[Ultra-Basic Guide] Why do you get points for free? Understanding how credit cards work and the "5 key players" through diagrams

"I got a card with no annual fee, yet I get 1% in points every time I shop."

When you think about it, don't you find this very strange? Since this isn't alchemy, there is always someone, somewhere, who is bearing the cost of the points you receive.

In this article, for those who want to understand how credit cards work, we will explain the flow of money behind card payments and the "5 key players" from an ultra-basic level in an easy-to-understand way.

1. The "5 key players" supporting credit card payments

Even what we collectively call "card companies" are actually made up of multiple players, each with their own clearly defined roles when you look behind the scenes.

First, let's introduce the 5 players who make this world go round.

1. You (The User)

   1. The consumer who uses a card to make payments conveniently.

2. The Store (Merchant)

   1. The store that accepts card payments.

3. The Store Coordinator (Acquirer)

   1. The company that places card payment terminals in stores, solicits businesses to "introduce card payments with us," and manages the stores.

4. The Card Issuer (Issuer)

   1. The company that actually issues the card to you, bills you for monthly usage, and awards points. (e.g., Rakuten Card, Credit Saison, etc.)

5. The Global Communication Network (International Brand)

   1. The company that connects payment networks not just in Japan, but all over the world. (e.g., Visa, Mastercard, JCB, etc.)

*In Japan, many card companies serve both the "3 (Acquirer)" and "4 (Issuer)" roles, but to understand the mechanism, it is fundamental to think of the "Store Coordinator" and the "Card Issuer" as separate entities.

2. Who gets the "payment fee (approx. 3%)" that the store pays?

The biggest source of income for credit cards is not the money we pay. It is the "merchant fee" borne by the store.

For example, suppose you make a 10,000 yen purchase with your card. In this case, the store does not receive the full 10,000 yen. Approximately 3% (300 yen) is deducted as a fee, and 9,700 yen is deposited into the store's account.

So, who gets this 300 yen that was deducted?

💰 Fee (300 yen) distribution simulation

Player Name, Purpose of Receipt, Estimated Share, What is the money used for?

1. Merchant Coordinator (Acquirer)

• Purpose of receipt: Acquiring fee

• Estimated share: approx. 50 yen (approx. 0.5%)

• What is the money used for?: Used for sales expenses to convince merchants to "adopt card payments," installing and managing payment terminals at registers, and processing fees for depositing sales proceeds into merchant accounts.

2. Global Communication Network (International Brand)

• Purpose of receipt: Brand licensing fee

• Estimated share: approx. 10-20 yen (approx. 0.1-0.2%)

• What is the money used for?: Used for providing and maintaining a massive communication network that allows cards to be used safely 24/7 anywhere in the world, such as Visa or Mastercard, and for protecting brand value.

3. Card Issuer (Issuer)

• Purpose of receipt: Interchange Fee (IRF)

• Estimated share: approx. 230 yen (approx. 2.3%)

• What is the money used for?: ★This is the heart of card payments! Used to pay for the heaviest costs, including "point rewards" for us users, "advancing payments" to merchants, covering "credit risk" in case of non-payment, and maintaining security systems to monitor for fraudulent use.

Merchants pay 300 yen directly to the "Merchant Coordinator (Acquirer)," but in reality, most of that is converted into an "Interchange Fee (IRF)" and passed on to the "Card Issuer (Issuer)" that issued your card.

3. The Struggles of Card Issuers: Actually a "Super Low-Margin" Business

Looking at the table above, you might think, "If they get 230 yen, the card issuing company must be making a killing!"

However, the reality is very harsh. Card issuers (issuers) must pay the following massive costs out of the 230 yen (approx. 2.3%) they receive.

• Point reward costs: The cost of the 1.0% to 1.5% (100 to 150 yen) in points returned to you.

• Bad debt risk: Compensation for losses in the unlikely event that a user cannot pay due to bankruptcy or other reasons.

• Fraud prevention costs: Maintenance costs for security monitoring systems that watch for suspicious transactions 24/7.

• Operational costs: Costs for operating call centers and issuing/mailing statements.

What happens when you subtract all of these?

The net profit remaining for the card issuer is only about 0.1% to 0.5% of the transaction amount (a few yen to a few dozen yen). Credit cards are actually a very high-volume, low-margin, and tough business model.

4. That is why 'co-branded cards' are the ultimate solution

'If the profit margins are so thin, how do they make money?'

The magic that dramatically improves this difficult structure is the 'co-branded card,' issued in partnership with other companies such as supermarkets or airlines.

If an independent card company pays for '1% rewards' out of its own pocket, its profits will vanish, but with a co-branded card (e.g., XX Supermarket Card), the partner (the supermarket) covers this heaviest cost, the 'point expense'.

• Benefits for the partner (supermarket, etc.):

  1. 'If you use our card, you will earn points.' By saying this, customers will visit their store instead of a rival's. If it increases sales in their core business, covering the point costs is more than worth it.

• Benefits for the card company (issuer):

  1. Because the supermarket covers the point costs, which were the biggest burden,they can direct the received interchange fees entirely toward their own profits (such as system maintenance costs). Furthermore, since supermarket customers sign up for new cards, the number of users continues to grow.

Three representative models of 'co-branded cards'

There are three main classic patterns for co-branded cards. Since each has a clear purpose of 'increasing core business sales or customer retention,' they are happy to cover the point costs on behalf of the card company.

① E-commerce/IT sector (e.g., Amazon Mastercard, Rakuten Card, etc.)

• Partner: Huge online shopping sites like Amazon

• Card issuer: Sumitomo Mitsui Card, etc.

• The reason it's the strongest: When you use an Amazon Mastercard on Amazon, you get very high rewards, such as up to 2%. The cost of this is borne by Amazon. From Amazon's perspective, 'getting customers to keep shopping on their site instead of a competitor's, even if it means offering high points,' is directly linked to their greatest profit, so they are happy to sponsor the point costs.

② Telecommunications carrier/Economic zone sector (e.g., au PAY Card, d Card, PayPay Card, etc.)

• Partner: Telecommunications companies/smartphone payment apps

• The strongest reason: The "economic zone" model is the most powerful trend in recent years. For example, by combining charging to their own smartphone payment app (up to 5%) with actual payments (0.5%), there are cases where they achieve an astonishing total return rate of up to 5.5%. If this were a standalone credit card company, it would go bankrupt instantly due to massive losses, but the telecommunications company covers the cost of the points. Their goal is "to get you deeply dependent on their smartphone lines and payment apps, and to prevent you from switching (canceling) to other companies."

③ Retail/Supermarket type (e.g., Aeon Card, Lumine Card, etc.)

• Partners: Supermarkets, station building commercial facilities

• The strongest reason: This is a classic, time-tested model that offers powerful discounts like "5% off on the 20th and 30th of every month." The supermarket covers this 5% discount. While a supermarket's profit margin is never high, it works because the increase in sales from "customers visiting in large numbers on specific days and making additional purchases" outweighs the cost of the discount.

Summary: The "give and take" relationship behind point rewards

The points you receive casually every time you shop.

Behind the scenes, a brilliant ecosystem is at work, as described below.

1. Stores bear the payment processing fees, and

2. International brands andacquirers build the payment path, and

3. Card issuers protect the system while struggling with thin margins, and

4. sometimespartners cover the cost of points as sponsors.

Even if you felt that "credit cards seem complicated," just by knowing these 5 key players and the "flow of money," news about cashless payments in the world will become surprisingly interesting and clear to you.