Many of us has no idea how a credit card company makes money.
With SBI Cards IPO open, I thought to share the ways how these companies make money.
It can be categorized into 2 parts:
1. Interest income: –
• Interest charged at high rates (Upto 36% pa) when customers miss repaying on time.
• Some users convert their spends into EMIs at certain interest rate.
• Some withdraw cash as well from their credit cards.
2. Fee income: Annual card fee.
• Merchant Discount Rate (MDR) — on credit cards,
• Spend based fee like forex mark-up on international spends.
• Reward redemption fee: you pay some fee to redeem your points
• Processing charges, if any.
It’s a great business as interest rates are high, probably highest amongst all types of unsecured loans. Very few Indian have credit cards so long way to go.
Risk : There is a competition from e- wallets, UPI players etc.
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