The Profitability of Credit Card Companies and the Power of Understimulation

Feranmi Olaseinde

Feranmi Olaseinde

Apr 05, 20244 min read

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The Profitability of Credit Card Companies and the Power of Understimulation

Introduction:

Credit cards have become a ubiquitous part of our financial lives, offering convenience and flexibility in our transactions. However, have you ever wondered how credit card companies make their money? Contrary to popular belief, credit card giants like Visa do not profit from interest fees charged to cardholders. Instead, they rely on a complex network and business model to generate substantial profits. In this article, we will delve into the profitability of credit card companies and explore the fascinating concept of understimulation and its impact on our cognitive abilities.

The Profitability of Credit Card Companies:

Visa, one of the largest credit card companies globally, boasts profit margins that far exceed those of traditional retail businesses. While most retailers operate on profit margins ranging from 2% to 4%, credit card companies can achieve profit margins of 30% to 40%. This exceptional profitability is primarily due to the fixed cost nature of their business. Once the infrastructure is set up, each transaction flowing through the credit card ecosystem brings in high incremental margins due to the massive capacity network.

So how does Visa make money? Contrary to popular belief, Visa does not directly profit from credit card interest fees. These fees are charged by the card issuers, usually banks, which bear the risks associated with lending money. Visa, on the other hand, operates as the network on the cards issued by banks. While consumers may perceive their cards as Visa cards, they are, in fact, the banks' cards with the Visa network integrated into them. Visa's business model relies on the four-party model, involving multiple entities when a Visa card is used for a purchase.

Understanding Understimulation and its Benefits:

Shifting our focus to a completely different realm, let's explore the concept of understimulation and its impact on our brain's performance. We often find ourselves overwhelmed with tasks, responsibilities, and constant mental stimulation. However, research suggests that deliberately under-stimulating our brains can have numerous benefits.

Understimulation involves consciously deferring certain thoughts or tasks to a later time. When faced with a task or thought that demands immediate attention, we can simply write it down and promise ourselves to address it later. This technique frees up our working memory and allows us to maintain focus, attention, and motivation on the task at hand. While the theory of understimulation may appear counterintuitive, studies have shown that believing we have more motivation or that difficult tasks increase motivation can improve our performance, reduce errors, and even potentially boost our IQ by up to 15 points.

Actionable Advice:

  • 1. Embrace the four-party model: As consumers, it's essential to understand the intricate network behind credit card transactions. While we may perceive our cards as belonging to the credit card companies, they are, in fact, issued by banks. By acknowledging the roles of each party involved in the process, we can make informed financial decisions and potentially leverage the benefits offered by different banks.
  • 2. Practice understimulation: In a world filled with constant distractions and mental clutter, deliberately understimulating our brains can improve our focus and overall performance. Write down tasks or thoughts that demand immediate attention, promising to address them at a designated time. By freeing up our working memory, we can enhance our cognitive abilities and achieve better outcomes in our daily tasks.
  • 3. Challenge the limitations of motivation: Believing that we have more motivation than we initially thought or that difficult tasks increase our motivation can have a positive impact on our performance. Instead of succumbing to the concept of ego depletion, challenge yourself to perceive tasks as opportunities for growth and increased motivation. By reframing your mindset, you can overcome obstacles and achieve better results.

Conclusion:

Credit card companies like Visa have built highly profitable businesses by leveraging the fixed cost nature of their operations and the expansive network they have established. Understanding the complexity behind credit card transactions allows us to make informed financial decisions. Additionally, exploring the concept of understimulation and its impact on our cognitive abilities can help us optimize our focus and performance. By embracing the four-party model, practicing understimulation, and challenging the limitations of motivation, we can navigate the world of credit cards more effectively and enhance our overall productivity.

Resource:

  1. "(259) How Credit Cards Work In The U.S. | CNBC Marathon - YouTube", https://www.youtube.com/watch?v=oue5A-7Hpx4 (Glasp)
  2. "(95) Deep Focus: Why Your Brain Needs Understimulation - YouTube", https://www.youtube.com/watch?v=qiZZbyHPHzc (Glasp)

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