We all have them and we know there seems to be some kind of game afoot, but how actually do credit cards work?
Who actually pays for all those billions of reward points?
Lets explain this
For argument let’s consider that the Bank Of Cabal (BOC), a shady bank located in some cabal controlled country wants to extend loans to consumers and will make money based on these parameters
- Annual Percentage Fee of 1.5000% per month on all credit balances of card holders
- Annual Fee of RM 300 per year
With respect to the Bank Of Cabal, they have figured out from their risk analysis that they want to generate a credit card portfolio of RM 1 billion. This refers to the unsecured credit balances which earn average of 19.5% a year based the magic of compounding interest rates. So that means the Bank Of Cabal gets RM 195 million per year on average just on interest income alone, excluding the annual fee. For the annual fee, you can call to apply for a waiver of the fee and lets say there are 1 million cardholders and they grant fee waiver to almost all except 100,000 folk. So the remaining 100,000 folk pay the RM 300 annual fee and they get from these guys an additional RM 30 million.
So in 1 year, the Bank of Cabal makes more than RM 200 million from their credit card portfolio, a wonderful situation.
But the question the Cabalites face is how do they actually convince 1 million people to sign up for their card? As they have a horrible brand, there is no way they can actually get people to sign up.
Here is where this whole concept of co-branding comes into play.
Rather than issue the card directly, they engage an entity with an excellent brand name, like The Rembau Times. The Rembau Times marketing experts figure out that what Malaysia really need is a “Rembau Times Card“, which offers as benefits the following
DASHYAT dan HEBAT!
- Free subscription to The Rembau Times
- Insurance against Cancel Culture redeemable for 10,000 points
The Rembau Times card converts transactions to points on a dollar for dollar basis. So if you transact RM 10,000 you will get 10,000 points.
But there is a snag – Rembau Times, while having an excellent brand as an Anti-Fake news outlet, is not a payment processor. Merchants like Petronas do not have any linkup in their internal systems with either Bank of Cabal or Rembau Times. They however , for argument sake, have machines which connect to the Babu Payment Network (cos everyone knows Babu). So the Bank of Cabal approaches Babu, after seeing him with the Queen of England and he agrees that the Babu Payment Network will act as the payment processor for the Rembau Times Card .
Ok with that out of the way, we have identified 3 parties
- Bank which offers the loans to customers, namely Bank Of Cabal, called the Issuer
- The entity responsible to market the card, namely Rembau Times, called the Marketing Program provider
- The company which provides the terminals and networks at merchants in order for them to accept the Rembau Times card, namely the Babu Payment Network, called the Payment Processor
So now lets look at a real example.
In 2019, JP Morgan earned a total of $50.3 billion from interest income on its loans from a portfolio with average balance of about $945 billion. Of this portfolio of $940 billion, about $170 billion or close to 18% was from Credit Card loans. The net revenue rate of this is about 11%, so for argument lets assume that the total interest income on the Credit Card portfolio was 11% of $170 billion or about $18.7 billion. So notice even though the credit card portfolio was only 18% of the total portfolio, the contribution to interest income was massive – or almost 38%.
But that is only the interest income component. On top of this there is this whole shakedown of vendors that results in another income stream called Card Income.
So lets put some statistics out there.
In 2019, JP Morgan individual cardholders transacted $763 billion worth of goods and services using either cards issued by JP Morgan, or cards which were co-branded with whatever entity that JP Morgan chose to issue their card , example Antifa card, if they co-branded with Antifa. Corporate cardholders transacted an additional $400+ billion, so the total amount transacted using JP Morgan issued cards was greater than $1 trillion!
From that $763 billion, as any good ah-long would do, JP Morgan charged merchants $20.4 billion in 2019 under this thing called “interchange income”. That means for example if Cowboy Fried Chicken, who is called a merchant, accepted a $50 payment for their fried chicken from a customer who paid with JP Morgan card , then Cowboy Fried Chicken would need to pay JP Morgan a percentage on the $50 transacted. The total amount that merchants paid amounted to $20.4 billion.
From that JP Morgan had to kickback $14 billion to mainly 2 parties.
The first would be the parties who implemented the payment network, like Visa or Mastercard. In our Rembau Card example, this would be the Babu Payment Network.
The second would be the party who is in charge of administering the rewards program. Here is when the magical conversion of points takes place. So if you can redeem a Lifetime Insurance of Cancel Culture with 100,000 points, here is what actually took place in the background.
So for argument sake, the Bank of Cabal charges 3% rate on its merchants for them to process transactions using the Rembau Times card. So 100,000 points means that the Bank of Cabal earned minimum of RM 3,000 based on interchange income.
Now this only happened because card holders wanted that reward of being able to get Insurance from Cancel Culture. So when a card holder reaches 100,000 points they redeem the points for the lifetime insurance of Cancel Culture, a product that is only exclusively available from The Rembau Times. For this service, The Rembau Times tells the Bank of Cabal that it will cost RM 1,000 per insurance policy.
So the Bank of Cabal now deducts the RM 1,000 from their interchange income under the category called : “Reward Costs and Partner payment”. Also Babu demands that all payments processed through the Babu Payment Network also needs to be levied at 1% per transaction. So for RM 100,000 transactions processed through Babu’s Payment Network, Bank of Cabal needs to pay RM 1,000 to Babu. This is also included under the category of “Reward Costs and Partner payment”.
So what is left?
Bank of Cabal earned RM 3,000 from its merchants who took aggregate payment of RM 100,000 form the customers using the Rembau Times card. In return Bank of Cabal offered the customers 100,000 reward points. Customers redeemed the points for Lifetime insurance against cancel culture, which was provided by Rembau Times. Rembau Times told the Bank of Cabal that this will cost them RM 1,000 per contract. Additionally , Babu wanted 1% payment on all transactions, which also amounted to RM 1,000 . This left the Bank of Cabal with a net clean profit of RM 1,000.
So what are you waiting for?
Sign-up for the Rembau Times card today!