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PaperclipPerfector  5d ago (text post)   2877 thread views

Friday Fun Thread for January 9, 2026

Be advised: this thread is not for serious in-depth discussion of weighty topics (we have a link for that), this thread is not for anything Culture War related. This thread is for Fun. You got jokes? Share 'em. You got silly questions? Ask 'em.

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Yes, you are correct that this a-priory does not imply so. But The Fed seems to think so: https://www.federalreserve.gov/econres/notes/feds-notes/credit-card-profitability-20220909.html

First, 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. In addition, fees—in particular late fees—comprise approximately 15 percent of credit card profitability.

Of course, they are talking about profit and not revenue here, but I think one implies the other, and I think it is reasonable to say that if 80% of the profit comes from credit function, then the credit function is the one that "pays for" the enticement features - like rewards, is it not? It looks like if not for the interest, the rewards would outpace the transaction fees, and the whole business model would have been infeasible. The credit revenues, however, make it feasible. The original claim has been:

Except for all the people who get into massive credit card debt who these programs are actually trying to target and where the credit card companies make all their profit.

And according to the link I quoted, this sounds 95% correct at least. Of course, the link dates from 2022 so if you have more fresh data that amends the picture, please provide it.

I highly recommend reading the article I posted in order to refute this claim rather than demanding evidence without reading the evidence I already provided.

Here's one relevant excerpt.

We're looking at figure D, from the paper interchange income minus reward expenses, graphed against FICO score. And the upshot of this graph is that there is no part of the FICO score spectrum at which issuers continually rebate more rewards to customers than they earn in interchange.

I think I know what's going on here. This quote - and the data - comes from paper dating from 2013. And indeed, if you look at Figure 3b in my link, that was the case up to about 2017. When it changed, and rewards expenses started to exceed transaction income, and have exceeded it since. This also matches my own experience - a while ago, 2%+ no fee cashback cards either did not exist or were a rarity that required a lot of hoops to jump through. Now they are commonplace. As you can see in the graph, the rewards expenses went from ~3.4% in 2013 to about 4.5% in 2022, while the transaction margins decreased.

The article discusses (and refutes) the idea that rewards beneficiaries are "rich" and interest payers are "poor", but neither I nor thread-starter made such claim (it's not the fault of the article, obviously). In fact, both categories may be rich, or poor, it's irrelevant - the discussion about whether tx margins or interest is the main source of revenue does not require any specific income distribution among either category.

The article says:

I'll say, as an aside, this paper dates back to 2014, but it's the best available in field, in my personal humble opinion, and I don't believe the conclusions of it have materially changed.

Given what I have seen in my link, I must question this opinion and claim that while the conclusions of the article may have been warranted given the data from 2013-2014, the situation did materially change. At least a claim from the Fed to that effect strongly indicates it did, and one needs much more than an offhand "I believe" to counter that. Maybe the conclusions of the article - which differ from the initial claim - are still warranted, but I do not think that the old data in the article supports what you purport it to support anymore.

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