Who pays for the cashback gingerbread, which now only the lazy does not lure an experienced consumer? We continue to understand financial flows when making payments with plastic cards. The topic is not entirely about money technology, but such questions are asked to me. And I'm glad to figure out something new.
With a shameful sigh, I will remind you in a boring way what cashback is. In some cases, when you make a purchase (most often, with a plastic card), after a certain time, a percentage of the purchase is returned to your card. It is usually about units of interest (0.5% -3%), but in some cases it reaches tens of percent (10%, 20%, and even up to 90%!) Of the payment amount. Sometimes it is ordinary money, sometimes it is virtual, in the form of some kind of bonus points. Sometimes they can be disposed of freely, sometimes they can be used only for specific expenses.
Why such generosity? At whose expense are we walking?
Here it is necessary to separate two cases when this very cashback occurs. In one case, cashback is credited to you by the bank, whose card you pay with. Otherwise, you use a separate cashback service that has nothing to do with your bank and payment method. There are similarities and differences in these options. Let's start with bank cashback, and then smoothly move on to third-party cashback services.
As we already know, the bank the issuer (whose card) earns a little from each transaction on their issuing fees. The amount of these commissions is set mainly by the payment system (the bank can add its own premium, but you cannot overclock here). Through this value, the payment system can stimulate the development of the plastic card market. For example, today the issuer has a higher commission, and then banks start issuing cards, developing card products, encouraging their customers to switch to plastic. And tomorrow the acquirer's commission (whose terminal) is higher, and then banks start promoting the installation of POS terminals in retail outlets (merchants and merchants).
One way or another, from each transaction, your bank has its own percentage, even a small one. Yes, it's easy to assume that the bank is sort of sharing its profit from these commissions with you by paying cashback. But in reality this is not entirely true, and often it is not at all true.
I have said several times that the card business itself for the bank is either unprofitable or low-profit, it is needed only as a way to access other bank services. This means that the bank is not scattered with cashback from an excess of profit.
In fact, everything is more complicated and more interesting. The bank makes money on a variety of operations, this is a complex business (I mean, it consists of many elements). And the bank, like any business, is interested in attracting customers to its banking products. More clients - the higher the bank's income. How do you attract customers? Firstly, by advertising, and secondly - by all sorts of marketing enticements (which is also part of an advertising campaign).
In this case, cashback is simply taken from the advertising budget. Well, why? The most targeted spending ... If you look closely at the cashback conditions, you will see that there are a number of restrictions. Either the minimum purchase amount is set, the maximum payout is limited, or a very narrow category for which cashback works. In general, everything is calculated so that you do not get too rich, unlike the bank.
The client, of course, can have several cards from different banks, and carefully choose when to use which card in order to maximize his benefit. But by the way, according to various studies, a very small percentage of clients have such sophistication. So, on average, this strategy works well. Let's take an example.
Nifigaisen-Bank announces that cashback on transactions with its plastic cards is 1% for all categories of purchases. Let's say he has a turnover of one billion rubles a month on all plastic cards. Then the bank will spend ten million rubles a month (1% of a billion) to pay cashback. Having learned about such generosity of Nifigaisen Bank, new customers flocked to it, increasing the turnover on plastic cards to two billion two hundred million. The bank spent ten million and increased its client base by about 20%. And any business constantly solves the same problem: we spend money on advertising in order to get more customers and / or more traffic. In the case of the fictitious Nifigaisen Bank (well, what else to call it, if by as much as 20%!), I think, the advertising campaign turned out to be very profitable. And then already - the skill of marketers, economists and financiers, which will turn the influx of 20% of customers into additional income of the tank. And this income should be more than the spent ten million. Otherwise, there was no point in getting in touch. In short, it’s business as usual, and it doesn’t matter that it’s banking.
New clients forced employers to transfer their salaries to Nifigisen Bank. New clients brought their contributions here. New clients began to take out loans from Nifigisen Bank. Nifigaisen Bank has earned its additional income from all these new operations. And if no fools work at Nifigaisen Bank, then this additional income is much more than ten million rubles a month, which continue to go to pay cashback.
But this is not the only way to make money on cashback.
Another "digital gold" has appeared in the modern world - traffic. The one who owns the traffic earns. More traffic means more money. What is it about?
Let's say the hipster Feoktist has created his own online store. At the very least, he untwisted, sells beard trimmers. He wants more clients in order to generate more income. But as we know, clients are not easy to find. Obviously, we need to involve them somehow. In any case, some money is spent on attraction. For advertising, for marketing campaigns. It turns out that the hipster Feoktist is sort of buying new clients. In the case of an online store, these new potential customers come to its site. Some of them buy something. The more people visit his website, the more purchases are made on average. The flow of visitors to the site is the very traffic, if this word was unfamiliar to you. More traffic (more traffic) - more purchases - more traffic - more profit. And the hipster Feoktist is willing to pay for it, spending part of the (still future) profit. The hipster Feoktiste's skill as an entrepreneur is to earn more than you spend. Well, yes, this is his business, but we are still interested in Nefigaisen Bank and its prosperity.
Hipster Feoktist turns to Nifigaisen Bank, and they agree on the following. If a client of Nifigisen Bank buys something in the hipster store Feoktist, then Feoktist pays the bank 10% of the purchase amount. Nifigaisen Bank, secretly rubbing its hands, promises its customers 5% cashback from such purchases (it was not for nothing that I invented this name for the bank). What's happening? Clients, having heard about a new action of unprecedented generosity, even those who were not bearded, ran to Nifigaisen Bank for cards with an unimaginably high cashback. And let's buy beard clippers from the hipster Feoktist. Feoktist rejoices - following the traffic, turnovers have increased. Nifigaisen Bank is happy - it’s not exactly two birds with one stone, it has solved a whole colony of birds with one stone. And you will receive an unprecedented 5% income from each purchase, and attracting customers, and a PR attraction of unheard-of client-orientation ... And customers are not at a loss. It seems that I bought an ordinary beard machine, but, however, an unusual one - it’s cheaper than it was!
A month later, the hipster Feoktist decided that he had completed his marketing tasks and stopped the action. By that time, Nifigaisen Bank had already reached an agreement with the sofa warrior Akaki, who, looking at his neighbor Feoktist with racial hatred, opened a business selling machines for sewing socks. Clients of Nifigaisen Bank have a holiday again - they have another cashback promotion. And Nifigaisen Bank is happy again. The sofa warrior Akaki, too, could be happy, but he has such a character - he is always dissatisfied with something.
These same cashback services are based on this idea. For example.
Cashback service "Do not Pay" negotiates with the trading platform "Italian Sweatshirts". "Don't Pay" brings clients to "Sweatshirts", and Sweatshirts give 10% of the amount of their purchases to the "Don't Pay" service for this. "Italian Sweatshirts" are happy - because they pay for each client after the fact. Advertising budget spending is extremely effective. "Do not pay" is actively advertised, luring customers with an unheard of five percent of purchases in "Italian Sweatshirts". Customers are happy to agree - because they win 5% of the sale, and they might not win at all. "Do not pay" also earns, thanks to the five percent that is received from the difference received from "Fufayek" and paid to customers.
The "Non-Pay" service itself has agreements with several trading platforms, providing its customers with more and more goodies. In general, everyone wins. There was a division of labor. Rather than doing business and promoting, Italian Sweatshirts focused more on customer service. And "Don't Pay" is very good at attracting and managing traffic.
By the way, no one prevents third-party cashback services from negotiating with banks, joining forces. But I don't know if they do that.
PS all numbers in the article are fictitious. I just explained the technology. Real financial flows are not known to me. Because, fortunately, I am not a banker.
PPS About sources of income for the bank. Ideally, of course, the bank would just like to take a percentage for the operations that it performs and earn only on this. This is the safest business for the bank. But in practice, there is not so much running up there, so you have to deal with other types of earnings. Basically, by the way, this is the issuance of loans, which, although they bring good income, carry with them many different dangerous risks for the bank.
With a shameful sigh, I will remind you in a boring way what cashback is. In some cases, when you make a purchase (most often, with a plastic card), after a certain time, a percentage of the purchase is returned to your card. It is usually about units of interest (0.5% -3%), but in some cases it reaches tens of percent (10%, 20%, and even up to 90%!) Of the payment amount. Sometimes it is ordinary money, sometimes it is virtual, in the form of some kind of bonus points. Sometimes they can be disposed of freely, sometimes they can be used only for specific expenses.
Why such generosity? At whose expense are we walking?
Here it is necessary to separate two cases when this very cashback occurs. In one case, cashback is credited to you by the bank, whose card you pay with. Otherwise, you use a separate cashback service that has nothing to do with your bank and payment method. There are similarities and differences in these options. Let's start with bank cashback, and then smoothly move on to third-party cashback services.
As we already know, the bank the issuer (whose card) earns a little from each transaction on their issuing fees. The amount of these commissions is set mainly by the payment system (the bank can add its own premium, but you cannot overclock here). Through this value, the payment system can stimulate the development of the plastic card market. For example, today the issuer has a higher commission, and then banks start issuing cards, developing card products, encouraging their customers to switch to plastic. And tomorrow the acquirer's commission (whose terminal) is higher, and then banks start promoting the installation of POS terminals in retail outlets (merchants and merchants).
One way or another, from each transaction, your bank has its own percentage, even a small one. Yes, it's easy to assume that the bank is sort of sharing its profit from these commissions with you by paying cashback. But in reality this is not entirely true, and often it is not at all true.
I have said several times that the card business itself for the bank is either unprofitable or low-profit, it is needed only as a way to access other bank services. This means that the bank is not scattered with cashback from an excess of profit.
In fact, everything is more complicated and more interesting. The bank makes money on a variety of operations, this is a complex business (I mean, it consists of many elements). And the bank, like any business, is interested in attracting customers to its banking products. More clients - the higher the bank's income. How do you attract customers? Firstly, by advertising, and secondly - by all sorts of marketing enticements (which is also part of an advertising campaign).
In this case, cashback is simply taken from the advertising budget. Well, why? The most targeted spending ... If you look closely at the cashback conditions, you will see that there are a number of restrictions. Either the minimum purchase amount is set, the maximum payout is limited, or a very narrow category for which cashback works. In general, everything is calculated so that you do not get too rich, unlike the bank.
The client, of course, can have several cards from different banks, and carefully choose when to use which card in order to maximize his benefit. But by the way, according to various studies, a very small percentage of clients have such sophistication. So, on average, this strategy works well. Let's take an example.
Nifigaisen-Bank announces that cashback on transactions with its plastic cards is 1% for all categories of purchases. Let's say he has a turnover of one billion rubles a month on all plastic cards. Then the bank will spend ten million rubles a month (1% of a billion) to pay cashback. Having learned about such generosity of Nifigaisen Bank, new customers flocked to it, increasing the turnover on plastic cards to two billion two hundred million. The bank spent ten million and increased its client base by about 20%. And any business constantly solves the same problem: we spend money on advertising in order to get more customers and / or more traffic. In the case of the fictitious Nifigaisen Bank (well, what else to call it, if by as much as 20%!), I think, the advertising campaign turned out to be very profitable. And then already - the skill of marketers, economists and financiers, which will turn the influx of 20% of customers into additional income of the tank. And this income should be more than the spent ten million. Otherwise, there was no point in getting in touch. In short, it’s business as usual, and it doesn’t matter that it’s banking.
New clients forced employers to transfer their salaries to Nifigisen Bank. New clients brought their contributions here. New clients began to take out loans from Nifigisen Bank. Nifigaisen Bank has earned its additional income from all these new operations. And if no fools work at Nifigaisen Bank, then this additional income is much more than ten million rubles a month, which continue to go to pay cashback.
But this is not the only way to make money on cashback.
Another "digital gold" has appeared in the modern world - traffic. The one who owns the traffic earns. More traffic means more money. What is it about?
Let's say the hipster Feoktist has created his own online store. At the very least, he untwisted, sells beard trimmers. He wants more clients in order to generate more income. But as we know, clients are not easy to find. Obviously, we need to involve them somehow. In any case, some money is spent on attraction. For advertising, for marketing campaigns. It turns out that the hipster Feoktist is sort of buying new clients. In the case of an online store, these new potential customers come to its site. Some of them buy something. The more people visit his website, the more purchases are made on average. The flow of visitors to the site is the very traffic, if this word was unfamiliar to you. More traffic (more traffic) - more purchases - more traffic - more profit. And the hipster Feoktist is willing to pay for it, spending part of the (still future) profit. The hipster Feoktiste's skill as an entrepreneur is to earn more than you spend. Well, yes, this is his business, but we are still interested in Nefigaisen Bank and its prosperity.
Hipster Feoktist turns to Nifigaisen Bank, and they agree on the following. If a client of Nifigisen Bank buys something in the hipster store Feoktist, then Feoktist pays the bank 10% of the purchase amount. Nifigaisen Bank, secretly rubbing its hands, promises its customers 5% cashback from such purchases (it was not for nothing that I invented this name for the bank). What's happening? Clients, having heard about a new action of unprecedented generosity, even those who were not bearded, ran to Nifigaisen Bank for cards with an unimaginably high cashback. And let's buy beard clippers from the hipster Feoktist. Feoktist rejoices - following the traffic, turnovers have increased. Nifigaisen Bank is happy - it’s not exactly two birds with one stone, it has solved a whole colony of birds with one stone. And you will receive an unprecedented 5% income from each purchase, and attracting customers, and a PR attraction of unheard-of client-orientation ... And customers are not at a loss. It seems that I bought an ordinary beard machine, but, however, an unusual one - it’s cheaper than it was!
A month later, the hipster Feoktist decided that he had completed his marketing tasks and stopped the action. By that time, Nifigaisen Bank had already reached an agreement with the sofa warrior Akaki, who, looking at his neighbor Feoktist with racial hatred, opened a business selling machines for sewing socks. Clients of Nifigaisen Bank have a holiday again - they have another cashback promotion. And Nifigaisen Bank is happy again. The sofa warrior Akaki, too, could be happy, but he has such a character - he is always dissatisfied with something.
Third party cashback services
From the last example, you can build another picture in which there is no longer Nifigaisen Bank. As I said before, traffic is the digital gold of today. The client is a finicky bird, you won't be caught in a marketing snare so easily. A hunt has been announced for his head, but you cannot fool him on the chaff, he has become experienced, grated. And business knows that it costs money to acquire each new client. So it has always been, is and will be, there is nothing personal. And the business is ready to spend money on advertising and marketing campaigns. And then there is such a phenomenon as affiliate networks. Let's not go into too much detail. If you suddenly do not know what it is - search for the words "Cost Per Action". And here I will explain for the sake of brevity. Since there is a demand for finding clients, then there will be an offer. There are people who are ready to find clients for you, but want to make money on it.These same cashback services are based on this idea. For example.
Cashback service "Do not Pay" negotiates with the trading platform "Italian Sweatshirts". "Don't Pay" brings clients to "Sweatshirts", and Sweatshirts give 10% of the amount of their purchases to the "Don't Pay" service for this. "Italian Sweatshirts" are happy - because they pay for each client after the fact. Advertising budget spending is extremely effective. "Do not pay" is actively advertised, luring customers with an unheard of five percent of purchases in "Italian Sweatshirts". Customers are happy to agree - because they win 5% of the sale, and they might not win at all. "Do not pay" also earns, thanks to the five percent that is received from the difference received from "Fufayek" and paid to customers.
The "Non-Pay" service itself has agreements with several trading platforms, providing its customers with more and more goodies. In general, everyone wins. There was a division of labor. Rather than doing business and promoting, Italian Sweatshirts focused more on customer service. And "Don't Pay" is very good at attracting and managing traffic.
By the way, no one prevents third-party cashback services from negotiating with banks, joining forces. But I don't know if they do that.
PS all numbers in the article are fictitious. I just explained the technology. Real financial flows are not known to me. Because, fortunately, I am not a banker.
PPS About sources of income for the bank. Ideally, of course, the bank would just like to take a percentage for the operations that it performs and earn only on this. This is the safest business for the bank. But in practice, there is not so much running up there, so you have to deal with other types of earnings. Basically, by the way, this is the issuance of loans, which, although they bring good income, carry with them many different dangerous risks for the bank.
