How Banks Make Money Through Credit Cards

How Banks Make Money Through Credit Cards: Details are here

Credit cards have become an essential financial tool in India, providing convenience and flexibility to users. For banks, credit cards are a significant revenue stream. This article explores how banks in India make money through credit cards, supported by relevant figures and data.

Interest Charges

Interest charges are the primary revenue source for banks from credit cards. When cardholders do not pay their balance in full by the due date, banks charge interest on the remaining balance. This interest rate, known as the Annual Percentage Rate (APR), varies between 24% and 48% on average in India.

According to the Reserve Bank of India (RBI), the average APR on credit card accounts was 36% in 2023. The interest revenue depends on the balance carried by cardholders. For example, if a cardholder carries a ₹50,000 balance with an APR of 36%, the bank earns ₹18,000 in interest annually if the balance remains unpaid.

Annual Fees

Annual fees are another significant revenue stream. Some credit cards, especially those offering premium benefits, charge an annual fee ranging from ₹500 to ₹10,000 or more. These fees are charged regardless of whether the cardholder carries a balance.

For instance, HDFC Bank’s Infinia Credit Card charges an annual fee of ₹12,500. Despite the high cost, the card’s exclusive benefits attract users, contributing to the bank’s revenue. In 2023, the average annual fee for a premium credit card was ₹3,000.

Transaction Fees

Banks earn a percentage of each transaction made with a credit card. These fees, known as interchange fees, are paid by merchants. The interchange fee typically ranges from 1% to 3% of the transaction amount.

Visa and Mastercard charge an average interchange fee of around 2.5%. For instance, on a ₹10,000 purchase, the bank earns ₹250. Given the volume of credit card transactions, this fee contributes significantly to bank revenues. In 2022, credit card transactions in India amounted to ₹10 lakh crore, generating substantial fees for banks.

Late Payment Fees

When cardholders miss their payment due dates, banks charge late payment fees. These fees typically range from ₹300 to ₹1,200. While these fees might seem small, they add up significantly given the number of cardholders.

According to the RBI, credit card late fees totaled ₹1,500 crore in 2022. These fees incentivize timely payments while generating revenue.

Cash Advance Fees

Banks charge cash advance fees when cardholders withdraw cash using their credit cards. These fees are usually a percentage of the amount withdrawn, often around 2.5% to 3.5%, with a minimum fee of ₹300. Additionally, the interest rate on cash advances is higher than for regular purchases.

For example, withdrawing ₹20,000 as a cash advance incurs a ₹700 fee, and the interest starts accruing immediately at a higher rate, often around 42%. These fees and interest rates make cash advances a lucrative revenue stream for banks.

Balance Transfer Fees

Balance transfer fees apply when cardholders transfer a balance from one credit card to another. These fees are typically 1% to 3% of the transferred amount. While balance transfers can help cardholders manage debt, they generate revenue for banks.

For instance, transferring a ₹1,00,000 balance incurs a ₹3,000 fee. In 2023, balance transfer fees generated substantial income for banks, as many cardholders sought lower interest rates on transferred balances.

Foreign Transaction Fees

Banks charge foreign transaction fees for purchases made abroad or in foreign currencies. These fees usually range from 2% to 3.5% of the transaction amount.

For example, a ₹1,00,000 purchase made abroad might incur a ₹3,500 fee. In 2022, foreign transaction fees contributed significantly to banks’ revenues, especially with the increase in international travel.

Reward Program Costs

While reward programs attract cardholders, they also generate indirect revenue for banks. Cardholders are often required to spend a certain amount to earn rewards. This spending increases transaction volume, thereby increasing interchange fee revenue.

Moreover, not all cardholders redeem their rewards, allowing banks to save on the cost of providing these benefits. In 2023, approximately 30% of reward points went unredeemed, indirectly benefiting banks.

Cross-Selling Financial Products

Credit card data provides insights into cardholders’ spending habits, creditworthiness, and financial behavior. Banks use this data to cross-sell other financial products like loans, mortgages, and investment services.

For instance, a cardholder with a high credit score might receive an offer for a low-interest personal loan. This cross-selling generates additional revenue streams for banks.

Co-Branded Cards

Co-branded credit cards, issued in partnership with retailers or airlines, benefit banks through shared revenue from fees and interest. These cards often have higher usage rates due to specific rewards tied to the partner brand.

For example, the SBI Card PRIME, co-branded with various lifestyle and travel rewards, has an annual fee of ₹2,999 and offers perks that encourage frequent use. Banks and their partners share the revenue generated from these cards.

Cardholder Behavior Analysis

Banks analyze cardholder behavior to optimize revenue generation. Predictive analytics help banks understand spending patterns, credit usage, and risk levels. This data-driven approach allows banks to tailor their offerings and marketing strategies.

For instance, a cardholder frequently using their card for travel might receive targeted offers for travel insurance or related products. Such personalized marketing enhances engagement and boosts revenue.

Technological Advancements

Investments in technology enhance banks’ ability to generate revenue from credit cards. Advanced fraud detection systems reduce losses, while mobile apps and online platforms increase card usage and transaction volume.

In 2023, banks invested heavily in artificial intelligence and machine learning to predict cardholder behavior and detect fraud. These investments improved operational efficiency and revenue streams.

Regulatory Impact

Regulations influence how banks generate revenue from credit cards. For instance, the RBI’s guidelines on credit card issuance and interest rates ensure greater transparency and consumer protection. While such regulations protect consumers, banks adapt by adjusting other fee structures or introducing new products.

Despite regulatory challenges, banks continue to find innovative ways to maintain and grow their credit card revenue.

Figures and Data

To provide a comprehensive overview, let’s look at some key figures and data:

• Interest Revenue: In 2022, Indian banks earned approximately ₹90,000 crore from credit card interest charges.
• Annual Fees: Annual fees generated around ₹12,000 crore in revenue in 2022.
• Interchange Fees: Indian merchants paid approximately ₹70,000 crore in interchange fees in 2022.
• Late Fees: As mentioned earlier, late fees contributed ₹1,500 crore in 2022.
• Cash Advance Fees: Estimated to have generated ₹8,000 crore in revenue in 2022.
• Balance Transfer Fees: Banks earned around ₹5,000 crore from balance transfer fees in 2022.
• Foreign Transaction Fees: These fees brought in about ₹4,000 crore in 2022.
• Unredeemed Rewards: Approximately 30% of reward points went unredeemed, benefiting banks indirectly.

Conclusion

Banks in India employ various strategies to generate revenue from credit cards. Interest charges, annual fees, transaction fees, late fees, cash advance fees, balance transfer fees, and foreign transaction fees are some of the primary sources. Reward programs, co-branded cards, cross-selling, technological advancements, and data analytics further enhance revenue streams. Despite regulatory challenges, banks continue to innovate and optimize their credit card offerings to maximize profitability. With significant revenue generated annually, credit cards remain a crucial financial product for banks in India.