How Do Credit Card Companies Profit From Cashback?
The credit card providers are in the business to make money, yet, you may come across these providers advertising incentives that feature various rewards such as cashback on the purchases made on the credit card. Many of the consumers are flooded with mailers and online offers, that promise attractive incentives, from signup rewards to zero or low introductory rates of interest, to cashback rewards whenever there is an expenditure incurred on the credit card.
Nowadays, it is not rare to see banks offer extremely generous cash back incentives to the cardholders, mostly even when the introductory bonus period ends. Many cashback credit card providers offer a certain fixed percentage of cashback on expenditures as part of the customer loyalty program.
One question that comes to mind after seeing all such offers is – how can these card providers offer such lucrative deals to cardholders and still make a profit?
The Fine Print Of Cash Rewards Program
First and foremost, it is extremely important to go through the fine print of the rewards program. Most of the cash reward programs offered are capped at an annual maximum limit. This means while they may be offering you a cashback that is as generous as 5%, there might also be a maximum limit or an annual cap that you can reach. Otherwise, the other cards may be offering a cashback only on certain spending categories, such as fuel spends or at restaurants.
Because most of the cardholders that seek to open a new credit card do not read the fine print thoroughly, they might open a cashback credit card account under the impression of the cashback rewards being much more generous or universal than they actually are. This is what makes it very important to be well aware of what the fine print says.
It Is Not Free Cash
When any of the merchants accept your payments by the credit card mode, they are required to pay the card provider a fixed percentage of the transaction amount in the form of a fee. If the cardholder is enrolled in a customer program that offers cashback rewards, the credit card provider simply shares a part of the fee received from the merchants with the customers. The main aim of the providers is to provide an incentive to people in order to make them use their credit card as a mode to make payments rather than opting for cash or debit cards – which will not earn them any sort of rewards. The more the usage of credit cards by the consumers, the more is the fees earned from the merchants by the credit card company.
Additionally, another way for these credit card companies to earn money is by charging high rates of interest on the credit along with charging late payment fees for the overdue balances that are carried forward from one month to another month by cardholders. The more cardholders use their cards, the more are the chances of it becoming that they either miss a payment or they carry forward a balance to the next month for which they have to pay certain fees and interest to the credit card provider.
Credit cards that claim to offer the most generous of all rewards and deals are the cards that end up carrying a very high rate of interest along with other high fees and charges, as compared to a card that offers lower rewards in their programs, or maybe no rewards at all.
In A Nutshell
Definitely when we hear the words “cashback rewards” we face a certain excitement in us. And no doubt, these can turn out to be extremely helpful for certain consumers in the market by helping them save a bit on the purchases incurred on their credit card. However, these rewards may not seem as generous as before once you go through the restrictions and qualifications that are spelled out in the fine print, including the limitations on the number of cashback rewards that can be earned per year.
As these programs are mere incentives for cardholders to opt for a credit card as their primary mode of payment instead of their debit cards or the cash at hand, they tend to generate high merchant fees for the providers of the credit cards and may also lead to some of the cardmembers to increase their debt, providing another stream of revenue for the credit card issuing company. Rather than the company draining corporate profits, these cashback reward programs are great marketing tools that actually help in increasing the bottom lines of the credit card companies in the market.