How Credit Card Companies Make Money Even When You Pay on Time — Transcript

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1. 0:00Imagine you're standing at a grocery
2. 0:01store checkout. The bill is $100. You
3. 0:04tap your cashback card and a small
4. 0:06notification pops up on your phone. You
5. 0:08earn $2 cashback. You smile a little.
6. 0:11You pay your full balance every month.
7. 0:13You never pay a cent of interest and the
8. 0:15bank is paying you on top of that. It
9. 0:17feels like you've beaten the system.
10. 0:19>> Brother, today I'm going to break that
11. 0:20assumption because that $2 didn't come
12. 0:22out of the bank's pocket. On that same
13. 0:24$100, the store paid the card system
14. 0:27about $1.90.
15. 0:29And that's the money that funds your
16. 0:30cashback. So here's the question. If
17. 0:33your cashback comes from the store's
18. 0:34money, what does the bank actually get?
19. 0:37And if the bank gets nothing from you,
20. 0:38why does it hand out such generous
21. 0:40reward? Today we'll work through it with
22. 0:42a hypothetical person named Maya. Maya
23. 0:45puts $2,000 a month on her card and pays
24. 0:47it off in full. We'll look at the fee
25. 0:49you never see, the people who actually
26. 0:51pay for your cashback, the one mistake
27. 0:53that can flip the whole thing, and the
28. 0:55math that shows when Maya wins and when
29. 0:57she loses. These characters and numbers
30. 0:59are for illustration only. But before we
31. 1:01start, if you're new to the money
32. 1:03mystery, make sure you subscribe. In
33. 1:05every video, we'll uncover a money
34. 1:07secret hiding in plain sight. Now let's
35. 1:09get to the real story. First, understand
36. 1:12something that 90% of people don't know.
37. 1:14When you tap your card, the store
38. 1:16doesn't receive the full $100. The
39. 1:18store's bank pays your bank a small fee
40. 1:20called interchange. According to NBER
41. 1:23research, that fee is typically around
42. 1:251.9% of the purchase. On $100, that's
43. 1:28about $1.90, so the store keeps roughly
44. 1:31$98.10.
45. 1:33In the US, interchange generally ranges
46. 1:35from about 1.5% to 3.5% and the more
47. 1:39premium and rewards-heavy the card, the
48. 1:41higher the fee tends to be. So here's
49. 1:43the first lesson. Your cashback isn't a
50. 1:45gift from the bank, it's a slice of a
51. 1:47fee the store paid. But that raises a
52. 1:49new question. If the store pays 1.9% on
53. 1:52every sale, how does it absorb that
54. 1:54cost? It doesn't, not entirely.
55. 1:56Merchants build their average costs into
56. 1:58their prices. Economists debate exactly
57. 2:00how much of this lands on whom and a
58. 2:02recent NBER study looks at precisely
59. 2:05that question. Who ultimately paid?
60. 2:07What's clear is that a shelf price is
61. 2:09the same whether you pay with a card or
62. 2:11with cash. So, even a shopper who pays
63. 2:13in cash may be helping carry a system
64. 2:15they never use. That's the part that
65. 2:17never appears on a receipt. Now, let's
66. 2:19follow Maya through a year. She spends
67. 2:21$24,000 on her card and at 2% cash back
68. 2:24she earns $480. For illustration, say
69. 2:27merchants paid about 1.9% in interchange
70. 2:30on that spending. That's roughly $456.
71. 2:33Look at that. Maya's cash back is almost
72. 2:35exactly the fee the stores paid. The
73. 2:38bank isn't making much on Maya's swipes.
74. 2:40It's mostly passing that fee along. So,
75. 2:42where does the bank's real profit come
76. 2:44from? Here's the part the rewards ads
77. 2:46never show you. It comes from people who
78. 2:48carry a balance. Say Maya has a friend
79. 2:51Jake. Jake has $5,000 on his card that
80. 2:53he doesn't pay off at the end of the
81. 2:55month. According to the Federal Reserve,
82. 2:57the average rate on accounts that were
83. 2:58charged interest was about 22.36%
84. 3:02as of August 2026. On $5,000, that's
85. 3:05roughly $1,118
86. 3:08a year. That's more than double Maya's
87. 3:10entire year of cash back. In other
88. 3:12words, one Jake can fund more than two
89. 3:14Mayas. That's why rewards are paid for
90. 3:16from three places: merchants, card
91. 3:19holders who carry a balance, and annual
92. 3:21fees. Which leads to another question.
93. 3:23If Maya only wins by paying in full, why
94. 3:25doesn't the bank try to stop her from
95. 3:27winning? Because the bank doesn't lose
96. 3:29when Maya wins and it wants something
97. 3:31else from her, her spending. Some
98. 3:33researchers argue that paying with a
99. 3:34card can feel less painful than paying
100. 3:36with cash and that people may spend more
101. 3:38as a result. It varies a lot from person
102. 3:40to person. But picture this, if chasing
103. 3:43rewards pushes Maya to spend an extra
104. 3:45$200 a month she otherwise wouldn't,
105. 3:47that's $2,400 more out the door a year.
106. 3:50Her $480 of cash back suddenly looks
107. 3:53small. Cash back only wins when the
108. 3:55spending was already planned. But
109. 3:57there's one more hidden risk and it's
110. 3:58the easiest mistake to make. Say one
111. 4:01month Maya hits an emergency and carries
112. 4:03a $1,000 balance into the next month. At
113. 4:0522.36%,
114. 4:07one month of interest on $1,000 is about
115. 4:10$18. That's nearly half of her month's
116. 4:13$40 in cash back. And on many cards,
117. 4:15carrying a balance can also end your
118. 4:17grace period, the interest-free window
119. 4:18you normally get. Every card's terms are
120. 4:20different, so check yours. One tough
121. 4:22month can undo a lot of good ones. Now,
122. 4:24let's step back and look at the whole
123. 4:26picture. The store pays a fee that
124. 4:28covers most of Maya's cash back. That
125. 4:30fee is built into prices. The bank's
126. 4:32real profit comes from people carrying
127. 4:34balances and from annual fees. And Maya
128. 4:36only wins if she pays in full and
129. 4:38doesn't spend more than she planned.
130. 4:39It's like a loyalty program funded by
131. 4:41everyone, but the benefits go mostly to
132. 4:43those who understand the rules. Maya's
133. 4:45cash back is real. It just isn't free.
134. 4:48Now, back to our opening question. If
135. 4:50you pay in full, how does the bank still
136. 4:52make money? The answer, not much from
137. 4:54you. It makes it from people who carry
138. 4:56balances, and a big share of your cash
139. 4:58back is paid by the store. You win when
140. 5:01you understand the rules, and you lose
141. 5:03when one bad month or extra spending
142. 5:05flips the math. One honest note, these
143. 5:07characters and numbers are hypothetical.
144. 5:09Fees, rewards, and interest rates vary
145. 5:11by card, merchant, and person, and this
146. 5:13is not financial advice. Read your
147. 5:15card's terms carefully, and talk to a
148. 5:17qualified advisor before making big
149. 5:19financial decisions. But one thing is
150. 5:21clear. Next time you see cash back, ask
151. 5:23one question. Who's money is this? Now,
152. 5:26a question for you. Have you ever bought
153. 5:28something you didn't really need just to
154. 5:30earn cash back or points? Let me know in
155. 5:33the comments. If you enjoyed this video,
156. 5:35give it a like, send it to a friend who
157. 5:37thinks cash back is free, and don't
158. 5:39forget to subscribe to the Money
159. 5:41Mystery. In the next video, we'll look
160. 5:42at why airlines keep losing money even
161. 5:45when their flights are full. Until then,
162. 5:47don't just count your cash back. Look at
163. 5:49who's money it really is.