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How do banks make profit by giving 5% CB for online spends?

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Deal Cadet
Imperial_Penny

The MDR is max up to 2% so how do banks give 5% CB on online transactions. What is the logic behind it how do they make profit? do networks pay fixed amount to bank for issuing their cards?

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Deal Cadet Deal Cadet
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Banks never earned from the customer who are active here on desidime. Even banks never preferred customers like us who spends considering returns only. Bank need customers who spend with blind eyes and also delayed payments. Bank loves those customers and from those customers banks earns only. But you know we are very few. Let me give an example, in my office we are around 100 people, almost 50% people use Credit Cards, among few let's say average of 3 always misses cc payment on time. I am the only one out of 50 who thinks this much of benifits before spending.

Finance Mentor Finance Mentor
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They make money from people who revolve credit(people who pay just the minimum due thinking that's enough). They will be charged interest anywhere  from 30 to 40% p.a.

People buy a lot of stuff because of that 5% cb and then convert to emi, which is a solid 15 to 20% p.a.

These people form the base of the banks profits. Have you ever thought how these credit card issuers are always reporting profits in crores every year?

This is how. There is a whole crowd that lives on credit cards, buying things they really don't need, paying the bare minimum(most of which is interest, so piling on their debt). These people basically keep These companies afloat.

Finance Mentor Finance Mentor
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They make money from people who revolve credit(people who pay just the minimum due thinking that's enough). They will be charged interest anywhere  from 30 to 40% p.a.

People buy a lot of stuff because of that 5% cb and then convert to emi, which is a solid 15 to 20% p.a.

These people form the base of the banks profits. Have you ever thought how these credit card issuers are always reporting profits in crores every year?

This is how. There is a whole crowd that lives on credit cards, buying things they really don't need, paying the bare minimum(most of which is interest, so piling on their debt). These people basically keep These companies afloat.

Deal Cadet Deal Cadet
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You make me feel very special. I won't spend even Rs 10 if its not worth it or required 😊

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Deal Subedar Deal Subedar
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Some high value cc used to off 3.7% rewards and charge 4% mdr because they used to show businesses they bring High value customers like amex.

Don't know how sbi is managing this

Deal Cadet Deal Cadet
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Banks never earned from the customer who are active here on desidime. Even banks never preferred customers like us who spends considering returns only. Bank need customers who spend with blind eyes and also delayed payments. Bank loves those customers and from those customers banks earns only. But you know we are very few. Let me give an example, in my office we are around 100 people, almost 50% people use Credit Cards, among few let's say average of 3 always misses cc payment on time. I am the only one out of 50 who thinks this much of benifits before spending.

Deal Cadet Deal Cadet
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Absolutely Correct. Facts. plus1 joy

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Finance Mentor Finance Mentor
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They make money from people who revolve credit(people who pay just the minimum due thinking that's enough). They will be charged interest anywhere  from 30 to 40% p.a.

People buy a lot of stuff because of that 5% cb and then convert to emi, which is a solid 15 to 20% p.a.

These people form the base of the banks profits. Have you ever thought how these credit card issuers are always reporting profits in crores every year?

This is how. There is a whole crowd that lives on credit cards, buying things they really don't need, paying the bare minimum(most of which is interest, so piling on their debt). These people basically keep These companies afloat.

Deal Cadet Deal Cadet
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You make me feel very special. I won't spend even Rs 10 if its not worth it or required 😊

Deal Subedar Deal Subedar
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Wise use of credit card is spent till that extent which is in your bank. 

Helpful Helpful
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And then there comes me, cc cb looter.making a living out of it.🤣

Benevolent Benevolent
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a school friend of mine was paying minimum due from last 10 months thinking it will end one day.
Shopping Friend Shopping Friend
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Ye dukh kahe Khatami na hote, that's the second worst mistake in credit cards, first being non payment
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Cool Cool
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A friend of mine did emi transaction for mobile phone. I asked why he didn't use ncemi, poor dude wasn't aware that emi and ncemi are different.

Deal Cadet Deal Cadet
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ncemi is not available all the time?
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Deal Cadet Deal Cadet
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Banks earn from merchant card swipe fees. That is why they keep giving you offers to spend. Also 5% cashback is really extreme example. Most cards give you 1% or less rewards. Even SBI cashback doesn't give 5% on everything and on many you get 0% but bank still get there merchant fees. Add to it other penalties and charges if you missed a payment. Scales are tilted in favour of bank. 

Deal Cadet Deal Cadet
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Ace use to give 2% now 1.5% except few most of them are eligible for CB. Most SBI CB users go for 5% they utilize as much as they can.
Deal Newbie Deal Newbie
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dime users are one of their worst customer and makes only a small base and even then they only have to pay cashback upto a FIXED amount but remember there are many users who keep paying their hefty 30-40% interest every month and of course, they take 2% UNLIMITED from business owners.
Deal Cadet Deal Cadet
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Dimers are the banks worst nightmare. Banks target naive users dimers target the bank the cycle goes on 😀
Helpful Helpful
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To start with banks have multiple  revenue streams  unlike we think 


For ex Co branded cards which give 5% like icici apay Amazon  is partially borne by Amazon not just icici 

Or manufacturer will share cut in case of no cost emi To push sales 

In case of banks its a foot in the door strategy To acquire customers to up sell banking products 

Banks get tax earnings by routing rewards as marketing cost 

Of course there is fee income -interest charges -MDR

Then thier is float by way of rolling over short term money - customer transaction timilines in certain cases 

then there is creation of money through thin air called M2 while licensed to create  is monopoly 


the list is extensive and as a standalone product banks may not be profitable at large but overall they mint money 

And usual lifecycle of a bank to earn from a product is 7YRS by then there would be atleast one hype -boom and bust happening

so its a stratetgy of flywheel to maje money ....forget 5 % there were cards giving high double digit returns at large in boom cycle Just ended 

Deal Cadet Deal Cadet
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marketing cost is tax exempt? what is M2. If cards give above 5% they wil definitely increase the fee proportionally. SBI has 1k fee not sure if all users utilize 5k CB per month. I mean they should spend 1 lakh per month.


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Deal Lieutenant Deal Lieutenant
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thanks for the tag:) hehe many dimers explained the important points already, so didnt replied in here on my opinion things:)


well in my observation banks earns from credit card in the following ways

1) ANNUAL CHARGES

2) MDR CHARGES

3) SPECIAL TIE UPS WITH MERCHANTS giving you discount for their card with percentage of cut for every merchant sales

4) Interest i.e finance charges on revolving credit 50% p.a approx in an average

5) Processing fee for credit card loans and EMI conversion

6) Currency Conversion charges for international transactions

7).... lot more to think on 



all this sound meager amount, but if only 1% to 5% use credit card efficiently and remaining 95% approx dont use credit card wisely and gets trapped in atleast one of the above charges, so thats how credit card companies survive with cash

Deal Cadet Deal Cadet
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Good time to add reliance industries 50% now and more on each fall
Deal Cadet Deal Cadet
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Here's another way:

Some merchants hike the prices just so they can give discounts to credit card users.

Example: If a Suit is worth 4k, the seller will jack up the price to 4.2k for all the users, in that way, even if a credit card user gets that 2k discount, the merchant can still maintain their margins from all the Debit/UPI/other payment methods.

Deal Cadet Deal Cadet
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but pro users like us monitor the price for few months
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Deal Cadet Deal Cadet
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It's very Easy to Buy a CC but Daamm Difficult to Close

Shopping Friend Shopping Friend
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Very wrong, closing a credit card is 100 times easier than closing a bank account
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Deal Cadet Deal Cadet
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Reading the comments here was an eye opener. 😬

Deal Cadet Deal Cadet
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No wonder banks charge min due as a nominal amount of 100 or 250 just to earn more interest on the outstanding

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