Credit card rewards is a bizarre almost impossible to get rid of idea. Those "rewards" are amortized across all customers for a given business by the virtue of a higher transaction fee. There is no such thing as free lunch obviously. It has a positive feedback loop - the more people use credit cards (because of rewards and fraud protection), the more the competition to provide better rewards. This competition drives higher transaction fees to business which in turn pass those onto the customers. At the end, consumers lose no matter how you slice the pie.
The only way to get rid of this racket is to pass a law that bans credit card rewards. Watch the chaos that ensues after that.
The more positive way to look at this is that a consumer using a CC is paying 2-3% extra for a product to have an isolation between their bank account and the business charging them. The reward thing is a distraction to lure consumers. 2-3% doesn't sound like a bad deal for fraud protection, isolation and some perks. Someone has to take on liability risk and that's what CC companies do. It also polices businesses from defrauding and exploiting the consumer - I would guess that if a business has a very high percentage of charge backs, they'll be investigated and reprimanded, if not blocked by the CC company.
Well, consumers don't really lose as long as they have a rewards card right? Whether it's 2.5% fee with 2% rewards, or 0.5% fee with 0% rewards, it's the same to me in the end as long as I'm paying with my card.
With an exception: for all your expenses that get reimbursed for work. If you're putting flights and hotels on your personal rewards card, then it adds up to a very nice little bonus at the end of the month. (But this is also why at some companies, you're required to use a corporate card if your expenses start going above a certain limit -- the company wants the rewards.)
Just like frequent flyer miles, it's an odd little tax-free trick that transfers a little bit more of your employer's money to you. And since people generally identify more with employees than with companies... nobody's really looking to change it.
Really the only real loser here is people who pay cash. It used to be that credit card companies prohibited stores from charging more for using a card (or less with cash). BUT... that was made illegal a number of years ago in many states, and you can now get a 3-5% cash discount at a lot of places, though not everywhere.
I personally feel much safer using a card -- I hate carrying cash, the risk of losing it, not hygienic, etc. -- but I totally understand some people prefer it, or very disadvantaged people don't have access to cards.
Another big thing though is if you are actually realizing those rewards: I vastly prefer a cash rewards card. "Airline miles" are arbitrary. They don't actually equate to either... actually flown miles nor dollar value. So airlines can pretty much devalue them at will, and impose any restrictions on them they want. Who knows what your airline miles actually get you back in value, if you successfully spend them in the first place.
Meanwhile, my credit cards have cash rewards: I know x% of my credit card statement I can credit back to my account. There's a direct cash value I glean from spending with my credit card versus cash and I know what it is up front.
> Really the only real loser here is people who pay cash.
Indeed. Since the price is the same either way most places, if you can buy with a credit card, that's the right choice.
> Well, consumers don't really lose as long as they have a rewards card right?
They lose because rather than spend slightly less money and having that money available (or consumers charging slightly less because they don't have as large of processing fees), they get some targeted benefit that constrains how they gain.
As a simple example, anyone that saved a bunch of frequent flyer miles to use around this time would probably be better off with the extra cash, since most people aren't traveling.
There are of course cases where the thing that would benefit a person the most is also what is offered as a reward, but as we're seeing, circumstances change, and in most cases the reward with the most utility (i.e. cash, or not being charged as much in the first place) is often the most beneficial overall.
I mean, Citibank gives 2% cashback. People who choose miles or other rewards are doing so intentionally, because they think they'll benefit more. Nobody's forcing them to choose a miles reward card. They know the risk they're taking. Cashback is the norm.
(Also, a lot of places let you exchange miles for things like Amazon gift cards as well, practically as good as cash, though the "exchange rate" is often closer to a 1% reward in the end.)
But it's only the portion of consumers that get rewards that don't lose, as much. And its the more well off portion of consumers that are offered and receive good reward cards. Those without end up subsidizing those who do.
A second (simpler?) way is to prevent credit cards from forced bundling of variable fees to the merchant.
Credit cards companies are in a very strong oligopoly and are able to essentially demand bundling of all their cards, regardless of the fees charged. If the credit cards companies were forced to charge a single rate for all cards in a bundle, it would allow merchants to either selectively drop higher priced bundles or the card company would have to start balancing the additional cost of higher rewards on their side, moving the incentives back where they belong.
I wish so much we would adopt rules like the EU has.
* No significant rewards because the fee is capped at 0.3%.
* Chip and pin because that decreases fraud more than chip and signature.
For many businesses, a 2-3% fee is so much of their total profit margin. For example, Google tells me a full service restaurant averages a 3-5% profit margin.
Dropping a transaction fee 2%->0.3% would mean a 3% margin turns into a 4.7% margin. All else equal, 56% increase in profit!
There are other considerations, like would people spend as much if they didn't get rewards. I don't know the answer, but another question is "what's best for society?". In my opinion, credit card companies commonly act as a low-value-add intermediary and a wealth transfer from the poor to the rich. [1] People are paying more because that fee is baked into every single transaction, whether credit, debit, cash, or check.
They do provide a great indisputable paper trail for many transactions, and going 100% cash probably isn't best for society because there would inevitably be more "untaxed revenue", but 2-3% is outrageously large fee to pay.
If they were doing it over (which they now can't) the US should insist on competent independent oversight for EMV and its card issuers. EMV ("Chip and PIN" or in the US case "Chip and Signature") is a proprietary system, and so inevitably the priority for the three card networks (Europay, Mastercard, Visa - hence the name) was to get something they could roll out cheaply and hopefully save some money, security wasn't irrelevant but it wasn't priority #1.
There are a bunch of choices that EMV makes which seem dumb, and then a bunch of choices for issuers that invariably get selected for the overall economic impact for the issuer (typically a bank) not the cost of fraud to individuals.
I don't want to oversell this. Automatically EMV's chips are safer than magnetic stripe because the whole point of magnetic stripe is that writers are a cheap commodity. A bad guy who wants to clone magstripe credit cards can buy everything needed in a hobbyist electronics store, assemble it at home and they've got a cottage industry. Cloning modern protected microchips is by no means impossible, but it's not a viable plan as a side hustle for your job waiting tables.
BUT EMV could have been significantly less fragile, and consumers could have come away from this with all the same protection and the knowledge that this helps them as much as the banks.
Example: An EMV card can be dumb. It can offer Static Data Authentication. SDA is something you could copy from a real card and play back, not so different from the magnetic stripe problem - whereas the more expensive Dynamic Data option prevents this. Why is SDA allowed? Because it makes the cards slightly cheaper. For end users the card seems the same, for the issuer they just saved a few bucks. But now the end users have less fraud protection. Maybe your bank uses these cheaper "dumb" cards for accounts it deems at lower risk, or with smaller credit limits, or at random, you have no way to know.
Consumers lose as a whole but rewards allow a portion of them to win. Mostly higher net worth individuals that get offered more rewards are subsidized by lower classes.
I remember reading that credit cards lower the transaction threshold substantially so it's worth it to businesses to pay the higher transaction fees.
I can't remember where (might have been HN or patio11), but it was a business owner arguing that the rewards to incentivize card use are better for the businesses overall.
I think a lot of folks seem to assume that dealing with cash is free, which it isn't of course. The biggest win probably comes if you can dispense with cash entirely though that isn't always possible for various reasons. (It's actually illegal for restaurants not to take cash in some US jurisdictions.)
What I found was that at least in the US you must accept cash for the payment of a debt. This means in restaurants and stuff where you pay after you're served they must accept cash, but when you pay first they don't have to (unless there are other state laws that require it).
I'm not super confident I have this right, but I thought it was interesting. Some states allow workarounds like cash to card machines at the location (you can input cash and get a gift card to use) - I think Amazon was doing this for some of their GO stores so they don't exclude people without bank accounts.
>This means in restaurants and stuff where you pay after you're served they must accept cash, but when you pay first they don't have to (unless there are other state laws that require it).
IANAL but I'm not sure how big a factor this is. There's a lot of mythology around the "legal tender for all debts" language but I'm not sure how much of it has a real legal (or practical) basis. In the real world, if you eat your meal at a credit card only place and you then tell them you don't have a card, I imagine they'll find a way to take your money--not because of some arcane legal reason but because cash is better than nothing.
I'm not aware of any credit card only places that serve you food first (all the ones I know are like Sweet Green - chipotle style order/pay first before food).
No idea. Credit card only isn't all that common in my experience other than situations where it's sort of inherent (planes, food delivery, and so forth). Sit-down may (rarely) be cash only in the US but I'm not sure I've ever personally run into a CC-only restaurant where I'm in the physical location. They do exist apparently but they're rare and, yes, I think they're probably mostly fast casual sort of places where you order at the counter.
If a law were passed that gets rid of credit card rewards, I very much doubt that prices would go down accordingly; the merchant would still pay that fee, and the credit card company would keep all of it.
I'd be happy to stop having rewards if all prices went down 2% accordingly. But that doesn't seem likely to happen.
There are already different fees charged based on card types, which is why you see some merchants accept Ames/Discover and some not. They have different per-transaction fees and different transaction percentages (at least the last time I saw, long ago). If a card offers a smaller fee, I imagine some processors and then merchants will jump on it ASAP. What's half a percent off the processing fee to Amazon/Walmart/Target? Hundreds of millions to billions of dollars, given it has a disproportionate affect on profit since it applies to total charged.
I'm sure this is also why Target tried to get you to sign up for their own card, and offers you a percent off all purchases at target with it.
> There are already different fees charged based on card types, which is why you see some merchants accept Ames/Discover and some not.
But those merchants are not allowed to accept both but pass through their fees.
Rather than seeing a prohibition on rewards, I'd rather see a prohibition on the anti-competitive terms that prevent merchants from passing through credit card processing fees. Then a card that charges less to the merchant would be just as good as a rewards card.
If businesses are free to add surcharges and/or discounts based on the payment instrument used, that should nudge consumers to lower-fee payment instruments like cash, debit cards, cryptocurrency, or at least a credit network with lower fees.
For better or for worse, there are some legal obstacles to surcharges for certain payment instruments, but discounts are always an option. I.e. merchants could pad sticker prices with the max fee they might pay, then discount depending on the instrument used.
I think we would get some value back, potentially even more. Probably hard to quantify anyway.
CC rewards are a strategy to limit competition. It makes it harder for new players because merchants don't need them, they need Visa and the other big ones. So the negotiation power is small. You seek for more customers, but you can't convince anyone because you don't have rewards.
When competition and choice is limited, you, as a customer, are on the loosing side of the deal. Always.
Just as a few of the billion examples: are stores going to go through and change their $3.99 prices to $3.91, and their "3 for $10" prices to $3.27? Are SaaS services going to change their nice round $19/month to $18.62/month?
Or are they just going to say "awesome, lower processing fees", and keep their prices the same?
Perhaps over the course of decades, new businesses and new products would take the change into account, so it would probably be a net win long-term, but in the short-term, consumers would just lose that 2%.
Now, on the other hand, I'd be quite happy to see a prohibition on the credit-card-company practice of preventing merchants from charging a surcharge for credit card use. If merchants were free to charge the consumer whatever the credit card processor charged them, then if you used a credit card with lower processing fees, you'd immediately reap the benefits.
Depending the kind of product and their business strategy, yes they will changes their price.
The market competition still apply.
If I see one product priced as 3.99 and same quality product priced as 3.98. I will choose the 3.98 like many other people will.
As a matter of course I just ask if there is a cash discount. Frequently there is. If it beats 2% I almost always take it.
I've always wondered if these cash transactions even make it onto the books, I suspect that many of them are not only merchant fee free, but also untaxed.
> As a matter of course I just ask if there is a cash discount. Frequently there is. If it beats 2% I almost always take it.
For a meal, that's fine. For a $2000 computer from a shady seller on the streets of Hong Kong, I would gladly pay $40 as an insurance against fraud. Peace of mind is nice and good CC companies (American Express) got your back.
Yea, I think I may live in a different world. I live on a small island in a smallish town. I routinely do thousands of dollars in business at a time either in cash because I have a relationship with that person or by check with a local bank.
Your reputation is worth more than anything else in a small community. If you start ripping people off its known very very quickly and scammers end up moving away, or just get well known enough that nobody sane does business with them. Eventually bad enough apples get encouraged by the local brutha's to stop being a problem or have their limbs broken.
You can have a free lunch. Economics is not a zero sum game. If more people are willing to purchase your goods because of the fraud protection, ease of use, or rewards, it is better than only accepting cash for business, and better for consumers.
I would this a mutually beneficial endeavor more than a "free lunch." Ultimately there are real resources put in to make all these things happen: the business, bank, network and consumer all have costs here. None of it is "free," it just has a benefit to all parties that is greater than the costs, which is why they all agree to it.
Not all consumers lose equally, however. The ones that lose the most are those that are poor or have bad credit, who effectively subsidize the rewards that rich people are able to collect. It is a regressive tax.
The transaction fees needed for the whole "isolation between bank account and the business charging them" are about 0.1%.
The remainder is subsidizing the rewards slot machine.
To me it seems like kind of a kickback program for people expensing their purchases. You make a purchase using a rewards card, expense the costs, then you get free stuff as part of it.
They gotta make their money somehow. I love them because they have saved me from fraud a few times. Anytime I need to buy something on a sketchy website where I don't trust their security, I use a privacy.com card.
In fact, I used their card to pay my water bill, because I didn't trust the city security, and in fact discovered a massive citywide fraud because of it.
One of the nice things about privacy.com cards is the cards are assigned to a vendor, so if there is a charge from another vendor it rejects the charge no matter how small and warns you.
I got a 56 cent charge from a "gardening service" on my water bill card. Usually most banks won't let you set charge alerts below $1, so they use a $0.56 charge to fall below the limit. But since I had a privacy card I got notified, so I notified the city, and after their investigation they found that their entire credit card database had been compromised.
So it saved me from fraud and it saved everyone else in the city too!
(I have no affiliation to privacy.com, I've just been using them since their alpha and I'm a big fan)
I don't use privacy.com for the actual privacy. I just use it so I can easily "turn off" a card for a specific vendor whenever I need to. I like to sign up for free trials with cards that have a $1 spend limit, so they can't charge me if I forget to cancel.
But yes, I think you are right. The "privacy" part of privacy.com is a bit misleading.
Wow, I had no idea the terms on these partnerships. Amex spending $4B on Delta miles in 2019 seems crazy. I wonder what sort of discount Amex (and other CC's) get on those miles vs retail buyers.
Also, they report total marketing spend of $2.9B in 2019 - seems like they could still be sitting on quite a few unused miles.
> It’s essentially free cash for the airline, and it underscores the massive profit potential
Point of order, cash is not profit. You can’t (or shouldn’t) book unredeemed loyalty credits as income; on the contrary, they sit on the balance sheet as a liability under “unearned revenue” or similar journal.
That would seem to get dangerously close to financial speculation and might invite some SEC scrutiny. A business in crisis selling future credits with a discount for both risk and time lag is essentially a (junk) bond.
