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The Acquired podcast did an episode on the history of Visa that covers a lot of how the credit card industry works. As another commenter noted, this article do

The Acquired podcast did an episode on the history of Visa that covers a lot of how the credit card industry works. As another commenter noted, this article doesn’t pull out clearly how this whole credit card reward scheme actually works. The Acquired episode does, by the end. It works like this: the ‘luxury’ credit card providers, partnering with Visa, take money away from merchants in order to extract profit for themselves while keeping the credit card consumers happy. The merchants are pissed about this, and regularly make lawsuits to regulate interchange. The money extracted by the credit card companies and Visa causes merchants to raise prices for everyone regardless of whether they have a rewards card or use a credit card at all. This creates in effect a massive money transfer from the poor, who do not use rewards cards, to the rich consumers who do. The Acquired podcast provides specific numbers on just how much worse off poor consumers are given this system, and how much the richest consumers benefit. I come from Australia where interchange fee regulation tamps down on the kind of credit card mania and fetishism seen in the USA.

kjkjadksj 3y ago
Some businesses do give you the money back though vs raising prices. Gas stations usually have a cheaper price for cash. Same with some restaurants.
humansareok1 3y ago
Theres a net gain between credit card rewards and higher prices for reward card users?
- Retric 3y ago
  Yes because they are required to charge non reward customers the same amount and competitive markets forced prices down. Suppose the reward is 2% so someone is paying 98% of the listed price. Now if everyone was a rewards customer the price just moves to 102.04$ from 100$, in effect nothing changes. However not everyone uses a rewards card, and the prices stay the same. Net result with an even split would be that 98% discount applies to 101$ and Bob an unrelated customer is stuck paying the extra 1% to give the reward customer their 1% savings. However, it’s not split 50/50 so rewards cards sometimes have more victims funding their rewards and other times few victims and it’s effectively just a marketing gimmick.
  - scarface_74 3y ago
    It’s much more nuanced than that. True a 2% cash back card costs the company 2%. But a 4% card that gives you credit card points doesn’t cost the card issuer 4%. If you transfer 4 Amex points for 4 Delta Skymiles. Amex isn’t paying Delta 1 cents per Skymile. On the other hand, you can then replace a $1 you would spend on Delta with 0.86 Skymiles (ie 1 Skymile is worth 1.4 cents). It’s also not costing Delta 1.4 cents to fly you. If you use your credit card points to buy on a credit card run travel portal, the credit card company is getting a kickback from airlines and hotels. It’s turtles all of the way down.
    - Retric 3y ago
      > a 4% card that gives you credit card points… Sure, plenty of cars just lie about how valuable the rewards are. That’s a completely different game.
      - scarface_74 3y ago
        I’m not saying it’s a lie. 4 Amex Membership Rewards points are worth around 6% if I transfer them to Delta instead of spending cash on the same ticket. If I transfer those same points to Flying Blue/KLM (a Netherlands airline), since they are a partner with Delta, I can buy a domestic round trip flight in the US on Delta through them where the cash price to fly into my parents small regional airport is $508. The price in points is 17K. That makes those same 4 points worth 12% back per dollar. This isn’t about “only the rich get value”. It’s about the well informed. 4 points per dollar is what you get back on the Amex Gold for groceries. You could never buy points as cheaply as Amex. For all intents and purposes, credit card users are collectively buying miles in bulk
        Retric 3y ago
        > This isn’t about “only the rich get value”. It’s about the well informed. It’s about people who can pay off the card every month not the rich. These cars charge high interest rates which can very quickly offset any benefit unless you have the resources to never use them as debt. Ie the capacity to have a ~months worth of spending in unused credit. > You could never buy points as cheaply as Amex. For all intents and purposes, credit card users are collectively buying miles in bulk. Many customers get discounts on ticket prices that don’t apply when using air miles. It’s another form of price discrimination designed to maximize profits not specifically a discount for bulk purchase. “Awards are subject to capacity controls. Awards may require higher prices depending on routing rules and restrictions. Exceptions to these rules may require additional mileage or taxes and fees. Travel to all destinations within region may not be available at lowest price. … Award seats may be limited and not available on all Delta Connection flights.” etc https://www.delta.com/us/en/skymiles/how-to-use-miles/travel-with-miles#:~:text=And%20there%20are%20no%20blackout%20dates%20on%20any%20Delta%20Air%20Lines%20flight.&text=GET%20THE%20MOST%20OUT%20OF,partners%20(excluding%20Basic%20Economy%20fares) https://www.delta.com/us/en/skymiles/how-to-use-miles/travel...
lotsofpulp 3y ago
> The money extracted by the credit card companies and Visa causes merchants to raise prices for everyone regardless of whether they have a rewards card or use a credit card at all. There has been nothing stopping US merchants from offering cash and/or debit card payers a discount since Oct 2011. https://www.ftc.gov/business-guidance/resources/new-rules-electronic-payments-lower-costs-retailers https://www.ftc.gov/business-guidance/resources/new-rules-el... Most merchants are betting that people paying with credit cards are willing to buy sufficiently more or buy at sufficiently higher prices such that credit card transaction costs are more than offset. That is the only reason why a cash/debit card discount would not be advertised. Edit to respond to below: I don’t buy that. Merchants of all types already engage in myriad types of discounts and promotions to price discriminate customers all the time. A simple sign saying “x% discount for paying cash/debit” is of negligible complexity.
- stuart73547373 3y ago
  yes there is. that's an enormous added pricing and communication complexity for businesses. which we know has a high cost because of all the businesses who have decided it would be higher than just stomaching the credit card fees.
  - massysett 3y ago
    Would a 1 percent cash or debit discount be an enormous burden? Some merchants already programmed their terminals to prod debit customers into entering their PIN rather than charging it as credit, so would offering a discount really be that much harder?
    - ghaff 3y ago
      One answer is: It's just annoying. I normally use a credit card. Yes, I can use my debit card and enter a PIN. If it's a discount specifically for cash, I may not have any on me and don't want the change anyway. In any case, it's adding mental overhead to just paying. (It's usually more like 3% delta which I almost get in cashback anyway but still annoying.)
stvltvs 3y ago
Here's the Acquired episode mentioned. https://www.acquired.fm/episodes/visa https://www.acquired.fm/episodes/visa
dheera 3y ago
Rewards is only part of it. There's also everything required for the credit card company to operate, down to building leases, datacenters, hardware, employee pay. All of that is vastly funded by late payment fees and interest, which are almost exclusively funded by the poor. At one time I wanted to start an "ice bucket challenge" to start a snowball of rich people donating 100% of their credit card rewards to the poor in some capacity. I'd happily join if I could get the snowball going, but unfortunately, if the snowball doesn't happen with a bunch of multi-millionaires I'll just end up indirectly giving my money (not poor, not rich) to the actually rich and I don't want that either.
- lupire 3y ago
  Merchants pay 3%. Cardholders borrow from banks, not card payment networks. Rich people can donate to poor people regardless of the credit card situation.
  - dheera 3y ago
    The cost of running the credit card company plus rewards is a lot more than that 3%. Money is fungible. So your rewards comes 85% from interest payments in the case of Capital One or 71% in the case of Chase. https://www.valuepenguin.com/how-do-credit-card-companies-make-money https://www.valuepenguin.com/how-do-credit-card-companies-ma... > Rich people can donate to poor people regardless of the credit card situation. While this is true my idea was more of a wide scale protest or behavioral art to make people aware of how bad the credit card system is for the poor. I know it isn't going to solve poverty but it might raise awareness about something not everyone knows about.
duxup 3y ago
>This creates in effect a massive money transfer from the poor I'm always a little confused on exactly HOW this plays out. I could see someone with terrible credit being denied, but most cash back cards I use are hardly gated / limited to "rich folks only". I feel like the reasons / the way it plays out are more complex than the results. And really if someone is poor, struggling to pay their card, that's a larger issue than the type of card they use. I'm just not sure reward cards = "This creates in effect a massive money transfer from the poor" as simply as stated.
- whoisburbansky 3y ago
  It plays out this way because anything anyone buys with a credit card, reward card or not, ends up costing 2-3% more than it would otherwise have, because of interchange fees. If you have a rewards card, the CC issuer turns around and gives you, say, half of that back (1% cashback on everything) and keeps the rest. It's kind of like a tax break that you only qualify for if your credit score is above a certain threshold, but you have to pay into regardless of income/credit score.
  - woobar 3y ago
    > ends up costing 2-3% more than it would otherwise This is a very simplified view. Cash handling is not free. Fraud levels with cash are different. Overall attractiveness of a small but cash-only business is different.
    - TheDong 3y ago
      The alternative to credit cards that charge 2-3% fees shouldn't be cash, but rather debit cards with close to zero fees. Cash handling isn't free, but a digital transfer that doesn't have rewards is obviously cheaper than a credit card.
      - chii 3y ago
        if the credit card merchant was able to extract 2-3% for using their network, what makes you think that a free debit card with low/zero cost wouldn't also be owned by the same credit card merchants and force the same fees to maintain their monopoly?
morpheuskafka 3y ago
That's a one sided view of it. Credit cards increase customer spending behavior which benefits merchants. For low end customers, the appeal is access to credit, either long-term or just in between paychecks. For high end customers, the appeal is the rewards and perks they get, and the convenience and safety of payments. This is why you are most likely to see credit card surcharges for tax payments, court costs, and other non-discretionary charges. Anything that either is optional to pay, or isn't but they really want you to pay now (ex. a debt collector) has every incentive to subsidize the card acceptance fee as it will increase their sales.
- lostlogin 3y ago
  > This is why you are most likely to see credit card surcharges for tax payments, court costs, and other non-discretionary charges. This will vary depending on where you are. Most retailers here in New Zealand pass the fee on to customers. Even paywave gets the percentage fee.
- Spivak 3y ago
  The other side is also that this is great for card users because we're the price sensitive side of the transaction. I feel like this dynamic is rarely talked about when it comes to two sided transactions. Businesses can't "just pass it to the consumer" is a lot of cases and just have to eat it because businesses don't have that kind of pricing power. This is how Doordash works on the restaurant side, they can't charge you the customer 20-30% of gross on orders, everyone would stop ordering. So mostly they just have to eat it or lose those sales. Some places choose to lose, some choose to raise prices on DD if they can but mostly they eat it.
- ghaff 3y ago
  I think the other thing that happens is that governments outsource electronic payment collection to a third party which imposes a surcharge for its collection and remits the full nominal amount to the government. Which can lead to seemingly ludicrous results somethings. I paid a "convenience" fee for parking the other night because presumably collecting a bunch of quarters from a meter was cheaper for the municipality than getting a bit less money transferred from the parking app people?
adrr 3y ago
I see interchange is capped at 0.20%. How do credit card companies not lose money by giving a 60 day interest free loan to customers? That is what interchange fee covers. BNPL providers charge 4% for 90 days interest free loans to the merchant.
- milesskorpen 3y ago
  Interchange is not capped at 0.2%
  - Too 3y ago
    For consumer cards in EU it is. 0.2% for debit, 0.3% for credit.
    - milesskorpen 3y ago
      Sure, but this article as about the US
- supertrope 3y ago
  In jurisdictions that cap interchange banks cut the fat. No rewards programs, and ending perks like price protection and extended warranties. On the revenue side they are more likely to charge an annual fee. Some customers carry balances at 29.99%.
thaumasiotes 3y ago
> The money extracted by the credit card companies and Visa causes merchants to raise prices for everyone regardless of whether they have a rewards card or use a credit card at all. This creates in effect a massive money transfer from the poor, who do not use rewards cards, to the rich consumers who do. Not quite. Credit card companies obligate merchants to charge the same prices regardless of whether you pay with a card, but merchants frequently don't honor that obligation. And there are also merchants who only take cash. The poorest customers are likely to patronize these merchants. They're also likely to be given discounts that aren't card-related; the whole idea of price discrimination is that, because impoverished customers have low willingness to pay, you charge them less. In a voluntary system, money transfers are always going to end up being much smaller than they looked like they would be when you thought about their effects, because people adjust their behavior to avoid them.
- deleted 3y ago
  [deleted]
- sunshowers 3y ago
  > Credit card companies obligate merchants to charge the same prices regardless of whether you pay with a card No longer true in most of the US, actually. https://www.lawpay.com/about/blog/credit-card-surcharge-rules/ https://www.lawpay.com/about/blog/credit-card-surcharge-rule...
jollyllama 3y ago
It creates a massive money transfer from small businesses to credit card companies, transfer partners, and wealthy consumers.
- skrbjc 3y ago
  Seems to make sense to transfer money from one group to another for a service that one group uses and the other provides.
vishnugupta 3y ago
To add to your point; there's an IMF paper[1] backing this claim of "massive money transfer from the poor...to the rich". I'm quoting the summary below "We study credit card rewards as an ideal laboratory to quantify redistribution between consumers in retail financial markets. Comparing cards with and without rewards, we find that, regardless of income, sophisticated individuals profit from reward credit cards at the expense of naive consumers. To probe the underlying mechanisms, we exploit bank-initiated account limit increases at the card level and show that reward cards induce more spending, leaving naive consumers with higher unpaid balances. Naive consumers also follow a sub-optimal balance-matching heuristic when repaying their credit cards, incurring higher costs. Banks incentivize the use of reward cards by offering lower interest rates than on comparable cards without rewards. We estimate an aggregate annual redistribution of $15 billion from less to more educated, poorer to richer, and high to low minority areas, widening existing disparities." [1] https://www.imf.org/en/Publications/WP/Issues/2023/03/10/Who-Pays-for-Your-Rewards-Redistribution-of-the-Credit-Card-Market-530801 https://www.imf.org/en/Publications/WP/Issues/2023/03/10/Who...
- vineyardmike 3y ago
  Technically this paper doesn’t say “poor to rich” it says “subprime borrowers to super-prime borrowers”. Income-to-FICO score is only moderately correlated. Well, it says rich to poor in the abstract and conclusions, but not the actual writing. The paper says high-income borrowers who run balances “lose” the most in this transfer - because they spend more in absolute terms, and banks are better able to capture that through balance increase. To quote: “our findings are inconsistent with the reverse Robinhood hypothesis”.
- cbdumas 3y ago
  I don't read that paper as backing that claim. At best the paper finds that the mechanism is more complicated than "money transfer from the poor... to the rich". To quote the conclusion directly: "Notably, our results are not driven by income, as they hold within the sub-samples of low-, middle- and high-income individuals. In particular, high-FICO high-income consumers benefit the most from reward credit cards, but they do so at the expense of low-FICO high-income consumers. While credit card rewards are often framed as a “reverse Robin Hood” mechanism in which the poor subsidize the rich, our results show that this explanation is at best incomplete."
psadri 3y ago
This is an interesting flywheel. Once I realized that by not using a CC I was subsidizing everyone else, I decided to opt into using a high reward credit card myself.
- supertrope 3y ago
  There are Prisoner's Dilemmas everywhere. Many jobs require a college degree as a blunt filter for employee quality. Now that more and more people have that so it's been devalued. You now need specific majors or to come out of an elite college to get the same advantage that used to be conferred by being a college grad. Colleges talk about affordability but many colleges spend big on recruiting star professors and new facilities to compete in the rankings and alumni donations arms race. Car traffic makes not driving dangerous so people are incentivize to drive. SUVs make driving a sedan more dangerous during crashes so people choose to buy bigger cars. Marketers race to the bottom on ever more annoying, numerous, and louder ads. People block or mentally tune out ads which feeds back into advertisers pushing the envelope to get noticed. If ransomware victims did not pay it would become unprofitable. But each business is rightfully concerned about mitigating its immediate business interruption.
  - psadri 3y ago
    Related - home loans to make buying homes accessible → higher home prices → now everyone has to get a loan. Same with college loans.
    - supertrope 3y ago
      Yes. Credit is inflationary.
alberth 3y ago
> The money extracted by the credit card companies and Visa causes merchants to raise prices for everyone regardless of whether they have a rewards card or use a credit card at all. Case studies indicate otherwise. Dodd-Frank Act postulated what you stated, that higher fees result in higher prices for consumers ... and if you lowered the fees for the merchants, merchants would lower their prices (to pass along that savings back to the consumers). But studies have shown otherwise, and merchants did not lower fees. https://www.cutimes.com/2015/09/03/durbin-failing-to-lower-merchant-costs-study/?slreturn=20240404125742 https://www.cutimes.com/2015/09/03/durbin-failing-to-lower-m...
- Devorlon 3y ago
  > Two thirds of the merchants surveyed reported no change or didn't know the change in their debit costs post-regulation. One fourth actually reported an increase in debit costs
- abalone 3y ago
  Also true for Australia! When they regulated interchange, merchants did not pass the savings on to consumers.[1] [1] https://laweconcenter.org/resources/the-effects-of-price-controls-on-payment-card-interchange-fees-a-review-and-update/ https://laweconcenter.org/resources/the-effects-of-price-con...
  - eltondegeneres 3y ago
    That think tank is funded[1] by the anti-regulation Charles Koch Institute and the article should be read with that in mind. [1]: https://www.influencewatch.org/non-profit/international-policy-network-international-center-for-law-economics/ https://www.influencewatch.org/non-profit/international-poli...
    - scarface_74 3y ago
      That may be true. But do you in your heart of hearts think that companies are going to pass those savings on to consumers?
esaym 3y ago
https://www.youtube.com/watch?v=akO8qAx4xjY https://www.youtube.com/watch?v=akO8qAx4xjY

kjkjadksj 3y ago

Some businesses do give you the money back though vs raising prices. Gas stations usually have a cheaper price for cash. Same with some restaurants.

humansareok1 3y ago

Theres a net gain between credit card rewards and higher prices for reward card users?

Retric 3y ago
Yes because they are required to charge non reward customers the same amount and competitive markets forced prices down. Suppose the reward is 2% so someone is paying 98% of the listed price. Now if everyone was a rewards customer the price just moves to 102.04$ from 100$, in effect nothing changes. However not everyone uses a rewards card, and the prices stay the same. Net result with an even split would be that 98% discount applies to 101$ and Bob an unrelated customer is stuck paying the extra 1% to give the reward customer their 1% savings. However, it’s not split 50/50 so rewards cards sometimes have more victims funding their rewards and other times few victims and it’s effectively just a marketing gimmick.
- scarface_74 3y ago
  It’s much more nuanced than that. True a 2% cash back card costs the company 2%. But a 4% card that gives you credit card points doesn’t cost the card issuer 4%. If you transfer 4 Amex points for 4 Delta Skymiles. Amex isn’t paying Delta 1 cents per Skymile. On the other hand, you can then replace a $1 you would spend on Delta with 0.86 Skymiles (ie 1 Skymile is worth 1.4 cents). It’s also not costing Delta 1.4 cents to fly you. If you use your credit card points to buy on a credit card run travel portal, the credit card company is getting a kickback from airlines and hotels. It’s turtles all of the way down.
  - Retric 3y ago
    > a 4% card that gives you credit card points… Sure, plenty of cars just lie about how valuable the rewards are. That’s a completely different game.
    - scarface_74 3y ago
      I’m not saying it’s a lie. 4 Amex Membership Rewards points are worth around 6% if I transfer them to Delta instead of spending cash on the same ticket. If I transfer those same points to Flying Blue/KLM (a Netherlands airline), since they are a partner with Delta, I can buy a domestic round trip flight in the US on Delta through them where the cash price to fly into my parents small regional airport is $508. The price in points is 17K. That makes those same 4 points worth 12% back per dollar. This isn’t about “only the rich get value”. It’s about the well informed. 4 points per dollar is what you get back on the Amex Gold for groceries. You could never buy points as cheaply as Amex. For all intents and purposes, credit card users are collectively buying miles in bulk
      - Retric 3y ago
        > This isn’t about “only the rich get value”. It’s about the well informed. It’s about people who can pay off the card every month not the rich. These cars charge high interest rates which can very quickly offset any benefit unless you have the resources to never use them as debt. Ie the capacity to have a ~months worth of spending in unused credit. > You could never buy points as cheaply as Amex. For all intents and purposes, credit card users are collectively buying miles in bulk. Many customers get discounts on ticket prices that don’t apply when using air miles. It’s another form of price discrimination designed to maximize profits not specifically a discount for bulk purchase. “Awards are subject to capacity controls. Awards may require higher prices depending on routing rules and restrictions. Exceptions to these rules may require additional mileage or taxes and fees. Travel to all destinations within region may not be available at lowest price. … Award seats may be limited and not available on all Delta Connection flights.” etc https://www.delta.com/us/en/skymiles/how-to-use-miles/travel-with-miles#:~:text=And%20there%20are%20no%20blackout%20dates%20on%20any%20Delta%20Air%20Lines%20flight.&text=GET%20THE%20MOST%20OUT%20OF,partners%20(excluding%20Basic%20Economy%20fares) https://www.delta.com/us/en/skymiles/how-to-use-miles/travel...

lotsofpulp 3y ago

> The money extracted by the credit card companies and Visa causes merchants to raise prices for everyone regardless of whether they have a rewards card or use a credit card at all. There has been nothing stopping US merchants from offering cash and/or debit card payers a discount since Oct 2011. https://www.ftc.gov/business-guidance/resources/new-rules-electronic-payments-lower-costs-retailers https://www.ftc.gov/business-guidance/resources/new-rules-el... Most merchants are betting that people paying with credit cards are willing to buy sufficiently more or buy at sufficiently higher prices such that credit card transaction costs are more than offset. That is the only reason why a cash/debit card discount would not be advertised. Edit to respond to below: I don’t buy that. Merchants of all types already engage in myriad types of discounts and promotions to price discriminate customers all the time. A simple sign saying “x% discount for paying cash/debit” is of negligible complexity.

stuart73547373 3y ago
yes there is. that's an enormous added pricing and communication complexity for businesses. which we know has a high cost because of all the businesses who have decided it would be higher than just stomaching the credit card fees.
- massysett 3y ago
  Would a 1 percent cash or debit discount be an enormous burden? Some merchants already programmed their terminals to prod debit customers into entering their PIN rather than charging it as credit, so would offering a discount really be that much harder?
  - ghaff 3y ago
    One answer is: It's just annoying. I normally use a credit card. Yes, I can use my debit card and enter a PIN. If it's a discount specifically for cash, I may not have any on me and don't want the change anyway. In any case, it's adding mental overhead to just paying. (It's usually more like 3% delta which I almost get in cashback anyway but still annoying.)

stvltvs 3y ago

Here's the Acquired episode mentioned. https://www.acquired.fm/episodes/visa https://www.acquired.fm/episodes/visa

dheera 3y ago

Rewards is only part of it. There's also everything required for the credit card company to operate, down to building leases, datacenters, hardware, employee pay. All of that is vastly funded by late payment fees and interest, which are almost exclusively funded by the poor. At one time I wanted to start an "ice bucket challenge" to start a snowball of rich people donating 100% of their credit card rewards to the poor in some capacity. I'd happily join if I could get the snowball going, but unfortunately, if the snowball doesn't happen with a bunch of multi-millionaires I'll just end up indirectly giving my money (not poor, not rich) to the actually rich and I don't want that either.

lupire 3y ago
Merchants pay 3%. Cardholders borrow from banks, not card payment networks. Rich people can donate to poor people regardless of the credit card situation.
- dheera 3y ago
  The cost of running the credit card company plus rewards is a lot more than that 3%. Money is fungible. So your rewards comes 85% from interest payments in the case of Capital One or 71% in the case of Chase. https://www.valuepenguin.com/how-do-credit-card-companies-make-money https://www.valuepenguin.com/how-do-credit-card-companies-ma... > Rich people can donate to poor people regardless of the credit card situation. While this is true my idea was more of a wide scale protest or behavioral art to make people aware of how bad the credit card system is for the poor. I know it isn't going to solve poverty but it might raise awareness about something not everyone knows about.

duxup 3y ago

>This creates in effect a massive money transfer from the poor I'm always a little confused on exactly HOW this plays out. I could see someone with terrible credit being denied, but most cash back cards I use are hardly gated / limited to "rich folks only". I feel like the reasons / the way it plays out are more complex than the results. And really if someone is poor, struggling to pay their card, that's a larger issue than the type of card they use. I'm just not sure reward cards = "This creates in effect a massive money transfer from the poor" as simply as stated.

whoisburbansky 3y ago
It plays out this way because anything anyone buys with a credit card, reward card or not, ends up costing 2-3% more than it would otherwise have, because of interchange fees. If you have a rewards card, the CC issuer turns around and gives you, say, half of that back (1% cashback on everything) and keeps the rest. It's kind of like a tax break that you only qualify for if your credit score is above a certain threshold, but you have to pay into regardless of income/credit score.
- woobar 3y ago
  > ends up costing 2-3% more than it would otherwise This is a very simplified view. Cash handling is not free. Fraud levels with cash are different. Overall attractiveness of a small but cash-only business is different.
  - TheDong 3y ago
    The alternative to credit cards that charge 2-3% fees shouldn't be cash, but rather debit cards with close to zero fees. Cash handling isn't free, but a digital transfer that doesn't have rewards is obviously cheaper than a credit card.
    - chii 3y ago
      if the credit card merchant was able to extract 2-3% for using their network, what makes you think that a free debit card with low/zero cost wouldn't also be owned by the same credit card merchants and force the same fees to maintain their monopoly?

morpheuskafka 3y ago

That's a one sided view of it. Credit cards increase customer spending behavior which benefits merchants. For low end customers, the appeal is access to credit, either long-term or just in between paychecks. For high end customers, the appeal is the rewards and perks they get, and the convenience and safety of payments. This is why you are most likely to see credit card surcharges for tax payments, court costs, and other non-discretionary charges. Anything that either is optional to pay, or isn't but they really want you to pay now (ex. a debt collector) has every incentive to subsidize the card acceptance fee as it will increase their sales.

lostlogin 3y ago
> This is why you are most likely to see credit card surcharges for tax payments, court costs, and other non-discretionary charges. This will vary depending on where you are. Most retailers here in New Zealand pass the fee on to customers. Even paywave gets the percentage fee.
Spivak 3y ago
The other side is also that this is great for card users because we're the price sensitive side of the transaction. I feel like this dynamic is rarely talked about when it comes to two sided transactions. Businesses can't "just pass it to the consumer" is a lot of cases and just have to eat it because businesses don't have that kind of pricing power. This is how Doordash works on the restaurant side, they can't charge you the customer 20-30% of gross on orders, everyone would stop ordering. So mostly they just have to eat it or lose those sales. Some places choose to lose, some choose to raise prices on DD if they can but mostly they eat it.
ghaff 3y ago
I think the other thing that happens is that governments outsource electronic payment collection to a third party which imposes a surcharge for its collection and remits the full nominal amount to the government. Which can lead to seemingly ludicrous results somethings. I paid a "convenience" fee for parking the other night because presumably collecting a bunch of quarters from a meter was cheaper for the municipality than getting a bit less money transferred from the parking app people?

adrr 3y ago

I see interchange is capped at 0.20%. How do credit card companies not lose money by giving a 60 day interest free loan to customers? That is what interchange fee covers. BNPL providers charge 4% for 90 days interest free loans to the merchant.

milesskorpen 3y ago
Interchange is not capped at 0.2%
- Too 3y ago
  For consumer cards in EU it is. 0.2% for debit, 0.3% for credit.
  - milesskorpen 3y ago
    Sure, but this article as about the US
supertrope 3y ago
In jurisdictions that cap interchange banks cut the fat. No rewards programs, and ending perks like price protection and extended warranties. On the revenue side they are more likely to charge an annual fee. Some customers carry balances at 29.99%.

thaumasiotes 3y ago

> The money extracted by the credit card companies and Visa causes merchants to raise prices for everyone regardless of whether they have a rewards card or use a credit card at all. This creates in effect a massive money transfer from the poor, who do not use rewards cards, to the rich consumers who do. Not quite. Credit card companies obligate merchants to charge the same prices regardless of whether you pay with a card, but merchants frequently don't honor that obligation. And there are also merchants who only take cash. The poorest customers are likely to patronize these merchants. They're also likely to be given discounts that aren't card-related; the whole idea of price discrimination is that, because impoverished customers have low willingness to pay, you charge them less. In a voluntary system, money transfers are always going to end up being much smaller than they looked like they would be when you thought about their effects, because people adjust their behavior to avoid them.

deleted 3y ago
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sunshowers 3y ago
> Credit card companies obligate merchants to charge the same prices regardless of whether you pay with a card No longer true in most of the US, actually. https://www.lawpay.com/about/blog/credit-card-surcharge-rules/ https://www.lawpay.com/about/blog/credit-card-surcharge-rule...

jollyllama 3y ago

It creates a massive money transfer from small businesses to credit card companies, transfer partners, and wealthy consumers.

skrbjc 3y ago
Seems to make sense to transfer money from one group to another for a service that one group uses and the other provides.

vishnugupta 3y ago

To add to your point; there's an IMF paper[1] backing this claim of "massive money transfer from the poor...to the rich". I'm quoting the summary below "We study credit card rewards as an ideal laboratory to quantify redistribution between consumers in retail financial markets. Comparing cards with and without rewards, we find that, regardless of income, sophisticated individuals profit from reward credit cards at the expense of naive consumers. To probe the underlying mechanisms, we exploit bank-initiated account limit increases at the card level and show that reward cards induce more spending, leaving naive consumers with higher unpaid balances. Naive consumers also follow a sub-optimal balance-matching heuristic when repaying their credit cards, incurring higher costs. Banks incentivize the use of reward cards by offering lower interest rates than on comparable cards without rewards. We estimate an aggregate annual redistribution of $15 billion from less to more educated, poorer to richer, and high to low minority areas, widening existing disparities." [1] https://www.imf.org/en/Publications/WP/Issues/2023/03/10/Who-Pays-for-Your-Rewards-Redistribution-of-the-Credit-Card-Market-530801 https://www.imf.org/en/Publications/WP/Issues/2023/03/10/Who...

vineyardmike 3y ago
Technically this paper doesn’t say “poor to rich” it says “subprime borrowers to super-prime borrowers”. Income-to-FICO score is only moderately correlated. Well, it says rich to poor in the abstract and conclusions, but not the actual writing. The paper says high-income borrowers who run balances “lose” the most in this transfer - because they spend more in absolute terms, and banks are better able to capture that through balance increase. To quote: “our findings are inconsistent with the reverse Robinhood hypothesis”.
cbdumas 3y ago
I don't read that paper as backing that claim. At best the paper finds that the mechanism is more complicated than "money transfer from the poor... to the rich". To quote the conclusion directly: "Notably, our results are not driven by income, as they hold within the sub-samples of low-, middle- and high-income individuals. In particular, high-FICO high-income consumers benefit the most from reward credit cards, but they do so at the expense of low-FICO high-income consumers. While credit card rewards are often framed as a “reverse Robin Hood” mechanism in which the poor subsidize the rich, our results show that this explanation is at best incomplete."

psadri 3y ago

This is an interesting flywheel. Once I realized that by not using a CC I was subsidizing everyone else, I decided to opt into using a high reward credit card myself.

supertrope 3y ago
There are Prisoner's Dilemmas everywhere. Many jobs require a college degree as a blunt filter for employee quality. Now that more and more people have that so it's been devalued. You now need specific majors or to come out of an elite college to get the same advantage that used to be conferred by being a college grad. Colleges talk about affordability but many colleges spend big on recruiting star professors and new facilities to compete in the rankings and alumni donations arms race. Car traffic makes not driving dangerous so people are incentivize to drive. SUVs make driving a sedan more dangerous during crashes so people choose to buy bigger cars. Marketers race to the bottom on ever more annoying, numerous, and louder ads. People block or mentally tune out ads which feeds back into advertisers pushing the envelope to get noticed. If ransomware victims did not pay it would become unprofitable. But each business is rightfully concerned about mitigating its immediate business interruption.
- psadri 3y ago
  Related - home loans to make buying homes accessible → higher home prices → now everyone has to get a loan. Same with college loans.
  - supertrope 3y ago
    Yes. Credit is inflationary.

alberth 3y ago

> The money extracted by the credit card companies and Visa causes merchants to raise prices for everyone regardless of whether they have a rewards card or use a credit card at all. Case studies indicate otherwise. Dodd-Frank Act postulated what you stated, that higher fees result in higher prices for consumers ... and if you lowered the fees for the merchants, merchants would lower their prices (to pass along that savings back to the consumers). But studies have shown otherwise, and merchants did not lower fees. https://www.cutimes.com/2015/09/03/durbin-failing-to-lower-merchant-costs-study/?slreturn=20240404125742 https://www.cutimes.com/2015/09/03/durbin-failing-to-lower-m...

Devorlon 3y ago
> Two thirds of the merchants surveyed reported no change or didn't know the change in their debit costs post-regulation. One fourth actually reported an increase in debit costs
abalone 3y ago
Also true for Australia! When they regulated interchange, merchants did not pass the savings on to consumers.[1] [1] https://laweconcenter.org/resources/the-effects-of-price-controls-on-payment-card-interchange-fees-a-review-and-update/ https://laweconcenter.org/resources/the-effects-of-price-con...
- eltondegeneres 3y ago
  That think tank is funded[1] by the anti-regulation Charles Koch Institute and the article should be read with that in mind. [1]: https://www.influencewatch.org/non-profit/international-policy-network-international-center-for-law-economics/ https://www.influencewatch.org/non-profit/international-poli...
  - scarface_74 3y ago
    That may be true. But do you in your heart of hearts think that companies are going to pass those savings on to consumers?

esaym 3y ago

https://www.youtube.com/watch?v=akO8qAx4xjY https://www.youtube.com/watch?v=akO8qAx4xjY