How credit card issuers make money
credit card revenue sources
Credit card revenue comes from three main sources:
- Interest paid by cardholders who carry a balance from month to month.
- Service fees. These include annual fees as well as charges for balance transfers, foreign transactions, cash advances, late payments, returned checks and so on.
- Interchange fees that merchants pay to accept credit cards — usually 2% to 3% of each transaction.
Interest revenue generated more than twice as much revenue as interchange and service fees in 2013, according to a composite income statement for credit-card-issuing banks assembled by First Annapolis Consulting. However, during the period studied by First Annapolis, interest revenue held fairly steady, while fee revenue nearly doubled. Here’s how revenue streams compared as a percentage of outstanding cardholder balances:
Percentage of outstanding cardholder balances, 2010-2013
|Year||Interest Revenue||Interchange & Service Fees Revenue|
|Source: First Annapolis Consulting|
A look at individual issuers
Each credit card issuer makes money differently, depending on its cards’ fee structures. Most, however, earn the bulk of their revenue from interest. Unlike other costs of carrying a credit card, interest is completely dependent on consumer behavior. Interest is charged only to consumers who don’t pay their balance in full each month. Pay in full, and you won’t pay a penny in interest.
To illustrate how revenue structures differ across issuers, here’s a look at how four issuers made money in 2015:
- Capital One. In 2015, Capital One reported $11.2 billion in net interest income from its credit card business, and $3.4 billion in “net non-interest income” — that is, interchange and service fees, minus consumer rewards.
- Synchrony. Unlike other major issuers, Synchrony makes most of its money on private-label store cards that don’t charge interchange but have high interest rates, so it’s no surprise that most of its income comes from interest charges. It reported $505 million in interchange revenue from its open-loop cards in 2015. Open-loop cards are those that can be used outside the store whose name appears on the card because they’re part of a payment network like Visa or MasterCard. Across all products, including credit cards and loans, it reported a net interest income of $12.1 billion the same year.
- American Express. Although AmEx offers several credit cards, its signature products are charge cards, which don’t allow cardholders to carry balances and don’t come with interest rates. The issuer also charges higher interchange on transactions. This could be why its U.S. card services division’s revenue is so different from those of its competitors. In 2015, it reported $13.2 billion in non-interest revenue, including service fees and interchange, and $5.6 billion in net interest income in 2015.
- Discover. Like other major issuers, Discover also makes more money on credit card interest than on interchange. In 2015, it reported $6.6 billion on interest income from credit card loans, and $1.1 billion from net discount and interchange revenue.
Issuer market share
We compared credit card issuers based on total number of credit lines extended to cardholders. The 10 biggest issuers hold about 86% of the total market value. Here’s how issuers match up, based on third-quarter 2015 data.
Total credit lines by issuer
|Bank of America||$462,365,000,000|
Credit card network acceptance
Among all credit card payment networks, Visa and MasterCard were accepted by the most merchants in 2015, according to Nilson Report data. Discover followed closely behind, while American Express had relatively lower acceptance rates, though the gap is closing year by year.
Merchant acceptance rates, 2008-2015
|Source: Nilson Report|
|2008||8 million||7.9 million||4.6 million||6 million|
|2009||8.2 million||8.2 million||4.9 million||7.4 million|
|2010||8.7 million||8.7 million||5.8 million||7.9 million|
|2011||9 million||8.6 million||6.1 million||8.5 million|
|2012||9.2 million||9.2 million||6.2 million||9 million|
|2013||9.4 million||9.4 million||6.4 million||9.2 million|
|2014||9.5 million||9.5 million||6.9 million||9.3 million|
|2015||9.8 million||9.8 million||7.3 million||9.6 million|
You can read the credit card terms for different products on the CFPB cardholder agreement database.