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An interesting article, but it doesn't sufficiently emphasize the lede: When you use a reward card, the merchant is charged a higher fee than if you used a "n
by nkurz 3y ago
An interesting article, but it doesn't sufficiently emphasize the lede: When you use a reward card, the merchant is charged a higher fee than if you used a "normal" card. Simply by putting a different branding on the plastic you pay with, the credit card issuer gets more money from each transaction.
The article goes on to ask the question "Why isn’t every card a rewards card?", meaning why doesn't every card pay cash back, but I think the more interesting question is why every card isn't branded in a way that makes the issuer more money. Why do they bother to issue cards where they get paid less? Why not brand every card as a "Signature Preferred" and then pocket the money instead of giving it to the less discerning customers?
And the most interesting question only gets a handwave: "The basic intuition underlying rewards cards as a product is that highly desirable customers have options in how they spend their money." But how far does this go in explaining why merchants "choose" to participate in this program. The obvious answer would seem to be that they get no benefit from the system as it exists but have no real choice, but maybe there is a better answer?
I liked the topic, but wished the author could have given more insight on what's happening behind the scenes to produce the outcome we see.
- empath-nirvana 3y agoRewards cards should be illegal and basically are privately levied tax on the poor and a subsidy to the wealthy.
- op00to 3y agoReturning merchandise should be illegal and allowing returns is basically a privately levied tax on those who make good purchase decisions and a subsidy to the impulse buyer.
- smallmancontrov 3y ago> privately levied tax on the poor and a subsidy to the wealthy That's 2/3s of capitalism. Hold enough MA and V -- directly or through just having enough net worth in an index -- and you'll start to see this as a feature, not a bug.
- realwitt 3y agoWhat's MA and V? Moving Average and Volatility? (genuinely don't know and unsuccessfully tried to google it)
- frogstomp19 3y agoMasterCard and Visa's stock ticker symbols
- agloe_dreams 3y agoBoy are you going to be shocked when Walmart, target, Amazon brag about the X% income increase when that happens and while prices continue to rise. Zero, zero companies will discount the sales price when the rewards cards are gone. There is a strong argument that discontinuing rewards cards actually helps the extremely wealthy by taking from the middle class and giving it to the Uber rich shareholders and big business owners.
- addandsubtract 3y agoThere's another side to this. By giving out rewards, wealthy people are given more on top. Things they otherwise would've paid for are now free to them. Whereas someone without those benefits has to pay for those things out of their own pocket.
- deleted 3y ago[deleted]
- BenjiWiebe 3y agoI see this sentiment sometimes, but I disagree. I have excellent credit score and several good rewards cards, despite never spending more than $10k/yr through them. I'd say someone making $10k/yr is dirt poor and yet they too can have a good rewards card.
- ValentineC 3y ago> The article goes on to ask the question "Why isn’t every card a rewards card?", meaning why doesn't every card pay cash back, but I think the more interesting question is why every card isn't branded in a way that makes the issuer more money. Why do they bother to issue cards where they get paid less? Why not brand every card as a "Signature Preferred" and then pocket the money instead of giving it to the less discerning customers? I didn't see any other comments actually answer the question, so I'll try my hand at this. (Caveat: I've never worked in the finance industry professionally, but I consider myself one of the Redditors mentioned in the article.) From my layperson understanding, banks undertake not to issue more than a certain percentage of cards as "Signature Preferred" cards, and there is a minimum credit limit required to open such card accounts. The Chase Sapphire Reserve mentioned in the article is a Visa Infinite card, and Chase requires a $10,000 credit limit to open it. Chase doesn't give $10,000 credit limits to just about anyone, and considering how flexible the US is with identity and income requirements, Chase needs to be more stringent with their underwriting and verification processes to avoid issuing such cards to people who are more likely to default. From further research, it looks like the Visa Core Rules do offer guidelines [1], for anyone interested: The bank would incur additional costs to satisfy the requirements to issue higher tier cards. For Visa Infinite, banks are required to offer benefits like "Priority assistance and convenience", "Exclusive privileges and rewards", and "Safety and security", and in some countries, concierge services. Visa Signature cards must have 24/7 customer support. The PDF is a gold mine for anyone interested in learning more about the various tiers. [1] https://usa.visa.com/content/dam/VCOM/download/about-visa/visa-rules-public.pdf#page=257 https://usa.visa.com/content/dam/VCOM/download/about-visa/vi...
- paultopia 3y agoIt seems pretty clearly implied from his Starbucks example: these rates are negotiated (at least with big merchants). Presumably, for example, Starbucks is willing to pay higher interchange on the Chase sapphire series than on the Chase freedom series because they believe that the people carrying Chase sapphire cards spend more money. Starbucks would not be willing to pay that for less profitable customers.
- twoodfin 3y agoThe answer is that the system doesn’t work if a 3%-fee card isn’t held by a low-risk, high-spend rich person. Indeed if that weren’t the case, merchants would reject the tiered fee structure. (This is also the answer as to why in the absence of regulation, exchange fees aren’t higher than they already are.)
- ptero 3y agoSorry, can you explain why the high spend is important? What is the benefit of a low risk buyer having a single card vs three different cards? Low risk is clear -- the lower the risk the more money is left, after handling problems, for the rebates and profits.
- kasey_junk 3y agoInterchange. The fees go directly to the issuer not the network (which collects much smaller scheme fees). If you have 3 cards they’d almost certainly be for 3 different issuers so they’d split the interchange. Making you less valuable.
- robertlagrant 3y ago> for the rebates and profits And salaries and pensions, etc.
- twoodfin 3y agoIn this context, it’s important to the merchants: They want these customers, so they grit their teeth on the higher interchange fees demanded by the banks. If the banks started handing out these cards to everyone, the merchants would revolt.
- nordsieck 3y ago> the system doesn’t work if a 3%-fee card isn’t held by a low-risk, high-spend rich person There's many rewards cards that require an annual fee (which encourages a high spend to recoup the fee with rewards). But there are plenty of 1.5%-2% cards with no annual fee. You just need a good credit score.
- eklavya 3y agoIn India, merchants have a choice and they regularly charge more for using credit cards.
- jasode 3y ago>But how far does this go in explaining why merchants "choose" to participate in this program. The obvious answer would seem to be that they get no benefit from the system as it exists but have no real choice, Some merchants like Amazon, Target, Home Depot etc do want the ability to refuse the "rewards cards" with higher fees but can't because of the current contracts they have for credit-card acceptance. If a merchant signs a contract to accept VISA cards, they must accept all VISA cards and therefore can't selectively choose to reject some VISA cards because of higher swipe fees. https://thepointsguy.com/news/retailers-want-to-reject-rewards-cards/ https://thepointsguy.com/news/retailers-want-to-reject-rewar... https://www.google.com/search?q=merchants+want+to+refuse+rewards+cards https://www.google.com/search?q=merchants+want+to+refuse+rew...
- kasey_junk 3y agoLarge merchants also pay much less for interchange generally.
- bombcar 3y agoSmall merchants negotiate with Stripe for a flat fee to accept all cards. Big merchants negotiate with the networks and pay varying prices for varying rewards amounts (or however they get the deal structured).
- scarby2 3y agoInterestingly my flat fee with stripe is less than my reward rate on my credit card for some categories. It obviously is against the contract terms and probably considered fraud but I could theoretically make about 1.4-3 cents on the dollar (depending how you value points) by charging myself money.
- ska 3y agoThis comes up in the article.
- matthewdgreen 3y agoThe only thing I would add to your comment is that merchants aren’t the ones being forced to pay these stupid fees, it’s their customers (and primarily their poorer and often non-card using ones) who are being quite heavily taxed to fund a marketing scheme for rich customers. Most competitive businesses can’t afford to fund such an elaborate targeted marketing campaign directly out of their fees without some competitive pushback: hence the actual question you should ask is why the entire system exists, and the answer has to do with a pile of inefficiency and rent collection based on regulatory capture.
- owisd 3y agoDoesn’t seem like regulatory capture is the issue, if the market was totally free to new entrants and you brought in a low fee card with no rewards then it’s going to fail in an unregulated environment because merchants won’t go to the hassle of offering tiered pricing to low fee cards if they’re not already offering tiered prices for cash, so no-one’s going to give up their existing rewards to still have to pay the same prices. Deregulation just ends up stuck in a local minimum where everyone’s effectively paying for the highest fee cards that the merchant will accept.
- gosub100 3y agoWhile we're in this topic: why is unsecured credit card debt NOT tax deductible but secured debt like HELOC is? Fwiw I don't really care what the technical reason is, it's a rhetorical question to add to the ways the credit system holds back the poor.
- gruez 3y ago> While we're in this topic: why is unsecured credit card debt NOT tax deductible but secured debt like HELOC is? AFAIK it's a carve out specifically for houses. Car loan interest isn't deductible despite being "secured".
- judge2020 3y agoIt's a bargaining chip to get votes. If one party promises a larger tax saving on homes, then homeowners are more likely to vote for them.
- miroljub 3y agoIt's the legislation that disallows vendors to have different pricing based on the payment system that disaligns the incentives. If I have a card that gives back 2% to me, back causes 5% fees to the vendor, both of us would be better off if I used a card with 1% fee, and the vendor gives me 2% discount. Unfortunately, not allowed.
- kasey_junk 3y agoIt’s been mostly legal to charge credit card surcharge fees since 2013. https://www.lexology.com/library/detail.aspx?g=5c6e1264-42a8-4ab0-ba95-f44699f927fe https://www.lexology.com/library/detail.aspx?g=5c6e1264-42a8... The real reason that most merchants don’t charge surcharges is that they don’t want to lose the sale, calculating the actual interchange is wildly complex and in general they prefer cards to cash.
- pkaeding 3y agoThere are definitely a good number of small businesses around me (cafes, and similar places) that offer a cash discount. They don't have a sign offering it, but when I pull out cash, they revise the price down.
- bombcar 3y agoMore and more small places around here are explicitly offering the discount either with a “3% less if you pay cash” but more commonly now a “listed prices are cash or debit, credit pays more”. It’s a noticeable fee for them.
- Danjoe4 3y agoIt is against VISA ToS. Small businesses can risk it but large businesses would get sued and VISA would refuse to do business with them
- sgerenser 3y agoNope, not against VISA ToS. Post you're replying to indicates it's no longer "illegal" but it was never actually illegal to charge a surcharge, it was just disallowed by ToS. This is no longer the case as of 2013 and retailers are now free to charge a surcharge if they so choose.
- anovikov 3y agoSimply because these customers are likely to buy more and at premium prices and not be a pain in terms of refunds etc. They are willing to pay more in commission knowing they are dealing with richer people.
- abalone 3y ago> But how far does this go in explaining why merchants "choose" to participate in this program. The obvious answer would seem to be that they get no benefit from the system as it exists but have no real choice, but maybe there is a better answer? The simple reason why issuers don’t make every card a signature rewards card is that merchants would revolt. The interchange fee schedule[1] is fascinating. Dozens of categories of merchants with different rates. There is no technical reason for this. Fraud costs are borne by merchants and to some extent processors, but not the issuer banks that receive the interchange fee. The fee schedule reflects a kind of battle for customers. It’s worth repeating that most of interchange for these higher end cards is passed back to the customer in the form of rewards. Essentially, merchants are willing to pay higher fees to support the cards that higher spending customers prefer. But there is a limit. We can observe that not all merchants accept AmEx, which has some of the highest interchange rates. If every visa/MC card were a signature card, more merchants would push back. [1] https://usa.visa.com/content/dam/VCOM/download/merchants/visa-usa-interchange-reimbursement-fees.pdf https://usa.visa.com/content/dam/VCOM/download/merchants/vis...
- hot_gril 3y agoMaybe it's not just that the merchants prefer high-spending customers, but that they're ok paying a little more for customers who have a lower chance of fraud, since they've passed through whatever hoops to have those special credit cards.
- sofixa 3y ago> There is no technical reason for this Point in case, there's an interchange fee cap of 0.3% for credit and 0.2% for debit cards in the EU. And there are entire countries moving to cashless, so obviously everyone is happy with it.
- ponector 3y agoAs the result, most of the reward programs in EU are meaningless: too much friction with almost zero benefits. Credit card in EU is only for rental cars.
- 3y ago
- dwighttk 3y agoCredit card processors actually provide a service for both their cardholders and the people who accept their cards… Yes there is the downside for businesses when the processors reverse charges but if this was big enough of a downside then people would stop accepting the card. Yes sometimes people get their number stolen and are out the money for a while during an investigation, but again if this downside were big enough people wouldn’t use that card anymore. Yes there are new types of fraud enabled by the technology. The big benefit is you don’t have to have liquid cash sitting around where people can grab it and disappear. Some merchants don’t accept some cards… they’ve decided that the cost outweighs the benefit. My grocery store fought against accepting Apple Pay and they do now. Walmart doesn’t.
- thfuran 3y ago>Yes sometimes people get their number stolen and are out the money for a while during an investigation One of the main benefits of credit cards over most other forms of payment is that that isn't the case. A fraudulent transaction on a credit card ties up some of your credit limit during resolution. A fraudulent debit card transaction or personal check takes money out of your account. Of course, if you wait long enough, you may have already paid the bill containing the credit card transaction and then you're in the same boat.
- insane_dreamer 3y agoSome merchants reject cards with higher fees; i.e., Amex is not accepted at some merchants with lower margins (i.e., grocery stores). It would be impractical for merchants to accept some branded cards and not others. Imagine "we accept "Chase Premium One" card, but not "Chase American Airlines" card." Very confusing for consumers. If it's a whole category, like Amex, it's easier to refuse it (besides, low income consumers are unlikely to have an Amex card).
- op00to 3y agoI’ve never seen an Amex declined at a grocery store.
- flextheruler 3y agoCostco
- op00to 3y agomembership warehouse store, not grocery store.
- kindawinda 3y agoWow you thought of something the author didnt cover and think the whole article should be about your post.
- supertrope 3y agoCitibank reissued my credit card well before the expiration date to upgrade it to a "World Elite Mastercard" with attendant higher interchange.
- gumby 3y agoThe merchant doesn't generally have much choice. I have some friends who ran a restaurant, and they stopped accepting Amex because the fee was too high. They sold the restaurant to an employee and he immediately started accepting Amex again. Too many high spending clients use it and he didn't want to miss out. Also, even though Costco only accepts a single brand of card (used to be Amex, now Visa), despite their size and market power they accept any Visa card a customer presents.
- deleted 3y ago[deleted]
- ugh123 3y ago> you use a reward card, the merchant is charged a higher fee than if you used a "normal" card That seems absolutely ridiculous. The FTC doesn't think this is a problem?
- deleted 3y ago[deleted]
- ccorcos 3y agoThe Acquired podcast episode about Visa explains this. The high fee for rewards cards can be justified to merchants because those are their best customers, i.e. rich people, people to travel a lot, etc. It’s actually kind of messed up because rich people are getting a larger discount on goods than poor people who can’t get a rewards card.
- anonu 3y agoLess money on interchange may mean more money on interest charges on balances