I was chatting with a relative of mine who lives in Bangalore. He had come back to his hometown; a 3rd tier city-for a vacation and to attend a wedding. We were talking about various things when the topic of buying gold came up. He had recently purchased some jewellery from a well-known local shop, but suddenly grew agitated while recollecting the experience.
Apparently, the shop owner refused to accept a credit card payment at the regular sale price. He told my relative that he would need to pay an additional charge (around 2% to 5%) to use the card. My relative noted that this never happened to him in Bangalore, where every payment method gets the exact same price quote.
That got me thinking: how do credit cards actually work? I am going to share what I found during my research, so get ready to dive into the surprising world of credit cards.
A responsible credit card user collects their points, redeeming them for airport lounge access, discounted movie tickets, online shopping deals, or even transferring them to an airline loyalty program to fly first class for free. But who is paying for the luxury of a timely payer? In your mind, the answer must be the people who do not pay their bills on time.
Hidden fees
That seems like a great answer, because credit card companies charge late payment fines and substantially high-interest rates if you do not pay on time. But there is a huge catch here. Is this enough to sustain a massive corporation? Just transferring the cost of rewards to those being punished with fees? It doesn’t seem like a foolproof business plan, because if the balance ever tilted and there were more “good” payers than “bad” payers, the whole system would crumble.
Always remember: if a massive financial institution appears to be giving away free money, the First Law of Corporate Generosity applies—someone else is quietly footing the bill.
In reality, these companies make money off every single transaction made by the user. While interest revenue is massive, it misses the true cash cow of modern finance: Interchange Fees (Swipe Fees). Let’s understand how this works.
The Process
Whenever a consumer buys something, a chain of middlemen—the consumer’s bank, the merchant’s bank, and the payment network—takes a cut of the sale, typically hovering around 2% to 3%. When a bank offers you 2% cash back, they aren’t dipping into their corporate profits. They are simply handing you a portion of the fee they just charged the merchant.
Why don’t merchants just pass these high fees directly to the people using premium cards? Historically, credit card networks enforced strict “Honor All Cards” rules, forbidding merchants from discriminating against specific cards or adding surcharges. Furthermore, consumers hate surprise checkout fees.
As a result, merchants bake the cost of credit card processing into the base price of all their goods. They estimate how many credit card transactions might happen, average out the charge percentages, and include that cost in their standard sticker prices.
This means if you pay with cash, cheque, direct bank transfer, or a debit card, you are still paying for those credit card charges. It functions as a massive, regressive transfer of wealth from lower-income cash users to wealthy rewards maximisers.
Technical Structure
The customer submits an application via a branch Relationship Manager or digital banking, supplying mandatory identity documents (as required by bank policy). The Underwriting (Risk & Credit Assessment) team evaluates the applicant’s credit history, debt obligations, and financial ratios to gauge repayment capacity.
Upon approval, the credit committee issues a PDC (Pre-Disbursement Certificate) detailing the authorized terms. The core banking system’s (the software systems that banks use for their functioning) credit card module is populated with the customer master record and credit limits, triggering secure physical card embossing and shipment.
When a card is swiped or tapped, an authorization executes in fractions of a second across distinct entities: the merchant’s bank, the customer’s bank, and the card payment or interchange network.
Conclusion
Back to our story, what actually happened is that this particular business owner was not operating like the bigger retail systems and never actually included the swipe fees into his base prices. As a result, he demanded extra compensation for credit card usage. You might feel that this system is not fair, and to be honest, it is not. We can only hope governments, central banks, and lawmakers discuss this and come up with an equitable solution.
This is the end for today. Next time, I will be back with a new topic. Until then, bye!
