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Why Credit Cards offer Cashback ?

Why Credit Cards offer Cashback ?

Last Updated : Nov. 28, 2019, 3:29 p.m.

Are you tempted by credit card cashback offers? I am sure you must be. A credit card cashback can basically be defined as a small monetary benefit which the bank provides to the cardholder as a gift for using the credit card. It is part of the promotional schemes by the banks where you receive a certain percent of your net expenditure as a rebate, which is credited to your account. The cashback is valid on most of the purchases which are made by a credit card.The entire promise of earning cashback when you use your credit card is so intriguing, right? But did you ever give a thought to ‘Why Credit Cards offer Cashback? There are certain reasons to it. So let’s explore them together.

To lock up new customers

One of the basic reasons behind banks giving so many cashbacks on credit cards is to attract potential and new customers who wish to avail the services of a credit card. Credit card issuers simply want to catch the attention of potential customers who are looking for a credit card which gives them various benefits. And what better than a cashback? Most of the cashbacks are offered during the festive season when buying is at its peak. The idea is to appeal to a certain demographic group who have peculiar spending habits and target them accordingly with such offers.

To encourage existing customers to spend more

Don’t you get thrilled when you are given exciting offers? The bank cashes upon this and gives you cashback of a certain amount when you make a transaction.The simple motto is to encourage you to use your credit card rather than cash to make payments. The bank wants to put a fullstop to your use of cash, debit cards or cheques for making purchases. When you start using your credit card more and more the bank offers you cashback to keep you satisfied. The more you spend happier is the bank. You need to keep in mind that if you pay the card balance fully and without any delay you will get good benefits of the cashback offer.

Now you must be wondering why will the bank offer you cashback even when you are not paying any kind of late or interest fees? WishFin will tell you why. When you pay through your credit card, the merchant generally pays some percent of the transaction amount as commission to your bank. The bank shares a fraction of this commission to you as cashback.

To gain revenue from interest

The objective of offering cashback is to entice the customer to make purchases with his credit card which normally he wouldn’t make. Now since the customer is lured by cashback offers he will end up spending more. But just in case he is unable to return the due amount on time, he will end up paying huge interest charges. This acts a good source of revenue for the banks. By giving you cashback the bank is betting that you are going to use a credit card to buy something which you can’t afford to repay by month end. This simply means you have a large balance which will carry forward and you have to pay a hefty interest amount.

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To tackle cut-throat competition

In today’s world where competition is at its peak and competitors are ready to kick you out of business, offering cashbacks on credit cards has proved to be a major mover advantage. Darwin’s theory of survival of the fittest completely fits the bill here. Banks offer you cashback to remain ahead of every competition available. As a matter of fact, there are some peculiar purchases for which you are dependent entirely on your credit card. The banks draw their profits from such purchases only. You either have to be innovative or kiss goodbye to the business. This is what some banks did by offering cashback on iPhone 5S when iPhone 6 was about to be launched in the market.

These are the four main reasons why credit cards offer cashback. So in case you are insatiably curious and want to know about the best cashback credit cards in India, you can read it on WishFin. It is going to be worth your read.

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