Money Grows on Plastic Trees

Visa Gift Cards, American Express Gift Cards, Money Orders, Payment Services, and other cash equivalents are fundamental in maximizing rewards and making a profit off of banking habits.

Being the good Finance Punk that I am, I usually buy about $10,000 worth of this plastic money per month.

I do this for a few reasons:

  • Meet minimum spend requirements for credit card bonuses
  • Convert lines of credit and balance transfers into cash for investments
  • Increase the balance in my bank account to pay off lines of credit
  • Generate rewards points and cash back for profit

None of the uses listed are what the gift cards are intended for but all parties involved are making money so who cares? – More on that later.

Generating Rewards Points and Cashback for Profit:

There are at least four parties involved in the Visa/Mastercard/American Express Gift Card business:

  1. The card brand (Visa, MasterCard, or American Express)
  2. The issuing bank (Greendot, Metabank, Blackhawk, American Express to name a few)
    • Any bank [Wells Fargo, JPMorgan Chase, etc] can be an issuing bank and yes, American Express is its own issuing bank
  3. The Wholesaler and/or Distributor and/or Retailer
  4. The Customer

It would be fair to assume that the visa/mc/amex gift card business model includes the first three parties all making a profit.

Finance Punk [and whoever buys these] is the fourth party.

So, I [Finance Punk] am saying that all four parties are making a profit.

Each Party’s Revenue Stream(s):

The Card Brand:

Visa, MasterCard, American Express, and Discover are all credit/debit card brands.

Their first revenue stream comes from allowing banks [like Wells Fargo] to use their brand on their debit and credit cards. The card brand [Visa] gives the bank’s cardmembers certain benefits in return.

Their main revenue stream, however, is from Interchange Fees. These are fees that all merchants pay in exchange for being able to accept Visa, MC, Amex, and/or Discover credit/debit cards. This is a percentage of the amount charged to the card that every merchant [like Walmart] has to pay [usually up to 3% and less for debit cards].

The Issuing Bank:

In the normal credit/debit card transaction scenario [using a Chase Bank, Visa branded credit card to buy a sandwich] the issuing bank [Chase] will get a portion of the interchange fees but will mostly be generating revenue from fees charged to the cardholder [interest fees, annual fees, late payment fees, and balance transfer fees].

These fees don’t really exist in the Visa/MC/Amex gift card business but there is another fee.

The activation fee is paid by the customer when purchasing one of these gift cards and is usually around $5. Like regular credit/debit cards, this fee is a huge part of the issuing bank’s revenue.

The final revenue stream for the issuing bank is known as breakage. Keep in mind that breakage doesn’t exist as a revenue stream for banks in the regular credit/debit card business. In fact, the opposite is true – banks lose money off of [what could be called] breakage in the regular credit card business [unpaid credit card debt that has to be sold off for pennies on the dollar].

In the gift card business, breakage refers to money customers leave on the card. So if someone only uses $18.97 of their $20 gift card, the bank will eventually recognize up to $1.03 profit.

The Wholesaler, Distributor, and/or Retailer:

All three can be a different entity or all three can be the same but they all make money off of gift cards the same way.

The retailer buys from the distributor who buys from the wholesaler who buys from the issuing bank [the manufacturer] and, again, the wholesaler can also be the distributor who can also be the retailer.

Simply put, they buy gift cards for less than face value and then sell the gift card to someone downstream for up to face value [all the way down to the customer who pays face value and the activation fee].

Even though the issuing bank is responsible for the entire amount on the gift card, they know they can profit off of selling them for less than face value because of all of their revenue streams.

So, the issuing bank determines that selling $500 Visa Gift Cards for a 5% discount is profitable and they sell them downstream for $475. Then, the wholesaler sells them to the distributor/retailer for $485 [a 3% discount] and makes $10 per card. Finally, the retailer sells the gift card to the customer for face value and makes $15. These numbers are just examples and are not the actual amount that the issuing bank sells/retailer buys gift cards for.

The Customer:

The customer loses the cost of the activation fee and is down ~1% [$5 in this scenario] right?

Finance Punk Customers Profit Too:

or money grows on plastic trees – whatever title you like better.

I make a lot of money off this Visa/MC/Amex gift card gravy train. I get rewards points that are worth more than the activation fee from using a high rewards earning credit card. I get signup bonuses from credit cards for spending thousands of dollars I don’t have. I get cash back from portals like TopCashBack. I take advantage of promotions [that stores like Staples, Office Depot, and Safeway run].

So, that $10,000 a month of gift cards, bought by yours truly, are generating at least 2% rewards from just using a credit card [>$200], 1% cash [$100] from going through topcashback, and often lump sums from promotions.

One of the best gift card promotions I’ve ever seen:

Going on just about a week ago was a promotion at Office Max/ Office Depot where you would get $10 per $100 MC gift card, up to 2 times per transaction, up to 2 transactions per day.

In other words, you could buy a $200 MCGC for $186.95 [$200 plus $6.95 activation fee – $20 instant rebate].

WOW!

It was supposed to go on for a couple weeks [but didn’t] so best case scenario you could do 28 transactions [ 2 per day]. and make ~$365.4 for basically showing up to Office Depot [if you used the MCGCs to buy more MCGCs].

DOUBLE WOW!

If you had more than one Office Max/Depot close to you, you could do 2 more transactions per day. If your Office Max/Depot didn’t care about the 2 transaction per day limit, you could buy all the MCGCs in the store and make thousands of dollars!

triple wow.

Some would say that you should buy these MCGCs with a 5% earning credit card and make 5% more. They wouldn’t be wrong but it would also involve converting dozens [or even hundreds] of $200 MCGCs into cash – not an easy task for most and would be time consuming.

Who wants to actually work for money by spending time buying money orders with MCGCs and then depositing them into a bank and then paying off credit cards x100 when money can just grow on plastic [Visa/MC/Amex gift card] trees?

 

 

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