#84: The Symbiotic Relationship Between Credit Cards and Airports
A deep dive into how credit card companies make money
Next time you head to the airport, take note of how many credit card company advertisements you see. From the flashy lounges to the airline co-branded credit cards, there’s no shortage of experiences or signs that nudge you to open that account in pursuit of a welcome bonus and waived checked bag fees. Whether you’re loyal to Amex or prefer Chase, it’s likely you signed up for your high-fee rewards card, at least in part, for the travel perks.
Airports are essentially billboards for credit card companies. And trust me, this is no accident. Credit card companies understand psychology and consumer behavior like the back of their hand. They aim for the first card you pull out of your wallet on your vacation or business trip to be theirs. It’s a concept called “top of wallet”, referring to the card being literally at the top of your wallet, or in the most accessible spot for repeated use.
Credit card companies want to subtly nudge you to associate their card with travel because when you are traveling, you are likely to spend significantly more than you do in your daily life. “Top of wallet” quickly translates into “top of mind”.
Airports are critical to the credit card economics flywheel, helping acquire customers and kick it off through spending. Let’s dive into the three margins critical to credit card companies and how airports help start the flywheel and push it into high gear.
Note: We will focus on examining premium rewards credit cards for major players like American Express, Chase, and Capital One. Also, if you’re new here, I used to work in the credit card industry.
Account Margin
This is where customer acquisition costs sit. But thankfully for credit card companies, they’ve found a way to offset the costs.
For an annual fee*, you gain access to exclusive perks like airport lounge access, rewards points multipliers, and travel, dining, and subscription credits. Not just anyone is allowed into an American Express Platinum airport lounge. It’s an exclusive location reserved for people who are willing to fork over the steep annual fee (nearly $900 at the time of publication for the Platinum card).
In the context of airports, these lounges are an enticing offer if you are a frequent traveler and appreciate a cleaner, secluded waiting area away from the masses. Despite being costly to maintain, they pay for themselves and then some, as a strong nudge for new sign-ups.
When it comes to monthly and annual credits, credit card companies rarely pony up all the cash. They tend to be at least partially merchant-funded, with merchants willing to subsidize the cost of the credit for their product or service with the hope that you’ll become a recurring customer of theirs. This is especially true given that premium card members typically spend more than those with $0 annual fee cards.
Rewards points multipliers come at the cost of the credit card company. You know, the 4x multiplier on dining spend (i.e. if you spend $100 at dinner, you will receive 400 rewards points, usually redeemed at ~$0.01 per point). These typically are geared around dining and travel, which tend to be higher-spend moments for people. This is a play to increase spending volume, with issuers willing to accept lower margins as the rate versus volume trade-off will likely work in the credit card company’s favor.
*For cards that do not charge an annual fee, perks tend to be quite limited. Perhaps a rewards point multiplier (i.e. greater than 1x rewards points) on a single category, but rarely any meaningful travel or dining credits.
Spend Margin
Once you have been convinced to sign up for a fancy credit card so you can unwind at your airport lounge of choice, it’s time to get into the habit of spending. Thankfully, the credit card companies have already thought through how to get the spending flywheel going.
They offer big-time welcome bonuses. You know, the “get 100,000 rewards points”, and then in smaller font, “if you spend $6,000 within the first three months of membership.”
These welcome bonuses sit in the Account Margin but are necessary to create an urgency around using the card. And the required spending is steep for a reason. They don’t want you to be able to reach your spending threshold after a few swipes (remember Bilt?); they want you to form a habit of using your brand-new card.
Every time you use the card, the credit card company receives a small percentage of each transaction. This is an oversimplification, but this fee ranges from ~2-4% of the transaction depending on the size and category of the merchant. After paying out fees to various networks and partners, the “discount rate”, commonly used terminology within the industry regarding the spend fee percentage, nets out lower. Given that overall network volumes reach into the trillions of dollars for the likes of American Express and Chase, the spending revenue adds up quickly.
This is a core revenue driver for credit card companies: people swiping their cards to pay for goods and services.
Lending Margin
So now that you are convinced to sign up for your grandiose premium rewards credit card at the airport and you’ve spent the amount needed to receive the welcome bonus, you are faced with a predicament. You cannot pay back the amount you owe in full.
They sure won’t admit this publicly (given the amount of legal scrutiny they already receive), but credit card companies are licking their lips when this scenario arises. They offer a minimum payment option, allowing you to pay your outstanding balance over time. But it comes at a steep cost: interest payments.
This is often the most profitable source of revenue for credit card companies. They borrow at relatively low rates from the capital markets and lend it back out to consumers and businesses at a punishingly high rate, otherwise referred to as an annual percentage rate (APR). In the case of American Express, they borrow at ~7% and charge APRs that stretch above 30%, depending on the prime rate.
Sure, the credit card companies take on the risk that you may not pay them back. For their lending business, they keep a certain amount of capital on the books in the case of charge-offs. But the interest income and the late payment fees more than offset the occasional instance that a card member stiffs them.
See, credit card company economics work in a synchronous flywheel. They offer exclusive rewards and benefits to card members to incentivize them to sign up for the card. Then give a reason to spend immediately and frequently on their new card for the sake of unlocking their welcome bonus, which builds habit and association with the card. And finally, provide a credit line which can lead to overspending and the need to borrow. And there’s no better place to get the flywheel going than where people are primed to begin spending more than they usually do: at the start of their journey, or in other words, at the airport.
Side note: I understand I’m preaching, but whatever you do, avoid credit card debt at nearly all costs. Not only can interest rates creep up into the thirties, but also, what most people miss is that once you start revolving a balance, all additional purchases you make are subject to interest until you pay off the balance in full.