How does a credit card actually make money, and why do shops pay fees?

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If you pay off your credit card in full every month, you might wonder how the bank makes anything from you at all. The answer is that a card payment involves several businesses, and the money flows in more directions than most people realise.

Who is involved in a card payment

A typical card payment has four main parties, joined together by a card scheme such as Visa or Mastercard:

You, the cardholder.
Your card issuer, the bank or lender that gave you the card.
The merchant, the shop, café or website you are paying.
The acquirer, the payment company that handles card payments for the merchant and pays the money into its account.

The card scheme runs the network that connects issuers and acquirers and sets many of the rules. Some card brands work slightly differently, acting as both issuer and network themselves, but the broad idea is the same.

Where the shop's fee goes

When you tap your card for a coffee, the café does not receive the full price. A small percentage is taken off, usually called the merchant service charge. It is made up of roughly three parts:

Interchange fee. Paid by the acquirer to your card issuer. This is the part that rewards the bank for issuing the card and taking on the risk.
Scheme fees. Paid to the card network for using its system.
The acquirer's own margin. For processing, terminals, fraud checks and settling the money.

In the UK, interchange on consumer cards used for domestic payments is capped: 0.2% of the transaction for debit cards and 0.3% for credit cards. The caps came from the European Interchange Fee Regulation in 2015 and remain in UK law. Cards issued to businesses are outside the cap and often cost merchants more. In some other countries, including the United States, interchange is much higher, which is one reason American card rewards tend to be more generous.

Why shops accept the cost

For most businesses, the fee is a price worth paying:

Customers expect it. Many people carry little or no cash.
It is faster than counting change and safer than holding a till full of notes.
Payment is guaranteed once it is authorised, subject to the scheme's rules.
It handles online sales, which would be very hard without cards or similar methods.

Some small businesses set a minimum spend for cards or prefer cash. That is a commercial choice.

Can shops charge you extra for using a card?

In the UK, since January 2018, businesses have generally been banned from adding a surcharge for paying with consumer debit and credit cards. If you think you have been surcharged unlawfully, the official advice is to contact your local Trading Standards service, usually through Citizens Advice. Rules differ in other countries.

How the issuer makes money from you

Interchange is only part of the picture. Card issuers also earn from:

Interest. By far the biggest earner. If you carry a balance from month to month, interest is charged, often at high rates. Many cards give an interest-free period on purchases only if you clear the whole balance by the due date.
Fees. Annual fees on some cards, late payment charges, cash withdrawal fees, balance transfer fees and fees for spending abroad.
Promotional deals that end. A 0% offer is designed to attract you, with the lender hoping you will keep a balance once the standard rate begins.

If you always pay in full and avoid fees, you are one of the less profitable customers, and the interchange on your spending is most of what the issuer earns from you.

Where rewards come from

Cashback, points and air miles are funded mainly from interchange, fees and interest paid by other customers. That is why rewards are modest where interchange is capped, and why reward cards sometimes carry an annual fee.

A useful extra: protection

In the UK, Section 75 of the Consumer Credit Act can make a credit card provider jointly responsible with the seller if something you bought for more than 100 pounds and up to 30,000 pounds goes wrong, for example if the goods never arrive or the firm goes bust. It does not apply to debit cards, though debit and credit card payments may both be covered by the card scheme's own chargeback process. Check the details with your provider or Citizens Advice before relying on either. Did anything about card fees surprise you? Share your thoughts in the comments.