Credit Cards

I think I've finally figured out how credit cards made money, and also how they make different amounts of money in different countries. Well, at least in this country and at home. Its actually quite a LOT of money when you add it all up. Actually its quite sad the amount of money that they make at the cost of 'everyone else'.

Somehow its really obscene. Before 'plastic money', there weren't that many alternatives. There was cash, which people carried around and are legally worth a certain value. There were also cheques, which are basically IOUs and were easier to carry around for large amounts of money, and first pioneered by the Romans. Then some weird person invented the ATM, and the requisite card that goes along with it. However, in each case you're using your own money, or money that was originally in a bank account in your name, or at least usually.

Then enter the credit card. Here we start introducing methods of paying for things where you actually borrow money to pay for your goods. Not that it appears this way to the guy you're purchasing off. In effect, you have borrowed from the bank and the bank has agreed to pay the amount for you and you have agreed to borrow from the bank. As long as the merchant has the piece of paper with your signature on it, the money is as good as theirs. You still owe the bank money for borrowing it though. For that, you might be charged an annual fee for the ability to have this line of credit, and also any interest you might have accrued during the period that you have borrowed it for.

In addition to this, the bank also has other revenue sources stemming from the use of credit cards. They also run the machines that process your cards as well. For that, they charge a nominal fee per annum to the merchant, plus a small fee on every transaction, plus a percentage of each transaction. All these things start to add up.

Lets start putting some numbers to it:

Annual credit card fee: Lets say an average of $50
Average credit card debt is about $5000 in Australia
Interest rate: 15%

This works out to about $800, assuming that people only have 1 credit card each and ignoring the interest free period.

From the merchant side, we have people spending about $18bn in a month on their credit cards. For your average small retailer, your credit card fee works out to be about 2.5% in Australia. So annually, thats about $5.3bn. Thats a lot!

The number of people with credit cards in Australia.. well.. actually I can't really find a link, so we'll be conservative again. I can see thats theres about 17m credit cards on issue, and even if everyone has 2, I think its relatively safe to say that half that number is about the number of people with at least 1.

So in total, we have 8m x $800 + $5.3bn, plus some extra cash that merchants pay the banks for having the privilege of using their machines, which works out to be $6.4 + $5.3bn = $11.7bn worth of revenue. According to Wiki, the GDP of the entire country is about $760bn USD, which in todays exchange rate, works out to be about $1100bn AUD. So if you work it out, thats about 0.5% of the total GDP comes from the use of credit cards. 50c out of every $100 that goes through the country... That might not sound like a lot, but fark, if I had 50c for every $100 that ANYBODY spent in the country, I'd be bloody happy.