Patrick McKenzie rebuts this here: (podcast) https://open.spotify.com/episode/2E2KRPcDvh1LcRw5bIsBms or here (article): https://www.bitsaboutmoney.com/archive/anatomy-of-credit-car...

The intuition being: people who carry balances and pay interest don't actually spend very much; they are not wealthy.

▲ buran77 14 hours ago | parent | next [-]

What does that graph tell you? Because I think patio11 wanted to send one message and people accidentally misunderstand the graph.

That's the interchange income corresponding to wealthy people. Interchange is paid by the card-accepting business, not by the buyer. The buyer pays interest and other fees and that graph looks very different.

From that original study the full picture table says in % of ADB that the "poorest" (below 620 FICO) pay ~45% interest and fees but bring only 2% additionally in interchange income. The wealthy (at 800+) pay ~10% interest and fees but bring another almost 10% interchange income, on 4 times higher spending, and 3 times higher rewards (so the wealthy get ~12 times higher rewards in $ value than the "poor").

Just the percentages paid by each group more than offset the difference in spending. There are also way more "poor" accounts than wealthy accounts. Intuitively you can tell that the banks are effectively subsidizing the fees and interest for the wealthy with the income from the poor, for the sake of the interchange income which is mostly generated by the wealthy but doesn't come from their pocket.

Those poorest of people (<620 FICO) pay more interest and fees (percentage and absolute terms) than any other group. There's a range in the middle on the wealth scale where the customers are actually a net loss for the banks (the 660-760 FICO range).

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tylerhou 14 hours ago | parent [-]

Businesses raise prices to account for interchange fees. So they are essentially is paid by the consumer. If we outlawed rewards credit cards (by capping interchange fees), everything would likely be slightly cheaper.

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buran77 14 hours ago | parent | next [-]

> Businesses raise prices to account for interchange fees

Agreed, which makes the picture even worse for those low income people. Even poor people are guaranteed to occasionally pay the "rich person tax" included in the prices of some of the products and services. At least until some AI pricing starts changing the price real-time based on the buyer's estimated wealth (sort of already real).

> So they are essentially is paid by the consumer.

Not from a bank's perspective. Only in the sense that prices are higher between the seller and buyer.

> If we outlawed rewards credit cards (by capping interchange fees), everything would likely be slightly cheaper.

I don't agree on the second point as a blanket statement. When Epic game store lowered its fee not a single game got cheaper for the buyers.

	▲	quickthrowman 6 hours ago \| parent [-]
		> Agreed, which makes the picture even worse for those low income people. Even poor people are guaranteed to occasionally pay the "rich person tax" included in the prices of some of the products and services. Credit card fees are baked into the price of everything that can be purchased with credit card, excluding merchants that offer a cash price and a credit price. Any time someone pays the (credit card) price with cash or a debit card is paying more than someone that earns CC rewards, it’s virtually every transaction.

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cmurf 12 hours ago | parent | prev [-]

Outlaw rewards credit cards? Or make it compulsory that the true cost of a specific credit card is revealed to the merchant who has the right to absorb or pass on, in a line item, that cost to that specific consumer?

If I know I'm paying for my own rewards, I'd choose a card that keeps more money in my pocket. I'd go as low as the PITA factor of cash.

It's not clear to me what the net benefit is of a credit card over a debit card.

But for sure the confusion ensuing from allowing debit cards to be charged as credit cards should be illegal. The merchant account providers are probably the ones reaping the free money on the racket.

Credit is the POS default, for whatever reason. Not all POS are the same. e.g. US Post Office consistently knows if I am using a debit card, and it prompts for a PIN when I do. Every restaurant, bar, service does not ask for PIN, and the handful of merchants I've inquired with say their debit card fees changed by the merchant account providers are the same as credit. Scammy.

At least in Colorado it's legal for businesses regardless of the TOS contract with a merchant account supplier to pass on the transaction and processing fees of credit cards. It's not legal to pass on cost/fees for debit cards, ACH, or cash.

▲ losvedir 14 hours ago | parent | prev | next [-]

I think that's out of date. He links to a study showing interchange revenue net of rewards showing up to 3% by high FICO scores. (Just at a gut check that seems crazy to me, since interchange revenue doesn't really go much above 3%!). But that's from 2013. I remember when Fidelity launched its 2% flat cashback AmEx back in 2003. People didn't really know if it would be sustainable. Now 2% is a dime a dozen.

The most recent I've seen otherwise is this Federal Reserve study[0] from 2022. It finds that the marginal return on swipes is actually slightly negative because of how juicy rewards have gotten, and 80% of their profitability comes from interest (with most of the rest fees):

> we find that, on average, the credit function makes up approximately 80 percent of the credit card profitability, whereas the contribution of the transaction function is slightly negative, as rewards and other expenses on credit card transactions outpace banks' interchange revenues.5 In addition, fees—in particular late fees—comprise approximately 15 percent of credit card profitability.

[0] https://www.federalreserve.gov/econres/notes/feds-notes/cred...

▲ djoldman 15 hours ago | parent | prev | next [-]

Credit card companies make 3/4 of their revenue from interest. From Capital One's 10k, Net Interest Income vs. Total Net Revenue:

  2023: 79.5%
  2024: 79.8%
  2025: 80.2%

https://www.sec.gov/ix?doc=/Archives/edgar/data/0000927628/0...

	▲	Brendinooo 14 hours ago \| parent [-]
		I don't really know my way around corporate filings, but...is that just for credit cards? Capital One also is supposedly huge on car loans; I'd imagine the interest from those would comprise a big chunk of that revenue.

▲ caminante 15 hours ago | parent | prev | next [-]

That "intuition" is agreeing with the parent.

▲ swed420 15 hours ago | parent | prev [-]

Discussion of Patrick's article:

https://news.ycombinator.com/item?id=39928604