Credit cards and POS are two of the core products that banks offer their customers. At first glance, credit cards might seem like a product that generates no return for banks beyond interchange fees, card fees, and late payment fees. Moreover, the card fee can be cancelled if the customer objects to it.
When the expenses borne by the bank are considered alongside the returns above, these include:
- Points given to customers
- Customers failing to pay their card debts
- Legal fees paid for customers whose card debt goes into collections due to non-payment
- Card printing and operational expenses
- Card distribution expenses
- Funding cost
- Advertising expenses incurred to increase the card's brand awareness
So what makes credit cards so attractive for banks?
- Merchant Commissions: The most important reason for this is that it strengthens the bank's hand during merchant acquisition and POS sales. On the payment systems side, banks earn their largest profit from merchants (merchant commission fees). For example, as a bank with 500,000 cards, if you approach a merchant and want to connect your POS device, you would have to offer extremely attractive terms for the merchant to agree to connect that POS device. However, as a bank with 10,000,000 cards, when you go to market a POS device to a merchant, you can market it very easily, for reasons such as the merchant being able to offer installment transactions through the POS (installment transactions require the card-issuing bank and the POS-acquiring bank to be the same), customers being able to earn extra points, and campaigns run by the bank also applying to that merchant. In short, the number of cards is crucial for generating commission revenue on the merchant side.
- Customers who habitually pay late: Another area where banks earn profit is the revenue generated from payments made after the card's due date. Customers who pay their debt but with a delay of a few days are the customers banks love the most.
- Card Fees: Even though the card fee can be cancelled when the cardholder requests it, the number of customers who never ask for it to be cancelled is very high. The revenue generated from this is not insignificant either.
- Cash Advance Fees: When banks issue a credit card to a customer, they set a specific cash advance limit for that customer. (Participation banks do not offer cash advances, since this is treated as interest.) When customers withdraw a cash advance, banks earn cash advance revenue.
- Cross-Selling: Studies have shown that customers generally transact with the bank whose credit card they actively use, and that when they need a new product, their first preference is the bank whose card they use. For this reason, credit cards are a very important product for cross-selling.
