[InclinedPlane]

For every credit card transaction the processor charges a discount rate, which is usually around 1 to 3% (depending on the particular type of transaction, how it's processed, and the merchant) which comes out of the credit card charge before it gets deposited to the merchant's bank account. The issuing bank and the processor (Visa, MC, etc.) split the revenue from the discount rate with the lion's share going to the issuing bank (this is called the interchange fee).

For example, if you spend $500 a month with your credit card but you pay every balance before it has a chance to collect interest then the issuing bank will still make something like $100 a year off of your purchases (give or take). This obviously pales in comparison to the 10x more revenue they could make if you never paid down your balance and racked up lots of interest, but it's not exactly nothing.

Also worth remembering is that high balances and high interest payments are higher risk (if we'd forgotten this from the recent/ongoing financial crises).

[camiller]

Yes but if I pay off the card every month then the bank is eating the cost of providing the credit. For example if I spend $500 over the month, by the time I get the statement and pay it by the due date I've probably had the use of the money - interest free - for lets say an average of 22 days. Additionally banks have to absorb the risk of deadbeat cardholders, etc. The card issuing bank also hast to pay visa/mastercard a fee every year. and finally the bank has to pays the company they outsource processing to (Total Systems/First Data/etc.). So the cost to the card issuing bank to provide credit is substantially greater than zero. In fact, if they are only making $100 in interchange fees they are probably losing money.

Also, I'm pretty sure the merchant bank gets a significant portion of the fee.

[Retric]

If you borrow 1000$ a month every month and pay it off they get fees. Each 1/2% in transaction fees works out to (12 * .5% * 1000) = 60$ / year aka the equivalent of ~6% in interest.

But, cards that offer cash back can eliminate this. So they only make money off of interest and late fees.