How Banks Make Money Using Credit Cards

Credit cards are ubiquitous substitutes for cash. Ever wondered in how many different ways banks make money through credit cards issued by them?

1. Commission: When we use our credit card at a shop, the shop keeper gets paid by the bank who issued that credit card. But the bank reduces a certain percent (generally 2%) from the transaction amount before paying the money to the shopkeeper. That’s why some shopkeepers give discounts when you use cash instead of credit card for payment, especially on high value purchases such as gold.
2. Interest Charges: Interest charges are levied by the bank from its credit card owner for the revolving credit they maintain. This interest is one of the highest, and in India it can be up to 49%. According to the Reserve Bank of India, the outstanding credit on all the credit cards issued in India stands at Rs. 29,359 Crore at the end of December 2008. This amount, coupled with the high interest rate will give you an idea how much money the banks get from interest charges.
3. Fines & Penalties: Various fines such as late payment fee, check bounce penalty etc. are levied by the bank on its credit card customers. These amounts are also huge (more than 500 bucks).

Bank also gives an offer to the customer to convert the O/S balance into EMIs for which they may charge a processing fees plus a regular interest rate between 1 to 2 %.

If a bank agrees to take your deposit, they don't keep it all in the bank. Because only a small percentage of the bank customers will demand their money at any given time, a percentage of all deposits, called vault cash, is kept on hand. The rest is loaned out, so that it can earn interest. Some of this cash is loaned to credit card companies, so that they can finance the purchases their customers make, until the customer pays the credit card company back. Actually, most credit card companies are organized as banks, so that they are regulated in a different way than regular companies. Because of the way the accounting system works, the more money that is owed a company or a bank, the more that the company or the bank is worth. Even though the debt may be uncollectable, it can still be shown as an asset on a balance sheet. So, the more money that the credit card company can loan out, the more money the credit card company is worth. (On paper.) This is why we are constantly receiving offers for credit cards, even if we have just declared bankruptcy.

In addition to that bank also gives a balance transfer option. To avail that option customer has to pay charges. Again an income for the bank... :)