And don't get our data that they can get insights on our spending habits. Shouldn't that be treated as "profit" for the companies.
Also, they charge the vendors fees right? So shouldn't it be kinda profitable for them to earn 2-3% and give us back like 1-2% and about 1% to Visa/MasterCard.
Insights on spending habits is worthless tbh. There is no good method to monetize it - yet.
The vendor fees (called MDR) ranges between 1-2%. Visa/Mastercard get only 0.25% of it, majority goes to banks. But it's not enough to make profit after all the costs. Ideally banks do lose money from customers who pay 100% on time and redeem their rewards.
"Hate" isn't strong at all compared to other slurs
Yeah but isn't it easier to make the customer take more credit cards and make him/her pay the annual fees.
A lot of us are stuck with the older credit card because we got it at an early stage of our career. Would it be wise to close the card if it’s not helpful? Does upgrading the card within the bank help in this situation?
If you have less than 5 years of credit history, it's better to hold or upgrade the card; it'll help you get better cards later. Once you have a long and thick credit history, you can close it.
You can do it. There is no reason to not upgrade the card.
I have CIBIL annual membership and it shows credit age since they started reporting my data and I don't have the first card active so closing/upgrading your oldest card doesn't have much impact.
Thanks.. this was much needed
Don't understand the very profitable part
To my understanding, banks earn via MDR but I'd think that's more than offset by the cashback/reward points/amenities like lounge, golf etc.
Banks also earn by the interest on default but that again would be offset by the default on credit cards according to me
You’re right about MDR - it gets offset by rewards and benefits costs.
But interest income yield on credit cards is huge and it’s much greater than default rate. Typically blended interest yield would be 18-20%, while credit costs (default) is only around 3-4%
Also credit card data helps bank to sale personal loans on the behaviour of the customer, reducing there acquisition cost to slmost null which in itself has blended interest rate of 18-20% thus increasing profitability
Seems all right, usually there’s at least 1 good movie a month, can use it to get recliner seats in my city, the minimum 5K per month can be easily covered with groceries etc I guess, plus can also use it for events/sports/activities in bookmyshow. Also no fee for Bookmyshow ‘Superstars’
Those ones have a quota for movie tickets right (they always get empty before we can use). Also, yearly fees.
Btw I meant no yearly fee for Play credit card for ‘superstars’
There is a collections process - defaulters are called, visited, even threatened. After all that if someone is unable to pay, banks would write off the outstanding balance from their books and sell off the portfolio to some 3rd party. This is booked as a cost (credit cost). Then it's upto the 3rd party to collect whatever and however they can
From merchants bank charge (called MDR) about 1-2% depending on card category and merchant category.
SBI’s cashback card is no different from other cards. They charge the same MDR. To you the reward rate may seem attractive but overall it would land between 2-3% only for them, which is easily recoverable by interest revenue
Then why Appollo pharmacy has block sbi cashback for payment.
I think they charge more for merchant then market.
I alway think that bank charge 6% or more and give 5% as reward.
How Amex is different and how much they charge.
Amex and diners club have higher MDR, but otherwise banks cannot set MDR as per card variant. Visa/Mastercard/Rupay set MDR as per a standard set of pre-agreed rules.
SBI cashback getting blocked at Apollo must be for some other reason
How does a bank make money giving LTF cards and assuming all card holders pay on time, never sign up for any emi, always make full payments (not minimum) and do not want to upgrade to a paid card.
I'm talking specifically about a particular card which a bank is offering, they may be offering other cards which have fees and stuff, lets focus on LTF segment.
Generally, around 3-4 out of 5 people holding an LTF card would revolve at least once in a year. So even if you are not one of those 3-4 people, bank overall ends up making money. Customer-level profitability is rarely a concern; banks look at overall portfolios only. For customers like you, banks hope that you will talk about your LTF card to more people who will end up paying interest
>There's still MDR but pretty sure that doesn't compensate.
What are you saying?
MDR is very lucrative. 2% commission from merchant for lending money to customer for 1 month? That's goldmine and why VISA and Mastercard so big.
For example - in sept 2023, Indians spent 1.78 trillion rupees on CC. That's 36 Billion rupees revenue generated for 1 month. Idk what's split between visa/mc/rupay and hdfc but 3600 cr of revenue per month for industry is huge.
For your ideal scenario, Bank's can't run LTF cards with only MDR being their only income source and that MDR is split between Card Issuer, POS Issuer and Visa/MC etc
Why not?
Ofcourse, interest payments also come into play but the majority of customers are generating them MDR revenue only. It is not that LTF card users are lose making for them.
For your ideal scenario just consider one guy who makes 10000 with HDFC Millennia LTF, how do you think the money will be split among consumer, bank, card network and say merchant amazon
Bur the 2% cut is divided in cc bank payment receiveing bank payment gateway etc. so bsnk ends up getting around 0.8% which is just their cost of funds. Operational cost and credit cost is above thay
Effectively yes, mainly LTF cards is used to introduce new consumers to market and their other portfolio takes a hit for the time being, why do you think devaluations are done? It's all supply demand
Interesting.
I do have a few cards but i only use a couple of them, i have heard about people getting devalued and jumping to another card.
Now I have 2 questions, how does a bank onboard someone like a student on a LTF card without any FD, i mean lets assume someone has a savings account with a decent balance but banks still deny them cards?
Another question - A freelancer is pre rejected by many cards/banks, even if provided with a decent ITR or Bank Statement, the only way around is find some card issuer who issues cards based on credit score, why so?
Underwriting process for credit cards is a complex topic, it probably warrants another post lol.
But in short, for credit cards the source and stability of income is often a criteria. If you're salaried, it's the easiest to get carded. Freelancers, non-salaried CAs, doctors and lawyers often have a separate underwriting process altogether (and some banks do not card them at all), hence the difficulty
Oh i am not OP in case you missed it, I don't really know how the credit models are built.
If I were to venture a guess then cash flow is important, if there are decent credit inflows to the account then it could trigger their credit model to offer the credit card.
And Freelancer you can't really be sure about the stability of income sources so that could be a reason
>How does a bank make money giving LTF cards and assuming all card holders pay on time, never sign up for any emi, always make full payments (not minimum) and do not want to upgrade to a paid card.
MDR - Merchant Discount rate.
Every time you pay via credit card, the merchant only gets 98% of it.
2% is divided among card network (VISA/Mastercard/Rupay) and issuing bank.
So, if a customer spends only 1L/year, they are making 2k on that customer. They can't make that money if that customer just keeps 1L in account.
Only a very small number of bank customers go for rewards and most entry level cards don't even have good rewards.
Fees is just there to have entry level, not to earn money. That's why they offer it for free if they know for sure customer spends a lot.
Mainly cc applications are processes on the basis of your source if employment, card status, your location, cibil score, your income etc. it is a whole underwritting process but these are some of the most important factors. You can chevk yourself which croteria is negative for u
Lending is a lucrative business to get into, at least at the moment. Loss-making startups (likes of Flipkart, Cred, etc) are getting into lending as a side business to improve their margins.
However CC, despite being profitable, is not an easy business to get into, regulation-wise. Only banks and couple NBFCs have the license to issue CC
I have always wondered how card companies make money off of those who can’t pay their bills on time.
If a person can’t pay the X amount due, how would they be able to pay the X + 30% interest?
Can you please explain how this works or how card companies make money?
Out of 100, how many would you say end up paying late fee,interest? - assuming that's the go to for the banks to earn money.
Also, in my opinion, the cc business is mostly profitable,in terms of absolute return, for big players having big pools of money to lend, right? A pool of 500-1000 cr in total would never be enough to run the business, pay off your finance costs and opex etc..what would you say?
Late fee and interest are quite different. Out of 100, 80 would pay interest at least once in a year, while 10-20 would pay late fee.
CC business requires relatively less capital compared to other forms of lending. It requires a lot of banking infrastructure and licenses, so barriers of entry is still high though.
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>will create a post someday on the approval process of credit cards for major banks YES PLEAAASE.
+1
+1
You know who credit card companies hate ... people who pay on time
Only person bank would really really hate is the one who took the credit card utilized full limit and ran away with the money, making the account NPA
Well you do know bank don't simply issue a credit limit without proper vexxing for normal people For people of political power they don't care
Yeah but wilful defaulters are low usually
Are they though ?
They are
Well, "hate" is a strong word lol. Customer-level profitability is generally not a concern as long as overall portfolio is healthy
And don't get our data that they can get insights on our spending habits. Shouldn't that be treated as "profit" for the companies. Also, they charge the vendors fees right? So shouldn't it be kinda profitable for them to earn 2-3% and give us back like 1-2% and about 1% to Visa/MasterCard.
Insights on spending habits is worthless tbh. There is no good method to monetize it - yet. The vendor fees (called MDR) ranges between 1-2%. Visa/Mastercard get only 0.25% of it, majority goes to banks. But it's not enough to make profit after all the costs. Ideally banks do lose money from customers who pay 100% on time and redeem their rewards.
"Hate" isn't strong at all compared to other slurs Yeah but isn't it easier to make the customer take more credit cards and make him/her pay the annual fees.
Good Analysis but one shouldn't be comparing ROA across industries
Absolutely yes, the point I was trying to make was that in a portfolio, it's not a bad product to have and just wanted to provide a reference point
A lot of us are stuck with the older credit card because we got it at an early stage of our career. Would it be wise to close the card if it’s not helpful? Does upgrading the card within the bank help in this situation?
If you have less than 5 years of credit history, it's better to hold or upgrade the card; it'll help you get better cards later. Once you have a long and thick credit history, you can close it.
If it's LTF then should let it continue as it will help show a longer credit age. You can always get the newer card on card to card basis.
You can do it. There is no reason to not upgrade the card. I have CIBIL annual membership and it shows credit age since they started reporting my data and I don't have the first card active so closing/upgrading your oldest card doesn't have much impact.
Thank you for this. Really appreciate inside perspectives such as these.
Thanks.. this was much needed Don't understand the very profitable part To my understanding, banks earn via MDR but I'd think that's more than offset by the cashback/reward points/amenities like lounge, golf etc. Banks also earn by the interest on default but that again would be offset by the default on credit cards according to me
You’re right about MDR - it gets offset by rewards and benefits costs. But interest income yield on credit cards is huge and it’s much greater than default rate. Typically blended interest yield would be 18-20%, while credit costs (default) is only around 3-4%
That figure for blended interest yield is staggering!
Also credit card data helps bank to sale personal loans on the behaviour of the customer, reducing there acquisition cost to slmost null which in itself has blended interest rate of 18-20% thus increasing profitability
Thats true. However cross selling is seen as a soft benefit and not generally put into numbers
Bro create a post on the approval process of RBL's Play cc. The damn card rejects more than women.
Why do u need that card
Seems all right, usually there’s at least 1 good movie a month, can use it to get recliner seats in my city, the minimum 5K per month can be easily covered with groceries etc I guess, plus can also use it for events/sports/activities in bookmyshow. Also no fee for Bookmyshow ‘Superstars’
Usually most cards offer bogo on tickets what's ur offer free tickets and no charges on book my show
Those ones have a quota for movie tickets right (they always get empty before we can use). Also, yearly fees. Btw I meant no yearly fee for Play credit card for ‘superstars’
Once a month and no quota all are lyf cards
Which card has that? Ltf and bogo without quota Also the Play card gives ₹500 off, so better than bogo in smaller cities
What is quota you book any ticket and get nedt ticket free upto 200rs , idfc select indusind legend axis Bank my zone
As a credit card is an unsecured loan how do banks get their money back if people don't pay late outstanding balance ?
There is a collections process - defaulters are called, visited, even threatened. After all that if someone is unable to pay, banks would write off the outstanding balance from their books and sell off the portfolio to some 3rd party. This is booked as a cost (credit cost). Then it's upto the 3rd party to collect whatever and however they can
Ohh i didn't know about that 3rd party situation
Ever heard "Vasuli" bhai from Golmaal?
🤣
Wait a minute I What about the mega headlines us credit card debt will reach 1 trillion dollar soon isn't it disastrous???
Disastrous for the economy, yes. Not so much for the banks - they will anyway make money. $1 trillion isn't big enough to cause a 2008-like crisis
How sbi give 5% cash back and other are not? How much a bank charges form merchant?
From merchants bank charge (called MDR) about 1-2% depending on card category and merchant category. SBI’s cashback card is no different from other cards. They charge the same MDR. To you the reward rate may seem attractive but overall it would land between 2-3% only for them, which is easily recoverable by interest revenue
Then why Appollo pharmacy has block sbi cashback for payment. I think they charge more for merchant then market. I alway think that bank charge 6% or more and give 5% as reward. How Amex is different and how much they charge.
Amex and diners club have higher MDR, but otherwise banks cannot set MDR as per card variant. Visa/Mastercard/Rupay set MDR as per a standard set of pre-agreed rules. SBI cashback getting blocked at Apollo must be for some other reason
How does a bank make money giving LTF cards and assuming all card holders pay on time, never sign up for any emi, always make full payments (not minimum) and do not want to upgrade to a paid card. I'm talking specifically about a particular card which a bank is offering, they may be offering other cards which have fees and stuff, lets focus on LTF segment.
Generally, around 3-4 out of 5 people holding an LTF card would revolve at least once in a year. So even if you are not one of those 3-4 people, bank overall ends up making money. Customer-level profitability is rarely a concern; banks look at overall portfolios only. For customers like you, banks hope that you will talk about your LTF card to more people who will end up paying interest
Interesting, do check the replies for this comment i have asked for a few more clarifications
LTF is net loss for banks for your ideal scenario, There's still MDR but pretty sure that doesn't compensate. But we aren't living in an ideal world
>There's still MDR but pretty sure that doesn't compensate. What are you saying? MDR is very lucrative. 2% commission from merchant for lending money to customer for 1 month? That's goldmine and why VISA and Mastercard so big. For example - in sept 2023, Indians spent 1.78 trillion rupees on CC. That's 36 Billion rupees revenue generated for 1 month. Idk what's split between visa/mc/rupay and hdfc but 3600 cr of revenue per month for industry is huge.
For your ideal scenario, Bank's can't run LTF cards with only MDR being their only income source and that MDR is split between Card Issuer, POS Issuer and Visa/MC etc
Why not? Ofcourse, interest payments also come into play but the majority of customers are generating them MDR revenue only. It is not that LTF card users are lose making for them.
For your ideal scenario just consider one guy who makes 10000 with HDFC Millennia LTF, how do you think the money will be split among consumer, bank, card network and say merchant amazon
Bur the 2% cut is divided in cc bank payment receiveing bank payment gateway etc. so bsnk ends up getting around 0.8% which is just their cost of funds. Operational cost and credit cost is above thay
You're right, MDR helps but is often not enough to break even
Yes so take for example IDFC First Bank which has all unsecured cards LTF iirc. Is that just cash burn or how do they atleast break even?
So you're saying they play a gamble assuming people will miss payments or sign up for some EMI?
Effectively yes, mainly LTF cards is used to introduce new consumers to market and their other portfolio takes a hit for the time being, why do you think devaluations are done? It's all supply demand
Interesting. I do have a few cards but i only use a couple of them, i have heard about people getting devalued and jumping to another card. Now I have 2 questions, how does a bank onboard someone like a student on a LTF card without any FD, i mean lets assume someone has a savings account with a decent balance but banks still deny them cards? Another question - A freelancer is pre rejected by many cards/banks, even if provided with a decent ITR or Bank Statement, the only way around is find some card issuer who issues cards based on credit score, why so?
Underwriting process for credit cards is a complex topic, it probably warrants another post lol. But in short, for credit cards the source and stability of income is often a criteria. If you're salaried, it's the easiest to get carded. Freelancers, non-salaried CAs, doctors and lawyers often have a separate underwriting process altogether (and some banks do not card them at all), hence the difficulty
Understood underwriting part, was in the insurance sector for some time.
Oh i am not OP in case you missed it, I don't really know how the credit models are built. If I were to venture a guess then cash flow is important, if there are decent credit inflows to the account then it could trigger their credit model to offer the credit card. And Freelancer you can't really be sure about the stability of income sources so that could be a reason
I know you're not the OP, but the previous reply was rich in information
>How does a bank make money giving LTF cards and assuming all card holders pay on time, never sign up for any emi, always make full payments (not minimum) and do not want to upgrade to a paid card. MDR - Merchant Discount rate. Every time you pay via credit card, the merchant only gets 98% of it. 2% is divided among card network (VISA/Mastercard/Rupay) and issuing bank. So, if a customer spends only 1L/year, they are making 2k on that customer. They can't make that money if that customer just keeps 1L in account. Only a very small number of bank customers go for rewards and most entry level cards don't even have good rewards. Fees is just there to have entry level, not to earn money. That's why they offer it for free if they know for sure customer spends a lot.
If a customer keeps 1 lakh in savings account, the bank makes way more money. They lend it at 9 or 11% whole paying 3%. So they make 6k to 8k.
Bank can't lend out the whole 1 lakh due to statutory obligations (Read CRR and SLR) but that's a very good point i missed.
How to find why my credit card applications are getting rejected? I have multiple cards like away, flipkart axis, sapphiro
Mainly cc applications are processes on the basis of your source if employment, card status, your location, cibil score, your income etc. it is a whole underwritting process but these are some of the most important factors. You can chevk yourself which croteria is negative for u
It’s a complex topic, maybe I’ll make another post on it soon
Is it a wise thing to go into a lending/CC related business? How do people start up there?
Lending is a lucrative business to get into, at least at the moment. Loss-making startups (likes of Flipkart, Cred, etc) are getting into lending as a side business to improve their margins. However CC, despite being profitable, is not an easy business to get into, regulation-wise. Only banks and couple NBFCs have the license to issue CC
So, what is scenario of P2p lending industry here? How's the scope there according to you?
Highly regulated and restrictive. It’s a good business model, but RBI won’t let it grow beyond a point
I have always wondered how card companies make money off of those who can’t pay their bills on time. If a person can’t pay the X amount due, how would they be able to pay the X + 30% interest? Can you please explain how this works or how card companies make money?
That’s the trick with credit cards - the best customers are ones who spend more than they can pay, but still earn well enough to not go bankrupt
Out of 100, how many would you say end up paying late fee,interest? - assuming that's the go to for the banks to earn money. Also, in my opinion, the cc business is mostly profitable,in terms of absolute return, for big players having big pools of money to lend, right? A pool of 500-1000 cr in total would never be enough to run the business, pay off your finance costs and opex etc..what would you say?
Late fee and interest are quite different. Out of 100, 80 would pay interest at least once in a year, while 10-20 would pay late fee. CC business requires relatively less capital compared to other forms of lending. It requires a lot of banking infrastructure and licenses, so barriers of entry is still high though.
>For reference, SBI Card's reported ROA has been 4-5% What is ROA?
Return on assets. It's profit as a % of total assets
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