December 28, 2010
– Comments (10)
Does anybody know how discover makes money? Most credit card companies make it off of the swipes but discover doesnt charge per swipe. Since they are not associated with any banks I guess they take the credit risk themseles and make money off of late fees?
They make money off of interest and transaction fees, which is the same business model with most of the other credit cards (AMEX is an exception). The only difference is that a lot of the other credit cards split the two; with Visa (V) and MasterCard (MC) dealing with only the transaction related issues and affiliated banks taking on the credit risk.
Under the Discover Financial umbrella is a Discover Bank, so they are "associated with a bank". They do collect late fees, as well, but I would wager to guess that a smaller percentage of revenues comes from that, relative to the transaction fees and interest charges. Keep in mind, some credit cards also have annual fees, which can be a significant source of income.
Most credit card companies make money per transaction, AND from 20%+ interest rates being paid by those card holders that carry a balance. I didn't know that Discover didn't charge per transaction, but it wouldn't take a huge percentage of card holders carrying a balance to offset write-offs and still turn a nice profit.
Some have speculated that many shoppers ran up credit card debt on Christmas shopping this year with no intention to pay back the balance...it will be interesting to see if late payments / writeoffs spike next year.
I often wonder how the credit card companies can afford to send out all the junk mail they send. I typically get at least 1 credit card offer each day...sometimes 4 or more in a day...and I get the same offers month after month. I'd estimate that these companies collectively spend ~$100/yr. sending me junk with no return...I'm assuming it's the same for millions of others. What percentage of junk mail recipients actually apply for these cards and then use them enough or carry a balance at a high interest rate to make it worth it? I don't remember seeing any Discover offers though...mostly AmEx and a whole slew of different bank cards.
I use Discover and I love them.
Jakila, are you sure Discover makes money off of transactions? I could swear the CEO said thats what seperates them from V and M, which is why there was no antitrust issues with them.
What does AMEX do differently?
AMEX isn't a credit card, it's a charge card. There's typically an annual fee, and you can't carry a balance...no interest charges.
That is what I thought. I dont get why anybody uses them I never carry a balance, but if I did I wouldnt want them. And since I pay my balance off, its easier to use Discover/Visa because there is no annual fee.
I'm not sure about Discover but I've looked into Mastercard and Amex.
Visa and Mastercard make money off of fees paid by the stores where the card is used. Most of this is paid to the bank which issues the card and is often paid out as bonuses to consumers for using the card.
Amex is like a combination of a Visa or Mastercard with an issuing bank. They tend to charge stores higher fees and give consumers more rewards. (Amex has charge cards and credit cards, by the way)
It sounds like Discover is similar to Amex, but I haven't looked into them at all.
Valyooo, if you look through this faq you might infer that Discover does charge a merchant transaction fee.
For clarification, as an AMEX holder, I can carry over a balance if I wanted to, though I don't. If I did, I would be charged 17% interest. And while I do pay an annual fee for my card, I more than make up for it when I use my points to stay at hotels for free and get free upgrades almost 100% of the time. Its awesome for vacations, especially when I stay at a hotel for free whose room would otherwise be going for $450+. In one 3 day get away, I saved my household 12x more than what we pay in annual fees....seems like a win to me.
AMEX is aimed at a different demographic than Visa/Mastercard.
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