Cash back and plastic discounts

T

tanchnewayll

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95
Location
delhi
ISP
airtel
I always wondered how can banks give huge discounts like 5-10 percent on stuff bought via cards be it debit or credit cards, how and why do they do that sometimes the scheme runs for weeks like on Flipkart and discounts are also heavy on a 20k phone 10% is 2k, I mean it's sort of huge. How does that work out for banks and Cc company?
 
I get cashback on my Standard Chartered Titanium Credit Card... 2.5% on fuel (used to be 5% few years ago), 5% on telecom bills (mobile/telephone/broadband) and 1% on shopping over Rs. 1000 (or Rs. 2000 not sure).
The limit is set at Rs. 500 per month I think. I stopped caring for it long time ago but it does end up saving me a thousand or so rupees per year. Since I pay my bills in time, I probably end up making money on my credit card.
Of course, this is just a game of probability. If I delay one heavy payment, they would recover it all and more in one go.
Personally I have no idea how Flipkart and other online retailers are able to offer 10-20% cashbacks. Even if the limit is set at Rs. 10000 (it was for standard chartered few months ago though it is much lower these days)... Someone is paying for that eventually.
I can only imagine that Flipkart and the bank shares the cost. Flipkart hoping to boost sales... They already lose money... A bit more is not going to hurt much. Banks probably hope that some customers would miss payments and hence pay the interest/penalty.
I guess I did not really answer your question in the end. :
 
illusion said:
I always wondered how can banks give huge discounts like 5-10 percent on stuff bought via cards be it debit or credit cards, how and why do they do that sometimes the scheme runs for weeks like on Flipkart and discounts are also heavy on a 20k phone 10% is 2k, I mean it's sort of huge.

How does that work out for banks and Cc company?
Click to expand...
Well there are couple of things to understand first,

[*]Nobody wants any LOSSES no matter how big you are
[*]Banks in particular can not afford to have any LOSE
[/list]Now coming to real question,
When Flipkart advertises about any cashback, as @chromaniac explained it involves both Retailer and Bank but there are two more entities involved Customer and Manufacturer. Companies like Flipkart receives huge discounts as being wholesaler and passive promoter of the brand.
Taking an example of a Mobile phone worth of Rs.20,000 MRP flipkart would give 10% discount (cash back) which will be worth of Rs.2,000 so for flipkart Net Selling Price becomes Rs.18,000 (one that will be reported in their annual finance report).
Retailer (Flipkart): It is very important to consider here for what price flipkart get these products from manufacturer; in electronics its usually 25-30% margin over MRP (as for any BIG distributor of the product) plus they will get additional 5-10% of discount being Promoter (online & offline). So overall cost of procurement for flipkart would be around Rs.13-15k.
Bank: Only an entity to facilitate the transaction between Consume & Seller. They only understand Credits & Debits so no Cashback, Discounts etc here. Flipkart would either raise a Credit request for Rs.18,000 or Credit request for Rs.20,000 + Debit request for Rs.2,000. What bank does is a deal with Flipkart which is a barter system where Flipkart will promote a specific Bank's Card and Bank won't charge them for the transactions made on it. So no FINANCIAL profit or loss on paper for Bank. Internally Bank would show Debit of foregone amount in favour of CC Txn and Credit of same amount for Marketing of product hence No-Profile-No-Loss for Bank.
Consumer: PAYS actual Money, Bank maintains only Numbers. We are easily fooled by discount schemes by forgetting the fact that physical cost of a product is not more than 25-30% of what they pay rest all is for Khans, Ambanis, Tatas and plethora of other flesh eaters. We are always in LOSS comparing material we purchase against its cost, leaving apart the usage and future benefits from it.
Manufacturer: Deals with Seller who does some marketing/promotion for them (flipkart would get some discount for featuring them on Frontpage/Mailers).

The ultimate cycle looks something like,
Manufacturer --- [15000 Cr] ---> Retailer ---> [18000 Cr or 20000 Cr + 2000 Dr] ---> Consumer
|-------------------------> [Bank]
 
So what about my case? Where I get a 2.5-5% cashback on fuel and telecom bills? :D
 
Tie-up between petrol pump and Bank again? Shared costs pump gets customers regularly, which will stop coming If cards not accepted, Banks propaganda is to make it a habit to customers to keep using cards. I think eventually they make money since buying through cards for other profitable points become a probability and in some cases it happens too
 
Means money comes free to banks and they are giving it away to stimulate use of the cards more and more at their own cost initially, promoting materialism in the name of discounts and free emi's and allOf course they still make profits
 
chromaniac said:
So what about my case? Where I get a 2.5-5% cashback on fuel and telecom bills? :D
Click to expand...
Think of the discounts in terms of amount I doubt it will be more than 500-1000 per month (capped?). So Bank can easily handle that amount as Cost of customer acquisition/marketing. Larger picture is at least 50-75% of people would use CC to purchase unnecessary charges and EMIs and once you are in pool there is no way out.
Macro-economy is not a simple game there are lots of factor like IOL/HP being shareholders in HDFC/ICICI and vice-a-versa.
 
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