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As someone who recently went down a rabbit hole into trying to optimize credit card rewards (and opting for cashback in the end), I'm still kind of perplexed ho

As someone who recently went down a rabbit hole into trying to optimize credit card rewards (and opting for cashback in the end), I'm still kind of perplexed how it all works. Like, who's paying for the flights? Consumers, merchants, airlines, banks? Is there a good primer on how all the pieces work and what the various incentives are and such? I found patio11's post[0] and this Fed investigation[1], and both were interesting but left me wanting more. [0] https://www.bitsaboutmoney.com/archive/how-credit-cards-make-money/ https://www.bitsaboutmoney.com/archive/how-credit-cards-make... [1] https://www.federalreserve.gov/econres/notes/feds-notes/credit-card-profitability-20220909.html https://www.federalreserve.gov/econres/notes/feds-notes/cred...

dheera 3y ago
> Like, who's paying for the flights? Mostly all the poor people in credit card debt pay for the flights of the rich. Interest income is the largest of their revenue sources, and interest + cash advance + penalty adds up to well more than half. https://www.fool.com/the-ascent/research/credit-card-company-earnings/ https://www.fool.com/the-ascent/research/credit-card-company...
- ravenstine 3y ago
  This exactly. If you always pay down your credit card debt every billing period, you're considered a "deadbeat" because you're using the benefits of the credit card's payment processing but not paying in interest. The best customers of financial institutions aren't those whom are financially responsible or flush with cash, but those regularly incurring 14+% interest on every purchase and paying overdraft fees. For airlines in particular, the deals they allow through credit cards are more like loss leaders. They need to fill up seats because that's the nature of their business model. If you don't fill up enough seats to make up for the operating cost, the plane doesn't fly, and if the plane doesn't fly then that's one fewer route you'll have paying customers for. Airlines need to keep routes going, so they create incentives to keep people flying, which hopefully gets them into the habit of flying again even when they've used up all their rewards points.
  - denimnerd42 3y ago
    not really. goldman sachs found out those customers cost them a lot of money with the apple card. the best customers are the wealthy who have $100k+ in their checking/savings accounts and million+ in their brokerage accounts and clear 10k+ monthly on their credit cards.
    - dmoy 3y ago
      That could well be (especially if you look at banks who don't offer competitive interest rates on cash). That said, Goldman Sachs is sort of infamously bad at consumer banking, so I'd take their words there with a grain of salt. They lose a lot of money on most of their consumer banking endeavors: they lose like a billion per year on Marcus, they're actively trying to drop the Apple credit card, etc. So at some level, of course GS is gonna say their best customers are the wealthy ones, because they largely haven't figured out how to make a decent business for anyone except the ultra wealthy.
    - TheCoelacanth 3y ago
      That's just GS overpaying in a business segment they don't have experience in. Companies that know how to run a credit card make a boatload off of high-spending users who pay off the full balance every month.
  - patch_cable 3y ago
    > If you always pay down your credit card debt every billing period, you're considered a "deadbeat" because you're using the benefits of the credit card's payment processing but not paying in interest. So why do they keep offering me incentives to use their product? Is it the hope that one day, after 20 years, I'll finally overspend and they'll get to collect some interest from me?
    - bombcar 3y ago
      Because they collect their 3% or whatever, and even after giving you your "cut" for strongarming the merchant for them, they still get 1% or whatever it is. You've paid off every month on time for 20 years, and they get 1% of that. For basically running some servers and balancing payments. That's big money - debit cards do the same thing for what, 25 cents a payment? So once the credit card hits about $9 it's all gravy.
- ipqk 3y ago
  It's also a tax on the people that pay cash (assuming the store charges the same rate for cash or card).
- smileysteve 3y ago
  Insurers (and Robbers, Safe Companies, Employees graft, Banks) If you had as much cash in the till as required to do business in the 90s; or took checks; or had employees that had to do regular bank runs; to insure against the loss via employees, robbers, etc it would cost a significant amount of each transaction to insure that, especially the liabilities of it.
goosedragons 3y ago
Consumers, especially those paying in cash. Merchants jack prices up to account for credit card fees. The fees pay for things like cashback and flights. Typically CC companies don't allow for merchants to have discounts for stuff like paying in cash (although some businesses may anyways...) so customers paying in cash essentially pay extra.
- eldaisfish 3y ago
  If I pay cash and pay a price that rose because of credit card fees, how does that cash go back to the credit card companies? Wouldn’t it stay with the seller?
  - pkulak 3y ago
    Money is fungible. Your physical dollar bill can be collected and deposited and make it possible for _another_ dollar to do something else.
  - sdwr 3y ago
    If the credit card companies take a dollar from every transaction, then the store raises prices by 80 cents to keep margins the same (because some people pay by cash). Your 80 cents in cash goes to the store, and subsidizes 4 other customers purchases (who would otherwise be paying the full extra dollar). Note that this complaining over fees is a privileged position, we are trying to slash visas margin, but if it didn't exist we would be BEGGING someone to come and run it this smoothly.
    - dheera 3y ago
      > but if it didn't exist we would be BEGGING someone to come and run it this smoothly I disagree, if they didn't exist and the need existed it would be fairly easy to get a company going to facilitate payments. China for one has settled on mobile app payments via QR codes for almost everything these days, credit cards are almost nonexistent.
      - 3y ago
doctorpangloss 3y ago
> who's paying for the flights? It’s appealing to blame everyone but the consumer. You, the person wielding the credit card, are paying for the flight. You swipe your card, and when you paid money for something, seemingly, you also get a little bit of a flight with it. This is kind of like going to a restaurant and swiping your card and enjoying the ketchup. You paid for the ketchup. In few restaurants can you go and eat the ketchup without buying something else. But they still sold you the ketchup. Why does this have to be a big conspiracy? It is definitely interesting that it’s this or that merchant bank swipe fee airline spin around turnaround thing. On the other hand who cares. It is all obscuring the fact that you are buying the flights. If the flights didn’t exist, 3% merchant fees would still be atrocious! It doesn’t fucking matter to me if people spend money to buy flights, whether by buying them directly through airlines or via some brain dead savings scheme. You and I will never benefit from high swipe fees. You and I will never be billionaires. Absolutely nothing in the world would be lost or become less meaningful if CC providers charged less for swiping in the US, like they do in the rest of the world.
potamic 3y ago
Previous discussion, linking to a study on this https://news.ycombinator.com/item?id=34492502 https://news.ycombinator.com/item?id=34492502
traceroute66 3y ago
> opting for cashback For cashback it depends where you live. In the US, cashback will be likely be wholly or significantly funded by the Interchange Fee that the merchant receives. The Interchange Fee is the fee the card issuing bank "skims off the top" from the fee the merchant is charged for taking your card. In the US, interchange typically around the 2% mark. In the rest of the world its more like 0.2%, hence you can only really fund your loyalty programme out of interchange in the US. Other sources of revenue the card provider can use are any annual fees they charge the customer, any penalties they charge the customer, and of course interest fees charged to cardholders who do not pay off their balance. If your card company also runs a points scheme, then they can get extra revenue by selling points, either to you directly so you can "top-up" your balance, or in bulk to third-party companies who wish to offer points promotions. > Like, who's paying for the flights? Consumers, merchants, airlines, banks? If you are asking specifically about points-accrual card loyalty schemes where the cardholder accrues points which they can then use at a later date for flights, then that is all magical smoke and mirrors. It boils down to the careful stage management of our old friends supply and demand. Supply: The card issuer issues your points. This sits on their balance sheet as a liability (the points are assigned a dollar value). i.e. at this stage it costs them nothing in terms of hard-cash, just a small technical accounting reduction in profits When you "buy" your airline ticket on points, the liability crosses the balance sheet (the company raises an invoice to you which is paid with the points). Demand: This is where the other half of the magic happens. The company makes sure to limit the ability for you and everyone else to redeem points. You will have seen this if you have ever tried to book a flight based on 100% points, you'll find very limited availability. Of course you will have seen companies offer you to pay "part-cash/part-points", but if you look closely, the "exchange rate" on offer is generally very poor value for money.
- bombcar 3y ago
  Does this mean when I use a "rewards card" outside the US (that has no additional currency fiddling fee) that the bank is eating the 1.8% difference? Or do they get me on the currency exchange rate? I suspect I know the answer, even thought their rate is almost always the best available to me.
quinncom 3y ago
Here's a popular analysis from r/Churning exploring who pays for cc rewards. TL;DR: cash customers. https://old.reddit.com/r/churning/comments/5oucdq/the_economics_of_churning_who_pays_for_the_rewards/ https://old.reddit.com/r/churning/comments/5oucdq/the_econom...
missedthecue 3y ago
I used to think it was the consumer/cash buyer but it's pretty clear now that the merchants do not have the pricing power to pass these costs on. It's why they get upset and try to lower fees. It's why Costco stopped taking Amex. If they could simply pass it on they'd be indifferent. There are various studies online confirming this.
BobaFloutist 3y ago
Surely your purchasing data gets sold off, if nothing else?
rstuart4133 3y ago
I don't know what happens in the US, but in Australia we have credit card and debit cards. Credit Cards typically charge a 1%..2% fee, Debit Cards have a 0% fee. Both are issued by Visa or Mastercard. 0% is much closer to what is costs for a computer to record the transaction that 1%..2%. That's 1%..2% of a huge chunk of consumer expenditure for something that evidently costs close to nothing to run (going by the Debit Card fees). If you earn $100,000 a year, spend 1/2 of it using credit cards, then at 1% that's $500 a year. How much are you earning in rewards?
chiefalchemist 3y ago
Consumers pay. One way or another. Sooner or later. And upstream costs flow down hill to the consumer. As for cash v rewards, the best way I've seen it said is: Rewards don't earn interest. So in general - due to inflation - the longer they sit, the less they're worth. To your point, cash back gives you the opportunity to invest / earn interest.

dheera 3y ago

> Like, who's paying for the flights? Mostly all the poor people in credit card debt pay for the flights of the rich. Interest income is the largest of their revenue sources, and interest + cash advance + penalty adds up to well more than half. https://www.fool.com/the-ascent/research/credit-card-company-earnings/ https://www.fool.com/the-ascent/research/credit-card-company...

ravenstine 3y ago
This exactly. If you always pay down your credit card debt every billing period, you're considered a "deadbeat" because you're using the benefits of the credit card's payment processing but not paying in interest. The best customers of financial institutions aren't those whom are financially responsible or flush with cash, but those regularly incurring 14+% interest on every purchase and paying overdraft fees. For airlines in particular, the deals they allow through credit cards are more like loss leaders. They need to fill up seats because that's the nature of their business model. If you don't fill up enough seats to make up for the operating cost, the plane doesn't fly, and if the plane doesn't fly then that's one fewer route you'll have paying customers for. Airlines need to keep routes going, so they create incentives to keep people flying, which hopefully gets them into the habit of flying again even when they've used up all their rewards points.
- denimnerd42 3y ago
  not really. goldman sachs found out those customers cost them a lot of money with the apple card. the best customers are the wealthy who have $100k+ in their checking/savings accounts and million+ in their brokerage accounts and clear 10k+ monthly on their credit cards.
  - dmoy 3y ago
    That could well be (especially if you look at banks who don't offer competitive interest rates on cash). That said, Goldman Sachs is sort of infamously bad at consumer banking, so I'd take their words there with a grain of salt. They lose a lot of money on most of their consumer banking endeavors: they lose like a billion per year on Marcus, they're actively trying to drop the Apple credit card, etc. So at some level, of course GS is gonna say their best customers are the wealthy ones, because they largely haven't figured out how to make a decent business for anyone except the ultra wealthy.
  - TheCoelacanth 3y ago
    That's just GS overpaying in a business segment they don't have experience in. Companies that know how to run a credit card make a boatload off of high-spending users who pay off the full balance every month.
- patch_cable 3y ago
  > If you always pay down your credit card debt every billing period, you're considered a "deadbeat" because you're using the benefits of the credit card's payment processing but not paying in interest. So why do they keep offering me incentives to use their product? Is it the hope that one day, after 20 years, I'll finally overspend and they'll get to collect some interest from me?
  - bombcar 3y ago
    Because they collect their 3% or whatever, and even after giving you your "cut" for strongarming the merchant for them, they still get 1% or whatever it is. You've paid off every month on time for 20 years, and they get 1% of that. For basically running some servers and balancing payments. That's big money - debit cards do the same thing for what, 25 cents a payment? So once the credit card hits about $9 it's all gravy.
ipqk 3y ago
It's also a tax on the people that pay cash (assuming the store charges the same rate for cash or card).
smileysteve 3y ago
Insurers (and Robbers, Safe Companies, Employees graft, Banks) If you had as much cash in the till as required to do business in the 90s; or took checks; or had employees that had to do regular bank runs; to insure against the loss via employees, robbers, etc it would cost a significant amount of each transaction to insure that, especially the liabilities of it.

goosedragons 3y ago

Consumers, especially those paying in cash. Merchants jack prices up to account for credit card fees. The fees pay for things like cashback and flights. Typically CC companies don't allow for merchants to have discounts for stuff like paying in cash (although some businesses may anyways...) so customers paying in cash essentially pay extra.

eldaisfish 3y ago
If I pay cash and pay a price that rose because of credit card fees, how does that cash go back to the credit card companies? Wouldn’t it stay with the seller?
- pkulak 3y ago
  Money is fungible. Your physical dollar bill can be collected and deposited and make it possible for _another_ dollar to do something else.
- sdwr 3y ago
  If the credit card companies take a dollar from every transaction, then the store raises prices by 80 cents to keep margins the same (because some people pay by cash). Your 80 cents in cash goes to the store, and subsidizes 4 other customers purchases (who would otherwise be paying the full extra dollar). Note that this complaining over fees is a privileged position, we are trying to slash visas margin, but if it didn't exist we would be BEGGING someone to come and run it this smoothly.
  - dheera 3y ago
    > but if it didn't exist we would be BEGGING someone to come and run it this smoothly I disagree, if they didn't exist and the need existed it would be fairly easy to get a company going to facilitate payments. China for one has settled on mobile app payments via QR codes for almost everything these days, credit cards are almost nonexistent.
    - 3y ago

doctorpangloss 3y ago

> who's paying for the flights? It’s appealing to blame everyone but the consumer. You, the person wielding the credit card, are paying for the flight. You swipe your card, and when you paid money for something, seemingly, you also get a little bit of a flight with it. This is kind of like going to a restaurant and swiping your card and enjoying the ketchup. You paid for the ketchup. In few restaurants can you go and eat the ketchup without buying something else. But they still sold you the ketchup. Why does this have to be a big conspiracy? It is definitely interesting that it’s this or that merchant bank swipe fee airline spin around turnaround thing. On the other hand who cares. It is all obscuring the fact that you are buying the flights. If the flights didn’t exist, 3% merchant fees would still be atrocious! It doesn’t fucking matter to me if people spend money to buy flights, whether by buying them directly through airlines or via some brain dead savings scheme. You and I will never benefit from high swipe fees. You and I will never be billionaires. Absolutely nothing in the world would be lost or become less meaningful if CC providers charged less for swiping in the US, like they do in the rest of the world.

potamic 3y ago

Previous discussion, linking to a study on this https://news.ycombinator.com/item?id=34492502 https://news.ycombinator.com/item?id=34492502

traceroute66 3y ago

> opting for cashback For cashback it depends where you live. In the US, cashback will be likely be wholly or significantly funded by the Interchange Fee that the merchant receives. The Interchange Fee is the fee the card issuing bank "skims off the top" from the fee the merchant is charged for taking your card. In the US, interchange typically around the 2% mark. In the rest of the world its more like 0.2%, hence you can only really fund your loyalty programme out of interchange in the US. Other sources of revenue the card provider can use are any annual fees they charge the customer, any penalties they charge the customer, and of course interest fees charged to cardholders who do not pay off their balance. If your card company also runs a points scheme, then they can get extra revenue by selling points, either to you directly so you can "top-up" your balance, or in bulk to third-party companies who wish to offer points promotions. > Like, who's paying for the flights? Consumers, merchants, airlines, banks? If you are asking specifically about points-accrual card loyalty schemes where the cardholder accrues points which they can then use at a later date for flights, then that is all magical smoke and mirrors. It boils down to the careful stage management of our old friends supply and demand. Supply: The card issuer issues your points. This sits on their balance sheet as a liability (the points are assigned a dollar value). i.e. at this stage it costs them nothing in terms of hard-cash, just a small technical accounting reduction in profits When you "buy" your airline ticket on points, the liability crosses the balance sheet (the company raises an invoice to you which is paid with the points). Demand: This is where the other half of the magic happens. The company makes sure to limit the ability for you and everyone else to redeem points. You will have seen this if you have ever tried to book a flight based on 100% points, you'll find very limited availability. Of course you will have seen companies offer you to pay "part-cash/part-points", but if you look closely, the "exchange rate" on offer is generally very poor value for money.

bombcar 3y ago
Does this mean when I use a "rewards card" outside the US (that has no additional currency fiddling fee) that the bank is eating the 1.8% difference? Or do they get me on the currency exchange rate? I suspect I know the answer, even thought their rate is almost always the best available to me.

quinncom 3y ago

Here's a popular analysis from r/Churning exploring who pays for cc rewards. TL;DR: cash customers. https://old.reddit.com/r/churning/comments/5oucdq/the_economics_of_churning_who_pays_for_the_rewards/ https://old.reddit.com/r/churning/comments/5oucdq/the_econom...

missedthecue 3y ago

I used to think it was the consumer/cash buyer but it's pretty clear now that the merchants do not have the pricing power to pass these costs on. It's why they get upset and try to lower fees. It's why Costco stopped taking Amex. If they could simply pass it on they'd be indifferent. There are various studies online confirming this.

BobaFloutist 3y ago

Surely your purchasing data gets sold off, if nothing else?

rstuart4133 3y ago

I don't know what happens in the US, but in Australia we have credit card and debit cards. Credit Cards typically charge a 1%..2% fee, Debit Cards have a 0% fee. Both are issued by Visa or Mastercard. 0% is much closer to what is costs for a computer to record the transaction that 1%..2%. That's 1%..2% of a huge chunk of consumer expenditure for something that evidently costs close to nothing to run (going by the Debit Card fees). If you earn $100,000 a year, spend 1/2 of it using credit cards, then at 1% that's $500 a year. How much are you earning in rewards?

chiefalchemist 3y ago

Consumers pay. One way or another. Sooner or later. And upstream costs flow down hill to the consumer. As for cash v rewards, the best way I've seen it said is: Rewards don't earn interest. So in general - due to inflation - the longer they sit, the less they're worth. To your point, cash back gives you the opportunity to invest / earn interest.