most of my purchases through them, they make a ton on the interchange fee.
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Re: How does Capital One make money off of me?

Post by xerty24 » Tue Apr 24, 2012 8:03 am

edge wrote:
Remy Winchester wrote:^ You may be right, but I would think it doesn't matter if it's a rewards card or not as far as interchange fees goes, only if it's a Visa/MC/AMEX/Discover. I know that rewards cards typically do have higher APR % if you do not pay your balance on time... which is where they may recoup some of the money on rewards loss leaders...

This is wrong, different levels of card have different interchange. E.g. 'Signature Visa' vs plain Visa. That said, Capital One typically targets people who cannot pay in full so you are probably one of their less profitable customers.
Rewards cards are in a higher tier, often costing the merchant 2.25-2.5%, and bringing in correspondingly more revenue to the card issuer.

CapOne has a big subprime business, but also a big super-prime business. Their rewards cards usually fall into the latter category.
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Remy Winchester
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Re: How does Capital One make money off of me?

Post by Remy Winchester » Tue Apr 24, 2012 8:16 am

I stand corrected. Thanks for the info!

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ejvyas
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Re: How does Capital One make money off of me?

Post by ejvyas » Tue Apr 24, 2012 8:39 am

ilmartello wrote:
celia wrote:You will supposedly use your credit card and they charge each merchant you patronize about 3% of your purchase.
I have checked and Visa cards have an interchange fee of about 1.8 percent and Visa takes their cut before Capital One gets at it.
No the card has no annual fee.

Here is what God, aka Wikipedia says.

For one example of how interchange functions, imagine a consumer making a $100 purchase with a credit card. For that $100 item, the retailer would get approximately $98. The remaining $2, known as the merchant discount [10] and fees, gets divided up. About $1.75 would go to the card issuing bank (defined as interchange), $0.18 would go to Visa or MasterCard association (defined as assessments), and the remaining $0.07 would go to the retailer's merchant account provider. If a credit card displays a Visa logo, Visa will get the $0.18, likewise with MasterCard. Visa's assessment is fixed at 0.1100% of the transaction value and MasterCard's assessment is fixed at 0.0950% of the transaction value. On average the interchange rates in the US are 179 basis points (1.79%) and vary widely across countries; in April 2007 Visa announced it would raise its rate .6% to 1.77%.[11]

http://en.wikipedia.org/wiki/Interchange_fee

I know that Discover and AmEx have considerably higher intercharge fees, hence why a lot of small businesses don't take them.
In the above transaction it is important to note that the retailer also has to pay a gateway fee (transaction charge) for using a payment gateway eg. Authorize.net, Paypal, Google Checkout. This transaction fee is about 3% but decreases if you have more transactions.

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Re: How does Capital One make money off of me?

Post by ilmartello » Tue Apr 24, 2012 12:47 pm

But that gateway fee goes to the third party that processes transactions, not capital one .Right?

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Re: How does Capital One make money off of me?

Post by mptfan » Tue Apr 24, 2012 12:57 pm

I think credit card companies break even or make a tiny profit on deadbeat customers, that is, customers who pay their bills in full and on time, every time. They are betting that most deadbeats will eventually do one of the following things, which will generate interest or fees:

- pay less than the entire balance one month
- pay a late fee
- take a cash advance
- use the card in another country

ilmartello
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Re: How does Capital One make money off of me?

Post by ilmartello » Tue Apr 24, 2012 12:57 pm

Oh, I found this and it looks interesting Visa's interchange fee schedule.

http://usa.visa.com/download/merchants/ ... il2012.pdf

Page 4 looks like the standard fee is roughly between 1.4-1.8 percent for a standard rewards card, meaning it still remains a mystery how they can afford a 1.5 percent cash back.

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ejvyas
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Re: How does Capital One make money off of me?

Post by ejvyas » Tue Apr 24, 2012 3:37 pm

ilmartello wrote:But that gateway fee goes to the third party that processes transactions, not capital one .Right?
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What I am talking about is the processing fee($0.5 in this case).
It seems to be about 3% for the end retailer

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Re: How does Capital One make money off of me?

Post by mmmodem » Tue Apr 24, 2012 7:05 pm

The interchange fee is chump change to the credit card companies. They make money on the interest they charge users. The last time I heard it, the average US household has $8000 in credit card debt. I don't know what the average CC APR is but I'd bet it's a lot higher than 1.5%. I would venture a guess of at least double digits. That's where they make their money. They don't make money off the small minority of us who pay off our cards monthly. We're the loss leaders. To put it in harsher words, people who are bad with credit cards are paying the 1.5% reward cards that we enjoy.

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Re: How does Capital One make money off of me?

Post by tfb » Tue Apr 24, 2012 8:20 pm

mptfan wrote:I think credit card companies break even or make a tiny profit on deadbeat customers, that is, customers who pay their bills in full and on time, every time.
Not tiny. At least 15% profit margin. Not 15% of what you charge of course but 15% over their cost: float, rewards, customer service, etc. Source: http://www.justice.gov/atr/cases/f11700/11793.htm (Ctrl-F search for 'transactor').
mmmodem wrote:They don't make money off the small minority of us who pay off our cards monthly.
Those who pay off cards monthly are not a small minority. They are not loss leaders. About 1/2 to 2/3 don't carry a balance. Logic says if it's not profitable, issuers will not go after this 1/2 to 2/3 of their customer base. Smaller gross margin maybe but also lower cost of chargeoffs.

This is from four years ago:
55 million credit card accounts owe Bank of America $94 billion. The average balanced owed is $1,719. 60% of the accounts don’t carry any balance. Another 28% of the accounts have balance under $5,000. The average balance owed for accounts which carry a balance is $4,311. (p. 29)
Source: Looking Inside a Credit Card Portfolio
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Re: How does Capital One make money off of me?

Post by grabiner » Tue Apr 24, 2012 9:39 pm

Rewards cards that have non-cash rewards also have another source of revenue. For nine years, I had a Shell card, and almost all of my spending on that card was at Shell stations; I bought gas once a week from a station near where I worked, and put most of my non-Shell spending on another card. Citibank could see this from my records (my credit report would show a balance of $80 on the Shell card and $500 on another card), and could tell that I was receiving an average of more than 4% cash back. If that wasn't profitable, Citibank would have changed the terms or cancelled the card, as there was no reason for Citibank to expect that I was going to change my spending patterns.

Presumably, Shell offered some money to Citibank as part of the card arrangement, as the card made it more likely that I would buy Shell gasoline. Thus everyone wound up ahead; Shell got a customer, Citibank made money on interchange fees, and I saved 5% on my gas. (And when Citibank changed the terms to make the card less profitable for me, I closed it, and am now in the same situation with Chase and United Airlines instead.)
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Re: How does Capital One make money off of me?

Post by mmmodem » Wed Apr 25, 2012 2:35 pm

tfb wrote:
mmmodem wrote:They don't make money off the small minority of us who pay off our cards monthly.
Those who pay off cards monthly are not a small minority. They are not loss leaders. About 1/2 to 2/3 don't carry a balance. Logic says if it's not profitable, issuers will not go after this 1/2 to 2/3 of their customer base. Smaller gross margin maybe but also lower cost of chargeoffs.

This is from four years ago:
55 million credit card accounts owe Bank of America $94 billion. The average balanced owed is $1,719. 60% of the accounts don’t carry any balance. Another 28% of the accounts have balance under $5,000. The average balance owed for accounts which carry a balance is $4,311. (p. 29)
Source: Looking Inside a Credit Card Portfolio
I don't agree with your conclusion from your source.

1. Not all people own Bank of America credit cards.
2. Looking at the number of open accounts is not the same as looking at the number of people who hold credit card debt. I have 3 Chase accounts of which I use one. Using just me, you could say 2/3 of Chase accounts don't carry a balance. Your statement that those who pay off their balance is not a small minority is not proved by your source. Using household as a metric is more useful in my opinion.

However, my source is anecdotal, so it's no better. There are only a handful of people I know who don't hold a balance on their CC.

Assuming you are correct, $1719 average balance per account is enough interest to do business. Again, the interest is where the credit card company is getting their money.

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Re: How does Capital One make money off of me?

Post by tfb » Wed Apr 25, 2012 4:28 pm

mmmodem wrote:1. Not all people own Bank of America credit cards.
True, but you would think 55 million accounts is a huge representative sample of US households.
mmmodem wrote:2. Looking at the number of open accounts is not the same as looking at the number of people who hold credit card debt. I have 3 Chase accounts of which I use one. Using just me, you could say 2/3 of Chase accounts don't carry a balance. Your statement that those who pay off their balance is not a small minority is not proved by your source. Using household as a metric is more useful in my opinion.
Feel free to find other data sources you like. It is true when people carry a balance, they don't necessarily carry a balance on all cards. Carrying a balance with Bank X doesn't really help Bank Y. Banks know full well who carry a balance and who don't. It's not possible to have this large number of the account base as a loss leader.
mmmodem wrote:Assuming you are correct, $1719 average balance per account is enough interest to do business. Again, the interest is where the credit card company is getting their money.
True they make more money from interest. They still make enough money from those who never pay any interest. The profit from merchant fees carries low risk. Banks actually lost money from their card portfolio a few years ago when they had high chargeoffs.
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