How Banks Generate Income through Credit Card : Role of ‘Network Company’ and More.

When people are selling Air, by tying in balloons, so why the bank giving everything for Free? A person can easily buy an I Phone worth INR 1 Lacs easily at no cost EMI for a year. And that without any interest. What is the advantages to this? Even after spending on Staffs, Marketing and office maintenance, the banks are not doing any charity. Everything comes with a price. Unless the banks earn it will not give the customers anything for free. The money for all these things is taken from the customer pocket. This is very complicated topic which we need to understand.

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The bank does not earn like the manufacturing plant. Banking system works with the deposits made by the people. The bank gives those deposited money as loan to other customers or business units or institution to earn Interest. These interests are the major source to earn money. Therefore, the more people take loan the more the bank will be benefitted.

Taking a loan from bank is very complicated process. Its take multiple visits to bank, lengthy verification process, lots of documentation and many more. This is why a person takes a loan only when there is a great compulsion. That is why banking system started offering the Credit cards, which is a short version of the loan and its access is very simple. The bank has given an easy digital card to its trustable customers. This will allow the people to spoil their habits. Because when someone takes a credit card, they doesn’t feel like taking a loan. They assume it to be a thing and needed at time of emergency. So, they keep them. And as soon as they take the credit card, the bank start introducing multiple offers. These offers are too lucrative and interesting, like loan without any interest for 50 days, and keep paying EMI throughout the year. Cash back, rewards, free movie tickets, No cost EMI etc.

Understand Credit Card Cycle

When we use the credit card, there are certain rules to follow for using it. The bank has given it the name of Credit Card Cycle. For example, a credit card whose cycle is from Aug 1 to Sept 1. It means that all the shopping that we do in between this period the bill will be generated on the second day i.e. Sept 2. and the payment for the bills should be completed after 20 days. This means if we have bought something on Aug 2, we get 50 days to make the payment. The bank gives us the extra time of 1 month to allow us to do more shopping using the credit card and every transaction of yours will benefit the banks. This is the first way for the bank to earn from the customer. To understand the whole game of credit card trap. You have to understand the concept of Network company. I already made a post about existence and purpose ofNetwork company* in the banking system working. The related post linked here

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Bank & Network Company Revenue Model

Network company are doing so many things, like verifying user, maintaining database, managing data centre etc. Like the banks they will not do this for free of cost. It is important for them to generate revenue to meet their own expenses. They also shared a little portion of the banking income. How a Bank and Network Company earn money on each Credit Card transaction, let understand with the help of any example:
When we made any credit card transaction, there are 4 parties involved, they are:

1. Network company,
2. Issuer bank (the bank credit card the customer is using)
3. Acquiring bank (the bank whose machine the shopkeeper uses to deduct the money)
4. The shop keeper.
   Suppose we have bought goods worth $100. To make the payment we take out the credit of a bank and the shopkeeper has other bank machine to deduct the money. As soon as you put the credit card in the machine, the network company like #visa, #amex. will verify the details of the transaction. They notify both the issuer bank and the acquiring bank and approve the transaction. As soon as the approval comes, the issuer bank give $98 to Acquiring bank and keep $2 . the acquiring bank will keep $1 from $98 and give $97 to the shopkeeper. Out of the $1 the acquiring bank will give $ 0.50 to the network company and keep the remaining with them. [the rate of percentage sharing keeps on changing as per the terms between bank and networks company]

If we look overall transaction cycle the bank whose credit card the customer had used earns more, the bank earned $2, the Network Company earned $0.50 and the acquiring bank earned $0.50. This is the reason why the shopkeeper refuses to accept credit card, or ask for some additional charges while using credit card of other bank.

The Wrap Up

In the whole transaction the Issuer bank whose credit card the customer is using keeps the higher profit. This is one way, along with this issuer bank earns in many way.

• Transaction charges,
• late payment fee,
• EMI interest
• cash withdrawal fee,
• over limit fee,
• annual fee etc.

Apart from this they have tie ups with many other companies with point redeem scheme. There are several ways from which the issuer bank earns a lot of money. This is why there are hordes of offer from different bank and each bank wanted to issue their credit card to the customer.
You can get an idea, how much a bank benefitted by offering a credit card rather than any other banking product. Around 12.7 % of credit card holders default on credit card. Even then the bank remains in profit.
This is how the banking works generating their income with the help of their customers banking cycle module and their way of revenue generation.

Peace!!

Namaste @steemflow

Posted Using LeoFinance Alpha