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.
> 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.
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.
> Fraud costs are borne by merchants and to some extent processors, but not the issuer banks that receive the interchange fee.
Merchant fraud and merchant credit risk is borne by acquirers (although, if they went under the issuing baking is ultimately on the hook). But fraud by the cardholder and cardholder credit risk is borne by the issuer.
There is a government to government payment fee category in there. Why on earth would two government agencies ever need to use a CC to pay each other and lose over 1% in fees?
Maybe 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.
>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.
This is actually the reason lower fee cards exist. If every card had a 5% transaction cost no merchant would sign up for that card brand. If the merchant is convinced their average transaction cost will be lower because some of the cards will be cheaper you can get away with some expensive cards.
Are they bound by contract not to offer a discount for casher buyers?
I ask because when I was in Germany (and, granted, this was a few decades ago) you got some percent off the price if you paid cash. Merchants there seemed pretty credit-card averse.
What I want to do is pass on the exact processing fee to my customers, then they can choose their payment method based on how much it is going to cost them. I might then choose to cover a portion of the fee for electronic transactions, because they mean I save money vs processing cash. But the customer would pay the excess.
I would need a system that can display to the customer what fee they would be charged with their selected payment method, and be given an option to switch to a less expensive payment method.
That would cause a massive customer support and frustration problem as regular customers don't know or care how their card is classified and would complaint that it doesn't work. This would affect both the merchant and the issuer negatively.
The 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.
> The 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.
Counterpoint: i will pay you $500 if any of the big retailers (>2k stores) lowers prices now and cites "lower credit card fees means we can charge less".
Doesn’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.
It'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.
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.
Is it legislation or the contract with the credit card? My understanding is the contract to take ie VISA has terms that you cannot apply a discount for customers using other payment methods (ie cash or someone else's card). There are a few places that don't have those terms (mostly government where often a card does cost more to use).
What people forget about these fees is a credit card is cheaper to take for the merchant. The credit card is never counterfeit money. The clerk never takes money from the credit cards, nor does the manager counting it (I wasn't in retail long but I saw both). You never have a robber come in to take your credit card money. Even when all goes well, you don't pay the clerk and manager by the hour to count all the cash twice. You do have some risk of taking a stolen credit card, but overall it is cheaper for the merchant to take credit cards and that savings should be what pays for the card costs (I have no idea how to count the different costs to see if that is true)
The 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.)
> 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.
Credit 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.
>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.
Boy 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.
Returning 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.
I 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.
> 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.
The 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.
Simply 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.
> 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.
Some 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).
It 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.
>Redditors are frequently sophisticated with their spreadsheets; many of them could clearly earn three orders of magnitude more from the financial industry if they stopped thinking that the right way to monetize spreadsheet skill was in gaming credit card signup bonuses.
It's a pretty decent outlet for having something complicated to work on. Another would be EVE Online with the added bonus that it's also an actual game. My guess is most of those people are just trying to min-max what the companies allow them, rather than trying to find an exploit in the system that prints money per spreadsheet CPU cycle.
I am suspicious that anyone can get a job in finance with only churning (or EVE) spreadsheet skills. I have rarely found "well if you can do that hobbyist but seemingly proximal activity, you can walk into a decent-paying job" to be true in tech and I suspect it's true for finance too.
Maybe the finance bros just need a leetcode-for-spreadsheets website to run their technical interviews to open the floodgates though.
I am pretty deep into the credit card hobby and most of the people in it are high-earning professionals already. The last meetup I went to consisted of half of software engineers.
So we already have jobs that pay well for optimizing things.
It’s hardly a difficult skill. I have a spreadsheet with the date , credit limit, money needed to spend to get the reward and a date to cancel the card. Wall Street better get ready for me
At the end of the day, it's mostly a hobby and you either find keeping track of everything and making effective use of rewards worth it or not. Personally, I have a few cards for targeted use but mostly I just take 2% cash back on a free card and figure that's close enough.
I was also intrigued by that quote and find it rather dubious. Coincidentally today, I and 5 other family members are boarding business class international flights worth ~$60k cash, paid for with signup bonus points. This doesn’t even include the other tens of $thousands of redemptions we’re doing on both this trip and the rest of the year. This is also just side hustle/hobby-that-pays-for-itself “money,” in addition to the (not) “three orders of magnitude” faang income.
I'm guessing (but could be wrong) that you would not actually have paid $60K for business class seats for your family had you not had points that would cover. (I have gotten really good deals using points for something I'd have paid for anyway--but it's been rare.)
Is $60K cash split between these 6 people? Then it is not that impressive.
If you want higher ROI on spreadsheet hobby start using it for your own financial/retirement planning. Playing with numbers in that field can change outcomes by hundreds of thousands dollars.
I think churning is just a hobby for bored divorced guys and used as a proxy for developing any real (non-financialized) interests. Normal cash back for most cards is good enough for most people, and you aren't going to get big point kickbacks unless you already have a lot of money to spend.
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.
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."
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."
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”.
This is interesting. The study you cite and quote is about a transfer of money from "naive" credit card consumers to "sophisticated" credit card consumers, which correlates to "poor to rich", "less educated to more educated", etc. I'm even more interested in the transfer that occurs from both cash and non-reward-card consumers to specifically reward-card users.
Can't this be rewritten in plain English as "unsophisticated (dumb) people don't know how to use credit cards in their own interest?". Isn't that just the free in free market?
Why is a principled objection to a paternalistic state intervening to protect dumb people from making bad decisions seen as unethical? What entitles dumb people to such protection?
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.
A huge aspect people ignore is how expensive it is to handle cash. From storage, administration, transportation, loss, etc. it's usually a little more expensive to take cash vs. card.
This is why your grocery store partners with an ATM network to let you take out extra cash at the POS. As long as you're paying the fee, they'll do whatever they can to trade you cash for a digital deposit into their bank account.
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?
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.
A large segment (in the US) that does _not_ subsidize credit card fees are gas stations, where, for the most part, the price for paying in cash is lower than with credit, or there is a per transaction surcharge for using a credit or debit card.
Car-centric as it is, gas prices are arguably the commodity that US consumers are most price sensitive to (and which is also most commonly evoked in politics). So this shows that consumers would prefer to discriminate between card and no-card purchases if given the option, except that the vast majority of retail outlets do not give them that option.
>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.
There was a study by the Federal Reserve that came to the conclusion last year that rewards cards is basically a money transfer of ~$15 billion from poor to rich per year. Discussion on Hacker News about it: https://news.ycombinator.com/item?id=34492502
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.
because poor people, typically:
- do not quality for high-rewards cards (which have higher credit score thresholds)
- if not savvy, carry a balance because they can't afford to pay off the amount in full, are subject to higher interest rates because those are the cards they qualify for, and thereby pay much more than than well off consumers (increasing the transfer of wealth)
- if savvy, realize that having a credit card costs them more than not, and stick to cash
- are more likely to be receiving payment for services in cash themselves and will just spend that rather than depositing and using a CC (if they even have a bank account)
> 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.
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.
Does accepting cash really save a business that much money? I've heard arguments in the past that it ends up being a negligible difference once you account for all costs of processing cash (someone has to take it to the bank, it can get stolen in a robbery, employees can skim, you have to count it, you need a safe, you need cash deliveries, etc).
I have no numbers, so it could be totally off-base, but it feels not-impossible that it costs a percentage or two to process all your cash anyway, so the difference between cash & credit cards isn't actually that big. It's just that the interchange fees show up as one big chunk whereas the cash processing is lots of little bites, or even accounting for things that didn't happen (like skimming).
I guess this only applies if you're legitimately reporting all your cash take, if the business itself is skimming for tax reasons then the savings on cash would be substantial.
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.
I don't disagree with your point; I do want to point out, though, that whether it's "the merchants have to raise their prices" or "the merchants benefit too and are complicit", the end result is still that it's still the poor who lose.
> 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.
Claiming that merchant fees result in higher prices is different from claiming that reducing merchant fees would directly, immediately, or measurably lower prices. Isn't a plausible explanation that companies are hesitant to lower prices for any reason?
Let's consider the opposite scenario, if Visa raises their fees do merchants keep prices where they are? I suspect not.
> 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
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.
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.
> 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.
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.
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%.
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.
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.
Merchants pay 3%.
Cardholders borrow from banks, not card payment networks.
Rich people can donate to poor people regardless of the credit card situation.
Fun fact: this is why crypto never took off as a replacement for credit cards. Too many entrepreneurs focused on “lower fees” as if it were some technical property. But it was never about the technology.
Interchange fees primarily fund consumer rewards programs and benefits. To become an appealing choice for consumers, any new payment method has to offer competitive benefits. Those benefits are funded by the fees.
Visa/MC/AmEx have essentially created a system whereby higher-spending customers are able to wrench more value from merchants in the form of higher fees. This is reflected in the fee schedules that slice and dice merchants by category and customers by card tier.
If you want to build a new payment system it is important to understand that it’s not just a negotiation between merchants and issuers. It’s a two-sided market where customers also leverage their spending power, directly or indirectly.
> this is why crypto never took off as a replacement for credit cards
If this were true you would expect crypto to have taken off in countries with low interchange rates. Europe, for example, has far less of a rewards and points culture for payment, and (compared to the US) much lower interchange.
Crypto never took off as a replacement for credit cards for many reasons - the biggest coins out there are simply too volatile to be usable as a currency, they lack the consumer protections you get paying with a credit card, and they’re simply too complex for an average person to understand.
Interchange is regulated in Europe. You would likely run into legal issues if you tried to jack up merchant fees via a novel payment method.
However, even if it were legal, I don’t think this would counter my claim. I’m merely saying that you’d need to match existing rewards schemes in markets where they are established. Introducing them into a new market is an entirely different matter. The system we have today evolved through many decades of negotiation and deal making among merchants, issuers and card networks.
You’re right about consumer protections —- it would be very expensive for a crypto-based system to provide those without an intermediary that can adjudicate and reverse transactions (chargebacks).
The second biggest is the missing need: Most people don't have any advantage of using crypto. They go to work, get a salary, buy/sell things and thats it.
If you don't need to buy something illegal or really believe that there is still a soviety left to take some crypto in worst case scenario, fiat is great.
And because it's uncompelling. I have a bunch of consumer protections around my credit card, why would I want to use crypto instead? Especially when it's a wildly fluctuating speculative asset and the burger I buy for $15 worth of coins today will be $60 dollars of coins tomorrow.
They can take either; waiting for confirmations is only a matter of reducing double-spend risk.
In practice, seconds after a transaction has been signed and broadcast, it is already very unlikely to double-spend. Miner incentives are such that the first-seen transaction is the most likely to be used. A delay of a couple seconds is sufficient to account for network-propagation lag.
You wouldn't do this for high-value transactions, but there's some threshold where real-world risk is lower than the convenience of a fast transaction, and that threshold is reasonably high.
That is almost certainly one reason and an important one. But as the other commenter to your comment shows, there is a lot more. Protections is a big one. I also personally side that, you need a way for people to interface with their crypto like they do with their current bank and as simple as possible. Normal people don't want to have to juggle around keys. Hell, Im a software engineer and I hate having to keep track of keys. So every time I get a new machine, I create fresh new SSH keys. My SSH keys are disposable to me.
Funny, because I would pay twice the CC fee for credit card transactions to be as painless as crypto. I'd rather scan a barcode and wait two minutes, compared to typing my address, handing over my phone number, confirming my zip, waiting for my CC's TOTP to arrive. Only for it to still fail 5% of the time for who knows what reason.
You should try Apple Pay (or maybe Google Pay?) It addresses all those pain points and more, while still giving you the consumer protections and fast transactions of cards.
It's not just crypto it's any alternative payment system. Multiple payment vendors have tried to up-end the credit card companies by focusing on lower fees for merchants, but customers have no incentive to use that new system if they have a benefit to using their credit card, at least in the US.
It's why, though, there are a bunch of payments companies that have popped up in places throughout Asia that aren't competing with rewards systems off the back of interchange.
> Fun fact: this is why crypto never took off as a replacement for credit cards. Too many entrepreneurs focused on “lower fees” as if it were some technical property.
I always thought the big problem with crypto was that the fees were atrocious for any small transaction.
And the fees only get higher as the network gets busier. You can choose to have a send some money with a small fee, but the miners will never confirm your transaction, as each block is limited.
The only way to cost in cc fees is to always assume the highest tier plus one time fees. This is then built into the retail cost of everything
If you pay with a lower fee card, you subsidize the higher fee customers
If you pay cash, debit, or check and don’t say anything - you subsidize the higher fee credit card payers
If you ask me, I’ll give you 2% discount for cash or check. I’ve built in 3%+
Visa debit is the biggest scam going, they’ve found a way to charge 2.5% to take debit cards. In Canada forever it’s been 0.10 a transaction for debit for higher volume clients
Pretty much - you need to get a high reward cc and use it for all your purchases and pay it off every month. If not, and you don’t ask for a discount, you subsidize the people who do.
Example - last month I was “funded” $130,681.33 this includes debit cards which I pay a low flat rate for (but this is changing)
On $130,681.33 I paid $2,433.51 in service charges or 1.86% . Plus the liability of the possibility of a charge back, also I do not accept Amex.
A lot of businesses give more than a 2% discount for cash. Personally I find that I instinctively tip less when I use cash than a credit card. The act of getting bills out of my wallet is viscerally more painful than writing numbers down, so I tip less without thinking.
- In the EU the main reason Rewards cards have declined is that the regulator capped interchange to a very small amount in 2015. The US will follow suit at some point (as noted debit cards have gone that way) but I guess not as low
- I think the simple answer to nkurz's point on why don't all cards charge the maximum in interchange is - it's just market forces. It's not worth enough money to long-term piss off the bigger merchants (i.e. Amazon). When you have a 30% APR card non-rewards card, the 3% interchange is small beans. Also the acquiring bank would probably want a bigger piece of the pie if it were more widespread
- Credit Card economics is radically different across different countries (for all sorts of reasons). So for example, a third of card users in the US explicitly seek the rewards and another third have it for the various protections/security vs. debit cards. In the UK only 12% seek rewards, with the two biggest use cases being to spread costs of big transactions or to improve their credit score. (so for that reason it's sort of hard to have a global view of this problem)
A fun fact is that most US reward cards with up to 5% rewards work fine in the EU.
I have noticed some strange behavior with some cards at certain supermarkets. That may be them trying to fight back against the US interchange fees, but there are workarounds.
It's not worth enough money to long-term piss off the bigger merchants (i.e. Amazon)
But most individual issuers (excluding Chase and maybe 1-2 others) have a small impact on the overall mix, so why wouldn't they issue exclusively the top tier (highest interchange) cards?
My credit card is a Fidelity 2% cash back Visa. (I think it was originally American Express, but it's Visa now. Presumably that happened sometime after 2016.) I don't travel much, so getting cash deposited into my brokerage is more useful to me, and with a "2% on everything" card, it's not really worth it to me to carry around other cards for specific categories.
After I bought my current home, I put a bunch of expenses on the card. I didn't realize I had gone over the limit until I got a letter in the mail telling me that they automatically increased the limit. They keep increasing it every year or two, so at this point I could put a mid range car on the card.
All that said, I would prefer if rewards cards in general were banned and everything was just 2% cheaper. The whole concept feels a little dirty to me, like I'm taking a bribe to use a specific form of payment. But, at the same time, it doesn't make sense not to in the current market.
I likewise have this card and it worked for me in a certain point in my life but it depends on what you spend money on. As a family of 4 we spend a lot on groceries and eating out so its good to use a card for those things that gives us 3%. The sort of most obvious one is the amazon visa which you can connect to your amazon account and get the 3% off on everything there automatically.
It's not a life changing amount but it's free money.
> All that said, I would prefer if rewards cards in general were banned and everything was just 2% cheaper.
Would you prefer that reality literally, or just if it was effectively like that? Literally doing that seems way worse than payment methods competing for your business with rewards.
I think either would be an improvement over the current situation. I'd be happy with regulations that put a cap on the fees, similar to what the EU has.
I want payment methods to compete by offering better service for lower fees, not by bribing consumers with rewards (and explicitly charging the businesses higher fees to pay for those bribes).
I've had the Fidelity 2% card for a long time. It's simple, and mostly no-nonsense. It's one of my two "everyday carry" cards, and what I use for everything except Amazon and Whole Foods Market (WFM).
For Amazon and WFM, I use the Amazon (Chase) card. Since WFM has replaced or outlived most of the grocery stores near me, this is my other carry card, and it doubles as a backup card if the Fidelity 2% has a problem.
I almost added a Target 5% store card recently, because being a cheap bastid overrides being a minimalist bastid. But I abandoned the card application form, when something about it seemed a little too invasive. So I'll keep doing the Fidelity 2% card when I shop at Target, and that makes Target prices a little less competitive.
Yeah, that's the other reason I like it: I rarely have to think about it. Both paying off the monthly balance and cashing out the rewards are fully automated.
All I have to remember to do is save a copy of the annual summaries at least once every 3 years, because they don't let you go back farther than that.
I try to keep most of my finances "on rails" like that where bills, savings, etc. just happen automatically.
I am really interested in the content of this post, and I assume other posts from the author. But his writing style is extremely long winded.
For instance, this is somehow only two sentences.
It is a fee, ultimately paid by the card-accepting business, which gets sliced up between various parties in the credit card ecosystem to incentivize them to put their logos in the wallets and on the phones of well-heeled customers and increase the amount they spend and the frequency with which they spend it. (In industry, we sometimes distinguish interchange—which mostly goes to the issuing bank—and scheme fees—which mostly go to the credit card brand itself—but as interchange is much larger, let’s just call them both interchange for simplicity.)
This gentleman discusses topics that I think I'd be interested in, but like the half dozen times I've tried to read this guy, I've just lost my motivation so quickly. I feel some arrogance in his long-windedness. Is there any parallel to make with The Last Psychiatrist?
Came here just to write the same. I've squandered to find an explanation because I absolutely enjoy the subject. Perhaps it's because I'm not a native speaker and generally have non-native speakers around so I don't understand some of the metaphors, perhaps it's because I'm just not used to reading these kinds of long sentences anymore, or perhaps it's just not my kind of beer. I really don't know.
On the other hand, I really enjoy both reading and writing long sentences, as long as they are logically easy to follow, for they exude a certain eloquence and elegance that elevates the style and, most importantly, refines my audience by filtering away potential readers who had not had sufficient high school language classes to get used to understanding such long sentences effortlessly, which, this being a matter of personal expression rather than instruction, I certainly have the right to.
Not to go too off topic but I'm extremely interested in the throwaway comment about holding enough equity in your service provider of choice to justify calling investor relations when you have an issue. Is this a real thing that people do? If it works it sounds like an amazing life hack but I have my doubts how much influence they would have over the "real" support.
It's very long so I'll just quote a small bit specifically about the Investor Relations:
> If you cannot route letters to the legal department, go as high up as required. Pro-tip: virtually every major US company has a department called Investor Relations which is trivially discoverable, very well-funded, publicly routable, and very bored during 80% of the year. You can excuse any letter to Investor Relations with: "I am a shareholder in BigBank. I was therefore profoundly displeased when I learned…"
> What’s a well-paid bored professional in Investor Relations going to do with your account information? Nothing? Nothing is a great way to get fired. No, they’re going to open up their internal phone tree or ticketing system and say “I have a letter from an investor which alleges an identity theft issue. Which group handles that? Your department? Great; handle it and call me when you’re done. Do you want it by fax, email, or FedEx?”
For this to work though you've got to present like your position in the stock is in the millions of dollars, even if it's actually like $100. The author of the article has been in the financial industry for a very long time, and has also spent a long time as a Japanese salaryman, so he can definitely pull that off.
There are a ton of free services only accessible to those with money. For example, if you buy jewelry from any luxury store you can often also bring it in for free cleaning. But they will honor this for any piece you bought from them. And if you bring in a mix of pieces they will often clean them all.
Luxury retail isn’t often worth it, but when it is it comes with lifetime services.
Probably going against the grain here, but I think it’s great that at least a modest fraction of the benefits of highly risk-optimized revolving credit and low-friction electronic payments are feeding back to the consumer, vs. having all the value derived from that technology captured by the banks and merchants.
In a world where these high-exchange-fee / high-reward cards were outlawed, merchants would pay less in aggregate in fees. But almost surely they’d lose out net from a drop in overall consumer spending.
That affiliate programs inspire gamification for consumers to optimize their spending patterns to “win prizes” seems like a neat bit of competitive market pressure: It’s obviously a win for all involved or they wouldn’t be so popular.
> It’s obviously a win for all involved or they wouldn’t be so popular.
Definitely not a win for consumers, who in aggregate lose out. The margins to make the system work are built into the prices you pay at the checkout.
Other markets like Europe and Australia capped interchange and made it cheaper for retailers and consumers.
This forced banks to redesign their products/rewards/pricing to give consumers a real choice of whether to play or not.
Some consumers decide to fund more of the rewards cost themselves (via cards with annual fees). Some keep high rewards by using new bank-issued Amex (but pay surcharges at the checkout). Some keep much of the gains for themselves (via no rewards/low cost cards, with lower costs for the retailer).
So now, consumers who don't want to pay the overhead of interchange-funded rewards for everyone else don't have to.
(Disclosure: I ran portfolio management/cross sell/profitability/customer retention for an Australian credit card issuer during the period that interchange there was capped and progressively forced down. Later, I was the Netherlands representative on one of the card schemes' European advisory committee.)
> Definitely not a win for consumers, who in aggregate lose out. The margins to make the system work are built into the prices you pay at the checkout.
While not wrong don't forget that cash also has costs that are built into the system - there are a number of theft ways to lose money with cash that don't apply to cards. Even when everyone is honest there is the time cost to count all that cash. Somewhere between the two is mistakes in counting.
Definitely not a win for consumers, who in aggregate lose out. The margins to make the system work are built into the prices you pay at the checkout.
Prices are a function of supply and demand. Higher interchange fees hit supply (costs more to produce and sell the same quantity of goods) but they also spur demand, or no merchant would accept the cards with these fees. And indeed some large merchants have (for example) excluded American Express or Discover from their available payment methods for just this reason.
> It’s obviously a win for all involved or they wouldn’t be so popular.
Why is it obvious that it's "a win for all involved", as opposed to some big powerful financial companies taking advantage of a bunch of less organized merchants while providing benefit to some subset of cardholders? Obviously the merchants benefit overall from accepting credit cards, but I don't think it's anywhere near obvious that they benefit from funding the rewards programs. If there was any way for them to opt out, I feel a lot of them would. And it's hard to see how the non-rewards cards customers are benefitting from the current system---would any of them choose the current system if given a choice?
I definitely agree that someone is winning from the current system, but I don't think it's obvious that it's everyone.
As the article says, those who get rewards are richer people who spend more money. so merchants are indirectly rewarding their customers who spend the most money.
> That affiliate programs inspire gamification... It’s obviously a win for all involved or they wouldn’t be so popular.
It's not a win for consumers having to spend their time learning the "game" in order to not be left behind and essentially lose money.
I use basically a single credit card with a simple, universal cash-back scheme. I do some extremely simple and low-touch investing on the side. I choose not to waste my time attempting to do a billion other things that everyone else is doing to extract more value from the system, but I'm well aware that I'm probably coming out behind a lot of people as a result. That's not a "win," it's a race to the bottom that I've partially conceded.
My problem with the system is the fact that merchants are prohibited from handling different cards differently, for example by passing reward fees to the consumers.
If that were not the case I would be happy and let the market pick the preferred way. My 2c.
>low-friction electronic payments are feeding back to the consumer, vs. having all the value derived from that technology captured by the banks and merchants.
Are you talking about the cash back? Isn't that just a shell game? If the consumer is getting 2% cashback, but the merchant is charging consumers 2% more to pay for it as well, how is it "feeding back to the consumer"?
> Are you talking about the cash back? Isn't that just a shell game? If the consumer is getting 2% cashback, but the merchant is charging consumers 2% more to pay for it as well, how is it "feeding back to the consumer"?
One of the issues is that the cash back rate is not evenly distributed across the buying population.
I wish stripe or some company would create a zero fee credit card that is truly equivalent to using cash. The wealth transfer from cash payers, merchants, and some card users to other card users and the cc companies is one of those gross injustices, a small and persistent leech on society. Surely there’s a way to do cc transactions for near zero? What is the point of all this tech otherwise?
There's still fraud detection / prevention, card terminals, and other various infrastructure to pay for. Someone's going to pay for it, somehow.
Also, suppose Stripe did offer a low / zero transaction cost card. What's the incentive for me (a customer) to get it? It isn't any better than the other no-monthly-fee CCs, and is strictly inferior to a rewards card.
For merchants, yes, they are incentivized to accept Stripe's new card. But they can't stop accepting the other ones until Stripe has a significant share of the transactions. And may not be able to do so even then.
And meanwhile Stripe is eating the cost of running this new zero fee card system, which effectively takes away money that they could invest in their own business.
Sounds like a lose, lose, lose all around.
The real solution is to have a law that caps the CC transaction fee. Or allow merchants to add a surcharge for rewards CCs.
They already started trying. The Credit Card Competition Act was introduced last year [1]. It doesn't explicitly limit interchange fees though. Instead it allows merchants to choose the payment network that payments go through which legislators hope would create a race to the bottom.
It has to be minted and circulated, we see it as "free" but in practice the gov foots the bill. And, for cards it would be issuers footing the bill.
Then moving cash isn't free either. Merchants handling a lot of cash also pay to get their cash moved, processed, exchanged etc. It's an aspect where card could be lower, but zero is also an impossoble goal.
Agree but maintaining the infrastructure has a cost someone has to pay and I as a customer won’t see any benefit.
I think it would be healthy to be able to have options with near zero cost but I guess this would only happen with strong regulations, which seems almost impossible in this space (in the US)
> Agree but maintaining the infrastructure has a cost someone has to pay
The bank? Keeping money in your account allows the bank to take out credit. Providing digital payments sounds like a reasonable service for a bank to provide. As well as fraud prevention. This is how it works in Europe, most people have debit cards. The insanity is having to take out a loan you don’t need to prove that you’re responsible.
To facilitate the penetration and usage of RuPay Credit Cards on UPI, there will be no charge for transactions up to ₹2,000, an NPCI circular said. For transactions upwards of ₹2000, the applicable MDR amount will be borne by merchants and no additional charges will be levied upon the customers.
Disadvantages of Rupay Cards
Limited International Acceptance: One of the main disadvantages of RuPay cards is their limited acceptance outside of India. ...
Restricted Usage: RuPay cards are primarily designed for domestic use within India.
The AI generated cover image was kind of distracting to be honest. If having a full-screen image to go with the post was so important, one would have contracted a designer or just purchased something cool.
The image content and size is annoying, agreed, but I imagine that, like myself, they would go without an image if it meant contacting a designer and spending time negotiating rates, ideating on designs, and waiting on project completion. It takes seconds and is free to generate a neat image with AI that can be very additive to something like this, but unless you’re NY Times or WSJ doing a long form article, it’s probably unreasonable to expect anyone to get something explicitly designed and paid for in this context.
I believe the parent was hinting at the other possibility: not use an image at all.
When I see these AI-generated cover images in posts I'm left with a bad taste in my mouth. They look "ok" when glanced but pay more than a second of attention and they're terrible and uncanny.
If you truly care about the image's place in relation to the post, you'd go through the process that you mention and most likely you will end with a chess board and piece set that make sense, as opposed to whatever the image in the OP actually represents.
I agree with the folks behind iA Writer on this:
> Average AI images drag down everything around them. An AI hero image is a comedian opening the show with a knock-knock joke. Good images enrich your article, bad images steal its soul.
Well, in that case I'd say it's better to publish a post without a cover image. There are plenty of websites that offer the choices between high-quality, royalty-free images or make it easy to buy one.
in 2013 we had generic unsplash bokeh-rich images for blog posts. Now, we have generic AI generated images. There's not that much different. I agree - in both cases they're fairly distracting.
The common wisdom among a number of publications I've written for is that you need some sort of graphic, even if generic, mostly for reasons of social media sharing (and, these days, because a lot of blog templates assume a post has an image).
Those publications usually had a contract with some provider of public domain or CC-licensed fairly generic graphics.
Often times you will find cash only businesses, especially in Chinatown and restaurants that will give you a discount on the final bill if you pay in cash. I have been to some mid-range restaurants that will knock 10% off my bill if I pay in cash instead of credit. This is the merchant fighting back using their own stratagems.
In many cases in my experience the vendors who can successfully pull off this strategy have a high quality, high value product and operate in a no-frills store front and are often family owned, maybe a generation or two already. There is a Vietnamese banh mi sandwich vendor where I live who has been around for 30 years only accepts cash - they have the history and patronage to pull this off.
And then there are plenty of other merchants that are 100% cashless, presumably because they don’t want the hassle (and perhaps cost) of handing, exchanging, storing, and transporting paper cash and coins to and from a bank.
> I have been to some mid-range restaurants that will knock 10% off my bill if I pay in cash instead of credit. This is the merchant fighting back using their own stratagems.
Not sure how things are in the USA, but in Germany, that has nothing to do with "fighting back" and everything with dodging VAT.
Cynically that's probably often the case but if you're offering <$10 food items at a mom & pop shop the credit card fees are non-trivial so there probably is a very legitimate incentive to take cash. There's also benefits to getting immediate cash that you can put in the bank for expenses at the end of the day vs waiting a day or two for credit card money.
The sort of obvious thing is that taking cash doesn't just save the merchant credit card fees but enables them to play games with the income they report for tax. Same with like repairmen that will give you a much better deal if you pay cash - it's not just CC fees they are avoiding.
Fun fact, this is actually illegal here in Sweden! That is, merchants aren't allowed to adjust prices based on payment method. Not sure what the reasoning is.
Because the main purpose of cash payments in small businesses is tax evasion - not just VAT but also paying family members in cash and thus dodging even more.
Fun fact, credit card merchants successfully made it illegal in the USA too, but that legislation expired and now it is legal to charge more for credit card usage (though credit card companies prefer that you offer a "cash discount" than an equivalent "credit card fee").
In Costa Rica this is illegal too but going through the hassle of reporting it to the local authorities is a pain and you won't gain much, just annoy the dealership.
Usually the POS rate is around 2% so at the end of the day you'll split it evenly and get a 3% discount. A few years back it was even highter and I bought several home appliances and saved around $100 so it's worth for both parties.
Now imagine people that deal with ranges from 10K to 100K - It's definitely worth it shaving a few bucks here and there
My local restaurant instituted a surcharge for card users. Kind of irritating but I understand why, considering the margins in the restaurant industry.
It used to be a violation of their merchant agreement but it seems a 2013 court case made it that as long as it's disclosed in a certain way, it seems to be ok. About 4 states still outlaw it, based on some digging, but none of the card rules that I could dig up allowed applying that fee to debit cards containing the logo (e.g. https://www.mastercard.us/en-us/business/overview/support/me... )
Pretty verbose article that can be summarized as “Credit cards charge merchants a fee, sometimes more when co-branded, to entice customers to use their credit card in favor over others.”
Agreed. I read it hoping to learn something I didn't already know. He kept teasing us with the promise of some inside baseball but didn't really deliver.
While this focuses mainly on the consumer-credit card company relationship, I wanted to add this interesting study on the relationship between consumers across socioeconomic strata:
```
Since retailers usually charge the same price regardless of payment method, payment card
rewards programs with different levels of rewards effectively cause some customers to subsidize
the consumption of others. The research presented confirms that households with income
less than $75,000 per year collectively transfer over $3.5 billion to those making more than
$75,000 per year.
Furthermore, the cost of interchange fees to retailers can be significant, especially in competitive
sectors such as gasoline and groceries. This study demonstrates that interchange costs are
typically about 17 to 19 percent of retailer profit. Variance in these costs may induce risk-averse
retailers to set higher prices, thus generating additional economic inefficiencies and hurting retail
consumers.
Negative impacts on low income and minority households and small businesses have become
“entrenched” and are likely to get worse as interchange fees continue to increase. This economic
inefficiency will not change unless there is a “sufficiently large shock” in the form of policy or
technology to change the dynamics of the monopolies holding sway over the credit card system.
```
A valid interpretation but not the only way to describe it. If a merchant offers a 10% discount for spending $1000 or more, are they making lower-spending customers subsidize the purchases of higher-spending ones? Are they transferring wealth from poor to rich?
Technically yes. But what would the impact be of outlawing the practice of volume discounts through a “policy change”?
> In industry, we sometimes distinguish interchange—which mostly goes to the issuing bank—and scheme fees—which mostly go to the credit card brand itself—but as interchange is much larger, let’s just call them both interchange for simplicity.
It’s frustrating to read an article that acknowledges (indirectly) that payment networks don’t earn revenue from interchange nor have anything to do with reward programs, but then goes on to say that for simplicity they will refer to it as if it did.
If there is a better name for the table of rates (or the list of rates on a monthly CC transaction table for your business) I don’t know it. It’s absolute madness and near impossible to make sense of.
Often I feel like they exist only to confuse the merchant into just throwing up their hands and saying “I mean, I guess it’s right”. It also means that almost none of them can tell you how much they’re paying for credit card transactions. All they know is the sales person said “I can get you the best rates” which may or may not be true, those people will lie to you and tell you anything that you want to hear, I know this from personal experience. These people are snakes and dealing with them makes my skin crawl.
I’m aware that there’s a chance that I’m leaving money on the table, but this is one of the main reasons I use Stripe. I prefer predictability an inscrutable of data that may or may not show that I’m saving a little bit more. It’s also why I normally avoid credit cards that have rotating categories or this or like. I prefer a flat, easy to understand rate that I can compare to other cards instead of having to keep track of which card I’m using which month. Again, this means I’m leaving money on the table, but I do it for my own sanity.
The big news in credit card rewards (that I was hoping this article would address) is that Robinhood just announced a 3% flat cash back card, highest I've ever seen, where the only catch is that the money is deposited into your Robinhood account.
At 3% they are clearly losing tons of money on every transaction. There is an annual fee but it is only $60. The money can be withdrawn from Robinhood as soon as it is deposited. How can they possibly afford this? What are people doing with their money in Robinhood that they are willing to pay people over 1% (I'm assuming) just to deposit money there in a roundabout way?
Fidelity has flat 2% no fee "deposit to fidelity" card since forever. Probably Robinhood is competing in "small customer" segment and just passes all rewards to customers since it's attractive for their target customer?
They take a loss from every transaction and make up for it with volume. /s
My guess is that since Robinhood Gold gives you a lower margin interest rate, enticing people to use more margin, they hope to reap all the money back and then some.
Since the rebate money goes directly into your Robinhood account, rather than a checking account, they encourage it to stay in Robinhood.
Well written and pretty interesting. Somewhat obvious I suppose.
I was hoping he would go into detail on how programs like Citi double cash work. In that program you get the normal 1% back at purchase and then 1% at payment. I assume the latter is subsidized from interest payments, but what about card holders that never pay interest? Are they subsidized by those that do?
Yes. Rewards are subsidized by anyone paying a fee for their card, and by everyone with higher prices. Reward programs incentive consumers to make that card “top of wallet” and prioritize spend on it, which is why the entire rewards system is afraid of interchange cram down and free instant payments in general.
(Work at a fintech, I see the financials but those I cannot share)
Yes and note that from a marketing pov, Citi looks like a "good player" by incentivising payback. But if everyone paid back in the grace period, the care would fail as transaction fees can't offset the costs of managing the process (payouts, fraud, chargebacks, limit management, etc). Interest and "nuisance" charges are the real money makers.
So, you pick a balance of how much to return assuming that you get a mix of revolvers (borrowers) and transactors, and recognize that if you hit it right, some folks will skip the "best outcome" (for most) option of grace-period payback and faster rewards, due to choice or need (running low on cash, etc). And that's how you get the 1 and 1: folks love to spend, and Citi estimates that the 1 on payback sounds good but can be spread out as folks still pay the minimum to revolve, garnering interest and fees along the way.
It's illegal in the US to reward for debt directly (you can't incentivize folks to revolve instead of paying in full), and this card is at least a step in the right direction of doing the opposite. But if they really incentivized best behavior for consumers, we'd see all the % rewards focused on payback (and none for spend), with a reduced reward for payback on revolving debt, to incentivize reducing avoidable debt where it makes sense.
But that card would fail as a business for most banks and fin companies. While the early trans fees would be great, it would self-select responsible payback folks who never generate interest or nuisance fees. Such a card would need a massive annual fee or have to be tied to some other profit driving product, at least in most companies I've seen.
But maybe somebody will figure a clever way to make it work.
Quite interesting. I've had one encounter with such a credit card, which I only used for making a rather large payment over the course of four months without having to pay interest. To me, that was the attraction, not having to adjust my monthly budgeting much and also not having to dip into savings. My bank would have said 'yeah, lol, you pay our 8% interest if you want a loan you could actually cash out at any time'.
Where I live credit cards are still relatively uncommon, most cards in use are debit, and from the article it seems they have a simpler scheme behind them. The idea to have a 'book-buyers credit card' seems quite foreign, though I think some people have gas-station-related cards.
Before, the American economy has been built on excess consumption. Assuming that the rising tide lifts all boats, rewarding and encouraging excess consumption helped everyone, not just the wealthy. That's almost the opposite case when most goods purchased are now overseas imports. If the model doesn't make sense anymore, it should be replaced. Remove the ban on charging based on payment method.
Stripe is relevant. If customer and merchant incentives are aligned, I would say Stripe probably just wants to have low or minimum interchange? Have I misunderstood?
If they're rewarding you with something, either you or someone else is paying for it. Someone else, in this case, means another cardholder. Maybe the merchant the rewards program is through is counting on you to spend on something you otherwise wouldn't. Sure as hell isn't the bank offering the card.
The credit-ification of everyday purchases in the United States since the 1980s has been a disaster for the average American's financial health.
I don’t pay attention to “points” systems at all. I sense that this is the right decision but I’ve never been able to quantify whether this is true.
My logic is that the people who design credit card reward systems are smarter than I am about the topic they spend 8 hours a day on. So, every rewards system they offer is designed to trick me into suboptimal purchase decisions. Even the perception of beating the system is built into the system.
patio11 seems to confirm some of this, but I’d love it if someone who is informed about the design of these programs would say it to me straight. (Experts in “hacking” rewards systems will be disregarded because according to my thesis you are victims of mind control.)
For context I’m one of those never-carry-a-balance credit card users.
Part of the point of rewards cards is to encourage people with more choice (ie you) to use cards from that issuer. If the rewards are bad then you use a competitor card. If the rewards are good you use the issuer’s card and they make money on interchange. The cost of paying out the rewards decreases the amount the issuer makes from interchange, but they still make a profit. So never gaining from the points is probably bad – you’re basically giving that money to the issuer – and you could be better served by cashback instead. The point of using points from an issuers perspective is that they can have companies subsidise the cost of the rewards by treating the available rewards as ad space. They have eg some hotel chain pay the issuer to create some ‘money off these hotels’ reward, potentially also offering a higher-than normal value for the points. The hotel chain is happy because they expect this promotion is made to people who are more likely to spend more at their hotels even after the discount (or just because it brings people to their hotels rather than competitors). The card issuer is happy because they make more money for a given % of interchange paid out in rewards. The consumer is potentially happier with the card because they now get slightly more valuable rewards. The competing hotels now getting less custom are unhappy about it.
I think it’s reasonable to think points systems are, in some sense, trying to trick you, but also silly to ignore them because of this. Coupons are also trying to trick you in a similar way but that similarly doesn’t mean they’re a bad deal.
>Almost everybody writing about credit cards on the Internet receives some sort of spiff if you sign up after clicking through tagged links in their material.
This is something that really can't be said loud enough. The vast majority of credit card content on the Internet is just shilling for referral money. Like almost all of it. There's so much money in this space, and most people have no idea.
About a decade ago I found some blog about credit card rewards and signed up for their mailing list. The owner of the blog emailed me directly saying how he's going to "guide me through the process" and was pushing me to sign up for certain credit cards for sign up bonuses and wanted to know if I had any questions. He was acting like he was a friend just trying to guide me. I was a little taken aback but replied I was going to spend a large amount of money soon and I wanted to earn a sign up bonus for it and I found a sign up bonus that was comparable to what he was pushing on me from Navy Federal. I asked what he thought of it. He said it was no good and I needed to use the cards he was pushing for XYZ reason, blah,blah,blah. It was so fucking sketchy, I stopped responding, unsubbed from the mailing list, and sent all his emails in the trash. Never visited the blog again.
I didn't realize until later how much money he stood to earn from me using his sign up links and the only thing wrong with Navy Federal offer was it wouldn't earn him anything.
I ended up becoming really familiar with the major credits after that.
There seems to be a split in my area with small businesses, mostly along generational lines.
The ones run by younger people are very credit-card-first, love not dealing with cash, etc. They usually have one of those Stripe iPad things. If you do pay with cash, they'll get a bit flustered because it breaks their flow.
The ones run by older people are either cash-only or try hard to disincentivize customers from using credit cards, sometimes with signs guilting customers about how much money card companies take from businesses.
It really feels like a generational thing depending on what people are used to. The older shop owners remember when cards were a lot more rare, and they've seen their swipe fee expenditure go up over the years. While the younger owners have only ever lived in a credit card oriented world and just bake the swipe fees into their prices from the beginning.
My experience lines up with yours. I love paying with cash when I can, but even in my smaller city, so many places won't accept cash. My assumption is that handling cash is a cost they'd rather not deal with.
For food, most places will accept cash here. Hell, even a bookstore near me won't accept cash anymore.
Using a credit card is always cheaper to the merchant, maybe the merchant doesnt realize it but cash is a bad deal like Uber is a bad deal - They money is up front so you never realize the costs.
In the case of user, it is fuel, vehicle wear and tear, and shifting demand.
In the case of cash, it is the cost of counting and keeping the drawer, security, deposits, change, and internal training/theft. Most estimates show it to be ~10-20% of income of a business is wasted. Always less than the cost of credit.
Well...that is...if you didn't do what maybe 50% of small businesses do: Screw the taxpayer. Sure, these credit card companies take 3%. Many small businesses take cash so they can do cash accounting and keep "money in" away from the IRS. They dont report it, they pay workers with it under the table and you, the customer and tax payer, may pay less, but you are getting screwed.
Only from some indignant-irate viewpoint. Paying less is a win. Taxes are a fraction of what you would pay (in th other imaginary scenario) - a percentage of the margins on the transaction. If those are apparently reduced to zero through some chicanery as suggested, you still pay less than what those 'missing tax dollars' would have been. You participate in the savings.
Kinda hard to incentivize when a responsible credit card user will come out ahead financially by using a rewards card. I get roughly 2k a year in rewards for doing nothing more than swiping.
So what's the deal with the Chase Sapphire Reserve card he mentions almost everyone having? I don't shop for credit cards often and when I Google it I see it's myriad of rules for points and perks, but nothing really jumped out at me as the killer feature that would lead to that sort of adoption.
When it came out, its signup bonus was quite generous, and its points could be redeemed for a lot of value if you used them right (travel). It's less generous now, but still pretty solid.
The big one is that points can be used for 1.5x travel or something like that. So 100 points buys $1.50 of travel, which can add up pretty quickly. The signup bonus was worth something like $1200. And its 'better than normal' categories fit well with professionals in cities who eat out a lot, with a high point-accumulation from that use.
I think their point was that it was the first card of its kind outside of American Express. Back in 2016 there wasn't anything else really like it other than Amex's high tier cards. It also had a really generous sign up bonus when they first released it, 100,000 points if you spent a certain amount on the card in the first few months. Since then other issuers have been playing catch-up so the CSR stands out less.
I would prefer no rewards. Rewards transfer wealth from poorer people to wealthier people, because the latter spend more absolute dollars on rewards cards. This regressive effect is a big turn off imho in addition to the stupid points optimization games that rewards card owners have to play.
What a fascinating article. Probably an unsophisticated model but the way I approach my credit card rewards program is as a “forced savings” deal. I’m aware that they are subsidized, I’m also aware that I’ll pay the same thing if I were to pay with cash (at least in all the places I buy).
Would we be better off by having capped swipe fees? Idk. Would merchants actually lower their prices instead of keeping the extra revenue that everybody is now used to pay? Idk either. I don’t trust in the goodness of the heart of merchants or credit cards issuers.
But, would I have an unexpected 3 or even 4 figures “unexpected” rewards at the end of the year that I can only use for vacations? I don’t think so. I could possibly set up something with my bank, but I don’t need to think or plan rewards… they just happen.
I’m seeing restaurants charge a credit card fee as a line item on receipts like a tax, with a percentage. I wish there were real time information what a particular card will cost the merchant, and that fee is what’s charged. The idea most people should subsidize other people’s kickback is obscene.
Also, I’m confused about the federal law flat rate fee on debit cards. I know merchants using Square and report that they’re charged the same fee for debit and credit cards, no discounted rate. For small businesses, I’d like to use my debit card, but not if the payment processor is going to pocket the difference between the discount debit fee and their fee to the merchant, and thus me.
An "advisor" (not a regulated adviser with an e) at my bank here in Canada asked me how often I travelled because a rewards VISA card pays blah blah.
I said I don't travel. She literally froze for five seconds it looked like her head was going to implode. After that my bank practically abandoned me.
There was a recent story here how all banks in Canada push services to the point of daily meetings and managers tell staff to aggressively push products. Even ignoring federal banking rules obligating bank employees to tell customers to pay off debt first before investing.
CC Rewards programs are amusing to me (because of time effort spent on them). At any rate, I haven't seen those in Europe/EU for ages, probably because they slashed intercharge fees so they make much sense (the main reason was making card payment accepted everywhere without dumb sticker: "card payments only for shopping above x [currency]"
Good article, I wondered about the details of card rewards schemes as a kind of meta commentary on the financial system. Interesting to see that patio11 has left stripe now to work (seemingly) on this newsletter full time. I do miss the days when the articles were technical; there’s a deep software and writing skillset that we’ve lost to the financial system which isn’t nearly as fun.
I would recommend Payment Systems in the US and, Global Payments: And the FinTech Innovations Changing the Industry, for anyone looking to learn more about how value (aka payments) gets transferred, and the various players / their incentives along the value chain.
I’ve read previously that folks who pay their card in full monthly are internally known as “deadbeats”, because there is no interest to be gained from them.
This seems to run counter to that - there is revenue, perhaps less?
I’m really curious about how the T-Mobile dining program works where by registering my credit card (which already gives 3% cashback on restaurant purchases), I get another 5% cashback through T-mobile.
Sucker buttons? How about (this is addressed to a certain group of people not everyone) spend your time trying to make money in some way rather than trying to max small amounts that you get from credit cards, reward programs what not. As if everyone is just some kind of retired person with time on their hands to think about miles, rewards etc as a way to keep busy.
> Due to long-standing practice, I am (homeopathically) exposed to the common equity of financial services companies that my family uses, so that I can call up Investor Relations if I ever need to escalate a routine banking issue.
For this to be effective, what parts-per-billion concentration do I need?
Depending on the card, you get around 1 or 2 or even 3% back in cash or other types of rewards like airline miles on your purchase. Basically the credit card company charges a merchant something like 3% on a transaction they accept through a credit card, and the credit card company decides to pass on a portion of that fee to the credit card user as an incentive to use that credit card over another form of payment.
In my case, I pay for as much as I possibly can using a credit card and then pay it off at the end of the month so that I can get that % reward back and am not charged any fees.
I find it odd that a person who understands the madness of our current financial system so well, still is violently opposed of anything blockchain related.
Blockchains are costly and don't solve these problems.
It is as evidenced by the way blockchains are used now. Cryptocurrencies are the most important applications, and few people actually own them, and by "owning" I mean being able to make a blockchain transaction. In most cases, they have an account with a third party who does the blockchain stuff. In other words, a bank. In fact, it may be an actual bank, which is probably for the best because actual banks are highly regulated and are less likely to just take your money and disappear.
Cryptocurrencies quickly became just another financial product that is being integrated in our current system. And for the other ways cryptocurrencies are used, these are mostly illegal (drug trade, ransoms, scams, tax evasion, etc...) and governments are working on that.
Other prominent applications of blockchains: NFT, DAO, etc... are even crazier than cryptocurrencies. All the madness of our current financial system without the regulations that make it somewhat usable to grownups.
Say you are from a third world country. Your family back home needs money, but a bunch of red tape and fees in the traditional finance system (sending money to a third world country often raises KYC/AML questions and wire transfer fees are high) make it difficult and expensive. Moreover, in some countries with unstable currencies such as Lebanon and Argentina, the banks have to offer government mandated exchange rates that are wildly off the effective rates; there have even been cases where FX deposits were forcibly converted to the local currencies at these unrealistic rates. Rather than go through all this, you can just send BTC and sidestep all the issues.
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.
> 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/vis...
> 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.
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> Fraud costs are borne by merchants and to some extent processors, but not the issuer banks that receive the interchange fee.
Merchant fraud and merchant credit risk is borne by acquirers (although, if they went under the issuing baking is ultimately on the hook). But fraud by the cardholder and cardholder credit risk is borne by the issuer.
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There is a government to government payment fee category in there. Why on earth would two government agencies ever need to use a CC to pay each other and lose over 1% in fees?
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Maybe 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.
>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-rewar...
https://www.google.com/search?q=merchants+want+to+refuse+rew...
This is actually the reason lower fee cards exist. If every card had a 5% transaction cost no merchant would sign up for that card brand. If the merchant is convinced their average transaction cost will be lower because some of the cards will be cheaper you can get away with some expensive cards.
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Are they bound by contract not to offer a discount for casher buyers?
I ask because when I was in Germany (and, granted, this was a few decades ago) you got some percent off the price if you paid cash. Merchants there seemed pretty credit-card averse.
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What I want to do is pass on the exact processing fee to my customers, then they can choose their payment method based on how much it is going to cost them. I might then choose to cover a portion of the fee for electronic transactions, because they mean I save money vs processing cash. But the customer would pay the excess.
I would need a system that can display to the customer what fee they would be charged with their selected payment method, and be given an option to switch to a less expensive payment method.
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That would cause a massive customer support and frustration problem as regular customers don't know or care how their card is classified and would complaint that it doesn't work. This would affect both the merchant and the issuer negatively.
Large merchants also pay much less for interchange generally.
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If only Walmart would take contactless payments.
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The 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.
> The 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.
Counterpoint: i will pay you $500 if any of the big retailers (>2k stores) lowers prices now and cites "lower credit card fees means we can charge less".
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While 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.
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Doesn’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.
It'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.
It’s been mostly legal to charge credit card surcharge fees since 2013. 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.
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Is it legislation or the contract with the credit card? My understanding is the contract to take ie VISA has terms that you cannot apply a discount for customers using other payment methods (ie cash or someone else's card). There are a few places that don't have those terms (mostly government where often a card does cost more to use).
What people forget about these fees is a credit card is cheaper to take for the merchant. The credit card is never counterfeit money. The clerk never takes money from the credit cards, nor does the manager counting it (I wasn't in retail long but I saw both). You never have a robber come in to take your credit card money. Even when all goes well, you don't pay the clerk and manager by the hour to count all the cash twice. You do have some risk of taking a stolen credit card, but overall it is cheaper for the merchant to take credit cards and that savings should be what pays for the card costs (I have no idea how to count the different costs to see if that is true)
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The 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.)
> 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.
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Sorry, 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.
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Credit 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.
>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.
Rewards cards should be illegal and basically are privately levied tax on the poor and a subsidy to the wealthy.
Boy 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.
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Returning 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.
I 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.
> 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.
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The 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.
Simply 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.
> 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/vi...
Some 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).
I’ve never seen an Amex declined at a grocery store.
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It 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.
Citibank reissued my credit card well before the expiration date to upgrade it to a "World Elite Mastercard" with attendant higher interchange.
The 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.
In India, merchants have a choice and they regularly charge more for using credit cards.
Less money on interchange may mean more money on interest charges on balances
> 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?
Wow you thought of something the author didnt cover and think the whole article should be about your post.
>Redditors are frequently sophisticated with their spreadsheets; many of them could clearly earn three orders of magnitude more from the financial industry if they stopped thinking that the right way to monetize spreadsheet skill was in gaming credit card signup bonuses.
It's a pretty decent outlet for having something complicated to work on. Another would be EVE Online with the added bonus that it's also an actual game. My guess is most of those people are just trying to min-max what the companies allow them, rather than trying to find an exploit in the system that prints money per spreadsheet CPU cycle.
I am suspicious that anyone can get a job in finance with only churning (or EVE) spreadsheet skills. I have rarely found "well if you can do that hobbyist but seemingly proximal activity, you can walk into a decent-paying job" to be true in tech and I suspect it's true for finance too.
Maybe the finance bros just need a leetcode-for-spreadsheets website to run their technical interviews to open the floodgates though.
I am pretty deep into the credit card hobby and most of the people in it are high-earning professionals already. The last meetup I went to consisted of half of software engineers.
So we already have jobs that pay well for optimizing things.
It’s hardly a difficult skill. I have a spreadsheet with the date , credit limit, money needed to spend to get the reward and a date to cancel the card. Wall Street better get ready for me
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How does one get deeper into the credit card hobby? I optimize for cash back on gas and groceries but not much else.
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At the end of the day, it's mostly a hobby and you either find keeping track of everything and making effective use of rewards worth it or not. Personally, I have a few cards for targeted use but mostly I just take 2% cash back on a free card and figure that's close enough.
I was also intrigued by that quote and find it rather dubious. Coincidentally today, I and 5 other family members are boarding business class international flights worth ~$60k cash, paid for with signup bonus points. This doesn’t even include the other tens of $thousands of redemptions we’re doing on both this trip and the rest of the year. This is also just side hustle/hobby-that-pays-for-itself “money,” in addition to the (not) “three orders of magnitude” faang income.
This was otherwise an interesting article.
I find it hard to believe you're getting almost 6 figures of value out of signup bonus points and other card reward redemptions in a year.
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The value of points is sort of hard to determine.
I'm guessing (but could be wrong) that you would not actually have paid $60K for business class seats for your family had you not had points that would cover. (I have gotten really good deals using points for something I'd have paid for anyway--but it's been rare.)
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Is $60K cash split between these 6 people? Then it is not that impressive.
If you want higher ROI on spreadsheet hobby start using it for your own financial/retirement planning. Playing with numbers in that field can change outcomes by hundreds of thousands dollars.
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Microsoft Excel World Championship 2023 - Finals: https://www.youtube.com/watch?v=UDGdPE_C9u8
I think churning is just a hobby for bored divorced guys and used as a proxy for developing any real (non-financialized) interests. Normal cash back for most cards is good enough for most people, and you aren't going to get big point kickbacks unless you already have a lot of money to spend.
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.
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...
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."
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”.
This is interesting. The study you cite and quote is about a transfer of money from "naive" credit card consumers to "sophisticated" credit card consumers, which correlates to "poor to rich", "less educated to more educated", etc. I'm even more interested in the transfer that occurs from both cash and non-reward-card consumers to specifically reward-card users.
Can't this be rewritten in plain English as "unsophisticated (dumb) people don't know how to use credit cards in their own interest?". Isn't that just the free in free market?
Why is a principled objection to a paternalistic state intervening to protect dumb people from making bad decisions seen as unethical? What entitles dumb people to such protection?
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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.
A huge aspect people ignore is how expensive it is to handle cash. From storage, administration, transportation, loss, etc. it's usually a little more expensive to take cash vs. card.
This is why your grocery store partners with an ATM network to let you take out extra cash at the POS. As long as you're paying the fee, they'll do whatever they can to trade you cash for a digital deposit into their bank account.
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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?
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.
> 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.
A large segment (in the US) that does _not_ subsidize credit card fees are gas stations, where, for the most part, the price for paying in cash is lower than with credit, or there is a per transaction surcharge for using a credit or debit card.
Car-centric as it is, gas prices are arguably the commodity that US consumers are most price sensitive to (and which is also most commonly evoked in politics). So this shows that consumers would prefer to discriminate between card and no-card purchases if given the option, except that the vast majority of retail outlets do not give them that option.
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>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.
There was a study by the Federal Reserve that came to the conclusion last year that rewards cards is basically a money transfer of ~$15 billion from poor to rich per year. Discussion on Hacker News about it: https://news.ycombinator.com/item?id=34492502
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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.
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The median credit score for low-income Americans is 658 (US average is 714): https://www.fool.com/the-ascent/research/average-credit-scor...
It looks like a number of decent rewards cards require a credit score over 670.
Poor people, actual poor people who are just scraping by, usually have bad credit and cannot get credit cards.
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because poor people, typically: - do not quality for high-rewards cards (which have higher credit score thresholds) - if not savvy, carry a balance because they can't afford to pay off the amount in full, are subject to higher interest rates because those are the cards they qualify for, and thereby pay much more than than well off consumers (increasing the transfer of wealth) - if savvy, realize that having a credit card costs them more than not, and stick to cash - are more likely to be receiving payment for services in cash themselves and will just spend that rather than depositing and using a CC (if they even have a bank account)
(update: 4.5% of US households are unbanked; these are mostly from the lower quantile) https://www.fdic.gov/analysis/household-survey/index.html
Here's the Acquired episode mentioned.
https://www.acquired.fm/episodes/visa
> 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-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.
Does accepting cash really save a business that much money? I've heard arguments in the past that it ends up being a negligible difference once you account for all costs of processing cash (someone has to take it to the bank, it can get stolen in a robbery, employees can skim, you have to count it, you need a safe, you need cash deliveries, etc).
I have no numbers, so it could be totally off-base, but it feels not-impossible that it costs a percentage or two to process all your cash anyway, so the difference between cash & credit cards isn't actually that big. It's just that the interchange fees show up as one big chunk whereas the cash processing is lots of little bites, or even accounting for things that didn't happen (like skimming).
I guess this only applies if you're legitimately reporting all your cash take, if the business itself is skimming for tax reasons then the savings on cash would be substantial.
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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.
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I don't disagree with your point; I do want to point out, though, that whether it's "the merchants have to raise their prices" or "the merchants benefit too and are complicit", the end result is still that it's still the poor who lose.
> 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-m...
Claiming that merchant fees result in higher prices is different from claiming that reducing merchant fees would directly, immediately, or measurably lower prices. Isn't a plausible explanation that companies are hesitant to lower prices for any reason?
Let's consider the opposite scenario, if Visa raises their fees do merchants keep prices where they are? I suspect not.
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-con...
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> 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
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.
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.
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> 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.
> 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-rule...
It creates a massive money transfer from small businesses to credit card companies, transfer partners, and wealthy consumers.
Seems to make sense to transfer money from one group to another for a service that one group uses and the other provides.
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.
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%.
Interchange is not capped at 0.2%
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Theres a net gain between credit card rewards and higher prices for reward card users?
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.
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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.
https://www.youtube.com/watch?v=akO8qAx4xjY
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.
Merchants pay 3%. Cardholders borrow from banks, not card payment networks. Rich people can donate to poor people regardless of the credit card situation.
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Fun fact: this is why crypto never took off as a replacement for credit cards. Too many entrepreneurs focused on “lower fees” as if it were some technical property. But it was never about the technology.
Interchange fees primarily fund consumer rewards programs and benefits. To become an appealing choice for consumers, any new payment method has to offer competitive benefits. Those benefits are funded by the fees.
Visa/MC/AmEx have essentially created a system whereby higher-spending customers are able to wrench more value from merchants in the form of higher fees. This is reflected in the fee schedules that slice and dice merchants by category and customers by card tier.
If you want to build a new payment system it is important to understand that it’s not just a negotiation between merchants and issuers. It’s a two-sided market where customers also leverage their spending power, directly or indirectly.
> this is why crypto never took off as a replacement for credit cards
If this were true you would expect crypto to have taken off in countries with low interchange rates. Europe, for example, has far less of a rewards and points culture for payment, and (compared to the US) much lower interchange.
Crypto never took off as a replacement for credit cards for many reasons - the biggest coins out there are simply too volatile to be usable as a currency, they lack the consumer protections you get paying with a credit card, and they’re simply too complex for an average person to understand.
Interchange is regulated in Europe. You would likely run into legal issues if you tried to jack up merchant fees via a novel payment method.
However, even if it were legal, I don’t think this would counter my claim. I’m merely saying that you’d need to match existing rewards schemes in markets where they are established. Introducing them into a new market is an entirely different matter. The system we have today evolved through many decades of negotiation and deal making among merchants, issuers and card networks.
You’re right about consumer protections —- it would be very expensive for a crypto-based system to provide those without an intermediary that can adjudicate and reverse transactions (chargebacks).
Surely that isn't the only reason
The complexity of crypto is probably the biggest.
The second biggest is the missing need: Most people don't have any advantage of using crypto. They go to work, get a salary, buy/sell things and thats it.
If you don't need to buy something illegal or really believe that there is still a soviety left to take some crypto in worst case scenario, fiat is great.
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15-60 minute settlement times early on certainly didn't help
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>this is why crypto never took off as a replacement for credit cards
I thought it was because transactions take minutes instead of seconds.
And because it's uncompelling. I have a bunch of consumer protections around my credit card, why would I want to use crypto instead? Especially when it's a wildly fluctuating speculative asset and the burger I buy for $15 worth of coins today will be $60 dollars of coins tomorrow.
They can take either; waiting for confirmations is only a matter of reducing double-spend risk.
In practice, seconds after a transaction has been signed and broadcast, it is already very unlikely to double-spend. Miner incentives are such that the first-seen transaction is the most likely to be used. A delay of a couple seconds is sufficient to account for network-propagation lag.
You wouldn't do this for high-value transactions, but there's some threshold where real-world risk is lower than the convenience of a fast transaction, and that threshold is reasonably high.
That is almost certainly one reason and an important one. But as the other commenter to your comment shows, there is a lot more. Protections is a big one. I also personally side that, you need a way for people to interface with their crypto like they do with their current bank and as simple as possible. Normal people don't want to have to juggle around keys. Hell, Im a software engineer and I hate having to keep track of keys. So every time I get a new machine, I create fresh new SSH keys. My SSH keys are disposable to me.
Funny, because I would pay twice the CC fee for credit card transactions to be as painless as crypto. I'd rather scan a barcode and wait two minutes, compared to typing my address, handing over my phone number, confirming my zip, waiting for my CC's TOTP to arrive. Only for it to still fail 5% of the time for who knows what reason.
You should try Apple Pay (or maybe Google Pay?) It addresses all those pain points and more, while still giving you the consumer protections and fast transactions of cards.
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This is where a lot of tech folks fail. It's almost never about the technology. Most of the time all you need is a spreadsheet.
Most tech things are various forms of spreadsheet.
Blockchain is a distributed and complicated one.
It's not just crypto it's any alternative payment system. Multiple payment vendors have tried to up-end the credit card companies by focusing on lower fees for merchants, but customers have no incentive to use that new system if they have a benefit to using their credit card, at least in the US.
It's why, though, there are a bunch of payments companies that have popped up in places throughout Asia that aren't competing with rewards systems off the back of interchange.
I had high hopes for https://www.prnewswire.com/news-releases/ternio-blockcard-wi... but it was just too much hassle to keep transferring in money
While looking up a representative link for that, I also saw that it appears Venmo is in that game, too: https://www.cryptovantage.com/best-crypto-credit-cards/venmo...
> Fun fact: this is why crypto never took off as a replacement for credit cards. Too many entrepreneurs focused on “lower fees” as if it were some technical property.
I always thought the big problem with crypto was that the fees were atrocious for any small transaction.
And the fees only get higher as the network gets busier. You can choose to have a send some money with a small fee, but the miners will never confirm your transaction, as each block is limited.
Not quite the case anymore—rollup fees are often below $0.05 per transaction.[1]
[1] https://www.gasfees.io/
Couple quick things - from a business operator
The only way to cost in cc fees is to always assume the highest tier plus one time fees. This is then built into the retail cost of everything
If you pay with a lower fee card, you subsidize the higher fee customers
If you pay cash, debit, or check and don’t say anything - you subsidize the higher fee credit card payers
If you ask me, I’ll give you 2% discount for cash or check. I’ve built in 3%+
Visa debit is the biggest scam going, they’ve found a way to charge 2.5% to take debit cards. In Canada forever it’s been 0.10 a transaction for debit for higher volume clients
Pretty much - you need to get a high reward cc and use it for all your purchases and pay it off every month. If not, and you don’t ask for a discount, you subsidize the people who do.
Example - last month I was “funded” $130,681.33 this includes debit cards which I pay a low flat rate for (but this is changing)
On $130,681.33 I paid $2,433.51 in service charges or 1.86% . Plus the liability of the possibility of a charge back, also I do not accept Amex.
A lot of businesses give more than a 2% discount for cash. Personally I find that I instinctively tip less when I use cash than a credit card. The act of getting bills out of my wallet is viscerally more painful than writing numbers down, so I tip less without thinking.
- In the EU the main reason Rewards cards have declined is that the regulator capped interchange to a very small amount in 2015. The US will follow suit at some point (as noted debit cards have gone that way) but I guess not as low
- I think the simple answer to nkurz's point on why don't all cards charge the maximum in interchange is - it's just market forces. It's not worth enough money to long-term piss off the bigger merchants (i.e. Amazon). When you have a 30% APR card non-rewards card, the 3% interchange is small beans. Also the acquiring bank would probably want a bigger piece of the pie if it were more widespread
- Credit Card economics is radically different across different countries (for all sorts of reasons). So for example, a third of card users in the US explicitly seek the rewards and another third have it for the various protections/security vs. debit cards. In the UK only 12% seek rewards, with the two biggest use cases being to spread costs of big transactions or to improve their credit score. (so for that reason it's sort of hard to have a global view of this problem)
A fun fact is that most US reward cards with up to 5% rewards work fine in the EU.
I have noticed some strange behavior with some cards at certain supermarkets. That may be them trying to fight back against the US interchange fees, but there are workarounds.
Reading the description of the interchange fee cap, it sounds like the cap should apply also for US-issued cards used in the EU [0]:
> ... the capping of interchange fees should result in lower fees charged by banks to retailers for processing card payments.
If users of US cards still get 5% rewards when using their cards in the EU, I'm curious about who pays for the 4.7% shortfall.
[0] https://ec.europa.eu/commission/presscorner/detail/en/MEMO_1...
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Cross border interchange & scheme fees are a whole other category.
FX is expensive in general regardless of the way you do it.
Similar but with my debit card from Europe. 0.1% cashback in Europe and UK, 1% everywhere else.
But most individual issuers (excluding Chase and maybe 1-2 others) have a small impact on the overall mix, so why wouldn't they issue exclusively the top tier (highest interchange) cards?
My credit card is a Fidelity 2% cash back Visa. (I think it was originally American Express, but it's Visa now. Presumably that happened sometime after 2016.) I don't travel much, so getting cash deposited into my brokerage is more useful to me, and with a "2% on everything" card, it's not really worth it to me to carry around other cards for specific categories.
After I bought my current home, I put a bunch of expenses on the card. I didn't realize I had gone over the limit until I got a letter in the mail telling me that they automatically increased the limit. They keep increasing it every year or two, so at this point I could put a mid range car on the card.
All that said, I would prefer if rewards cards in general were banned and everything was just 2% cheaper. The whole concept feels a little dirty to me, like I'm taking a bribe to use a specific form of payment. But, at the same time, it doesn't make sense not to in the current market.
I likewise have this card and it worked for me in a certain point in my life but it depends on what you spend money on. As a family of 4 we spend a lot on groceries and eating out so its good to use a card for those things that gives us 3%. The sort of most obvious one is the amazon visa which you can connect to your amazon account and get the 3% off on everything there automatically.
It's not a life changing amount but it's free money.
Just an unsolicited pointer, but if you're US-based you might consider computing the cost/benefit of an Amex blue cash preferred.
It carries an annual fee of $95, but the 6% back on groceries (on your first $6000/yr) and 3% on gas add up pretty quickly.
> All that said, I would prefer if rewards cards in general were banned and everything was just 2% cheaper.
Would you prefer that reality literally, or just if it was effectively like that? Literally doing that seems way worse than payment methods competing for your business with rewards.
I think either would be an improvement over the current situation. I'd be happy with regulations that put a cap on the fees, similar to what the EU has.
I want payment methods to compete by offering better service for lower fees, not by bribing consumers with rewards (and explicitly charging the businesses higher fees to pay for those bribes).
I've had the Fidelity 2% card for a long time. It's simple, and mostly no-nonsense. It's one of my two "everyday carry" cards, and what I use for everything except Amazon and Whole Foods Market (WFM).
For Amazon and WFM, I use the Amazon (Chase) card. Since WFM has replaced or outlived most of the grocery stores near me, this is my other carry card, and it doubles as a backup card if the Fidelity 2% has a problem.
I almost added a Target 5% store card recently, because being a cheap bastid overrides being a minimalist bastid. But I abandoned the card application form, when something about it seemed a little too invasive. So I'll keep doing the Fidelity 2% card when I shop at Target, and that makes Target prices a little less competitive.
> It's simple, and mostly no-nonsense.
Yeah, that's the other reason I like it: I rarely have to think about it. Both paying off the monthly balance and cashing out the rewards are fully automated.
All I have to remember to do is save a copy of the annual summaries at least once every 3 years, because they don't let you go back farther than that.
I try to keep most of my finances "on rails" like that where bills, savings, etc. just happen automatically.
I am really interested in the content of this post, and I assume other posts from the author. But his writing style is extremely long winded.
For instance, this is somehow only two sentences.
Agreed. I thought I was having a bad day unable to comprehend the content, but the style is off putting.
Agreed. Lots of parentheticals that distract from the main point.
This gentleman discusses topics that I think I'd be interested in, but like the half dozen times I've tried to read this guy, I've just lost my motivation so quickly. I feel some arrogance in his long-windedness. Is there any parallel to make with The Last Psychiatrist?
Came here just to write the same. I've squandered to find an explanation because I absolutely enjoy the subject. Perhaps it's because I'm not a native speaker and generally have non-native speakers around so I don't understand some of the metaphors, perhaps it's because I'm just not used to reading these kinds of long sentences anymore, or perhaps it's just not my kind of beer. I really don't know.
On the other hand, I really enjoy both reading and writing long sentences, as long as they are logically easy to follow, for they exude a certain eloquence and elegance that elevates the style and, most importantly, refines my audience by filtering away potential readers who had not had sufficient high school language classes to get used to understanding such long sentences effortlessly, which, this being a matter of personal expression rather than instruction, I certainly have the right to.
I agree with you.
They’re not essays you can skim. But I enjoy a word journey.
Don't ever read Proust!
Not to go too off topic but I'm extremely interested in the throwaway comment about holding enough equity in your service provider of choice to justify calling investor relations when you have an issue. Is this a real thing that people do? If it works it sounds like an amazing life hack but I have my doubts how much influence they would have over the "real" support.
It's a thing the author of that article does, at least. He's got an article mostly about how to escalate identity theft complaints here that touches on it: https://www.kalzumeus.com/2017/09/09/identity-theft-credit-r...
It's very long so I'll just quote a small bit specifically about the Investor Relations:
> If you cannot route letters to the legal department, go as high up as required. Pro-tip: virtually every major US company has a department called Investor Relations which is trivially discoverable, very well-funded, publicly routable, and very bored during 80% of the year. You can excuse any letter to Investor Relations with: "I am a shareholder in BigBank. I was therefore profoundly displeased when I learned…"
> What’s a well-paid bored professional in Investor Relations going to do with your account information? Nothing? Nothing is a great way to get fired. No, they’re going to open up their internal phone tree or ticketing system and say “I have a letter from an investor which alleges an identity theft issue. Which group handles that? Your department? Great; handle it and call me when you’re done. Do you want it by fax, email, or FedEx?”
For this to work though you've got to present like your position in the stock is in the millions of dollars, even if it's actually like $100. The author of the article has been in the financial industry for a very long time, and has also spent a long time as a Japanese salaryman, so he can definitely pull that off.
There are a ton of free services only accessible to those with money. For example, if you buy jewelry from any luxury store you can often also bring it in for free cleaning. But they will honor this for any piece you bought from them. And if you bring in a mix of pieces they will often clean them all.
Luxury retail isn’t often worth it, but when it is it comes with lifetime services.
Probably going against the grain here, but I think it’s great that at least a modest fraction of the benefits of highly risk-optimized revolving credit and low-friction electronic payments are feeding back to the consumer, vs. having all the value derived from that technology captured by the banks and merchants.
In a world where these high-exchange-fee / high-reward cards were outlawed, merchants would pay less in aggregate in fees. But almost surely they’d lose out net from a drop in overall consumer spending.
That affiliate programs inspire gamification for consumers to optimize their spending patterns to “win prizes” seems like a neat bit of competitive market pressure: It’s obviously a win for all involved or they wouldn’t be so popular.
> It’s obviously a win for all involved or they wouldn’t be so popular.
Definitely not a win for consumers, who in aggregate lose out. The margins to make the system work are built into the prices you pay at the checkout.
Other markets like Europe and Australia capped interchange and made it cheaper for retailers and consumers.
This forced banks to redesign their products/rewards/pricing to give consumers a real choice of whether to play or not.
Some consumers decide to fund more of the rewards cost themselves (via cards with annual fees). Some keep high rewards by using new bank-issued Amex (but pay surcharges at the checkout). Some keep much of the gains for themselves (via no rewards/low cost cards, with lower costs for the retailer).
So now, consumers who don't want to pay the overhead of interchange-funded rewards for everyone else don't have to.
(Disclosure: I ran portfolio management/cross sell/profitability/customer retention for an Australian credit card issuer during the period that interchange there was capped and progressively forced down. Later, I was the Netherlands representative on one of the card schemes' European advisory committee.)
> Definitely not a win for consumers, who in aggregate lose out. The margins to make the system work are built into the prices you pay at the checkout.
While not wrong don't forget that cash also has costs that are built into the system - there are a number of theft ways to lose money with cash that don't apply to cards. Even when everyone is honest there is the time cost to count all that cash. Somewhere between the two is mistakes in counting.
Definitely not a win for consumers, who in aggregate lose out. The margins to make the system work are built into the prices you pay at the checkout.
Prices are a function of supply and demand. Higher interchange fees hit supply (costs more to produce and sell the same quantity of goods) but they also spur demand, or no merchant would accept the cards with these fees. And indeed some large merchants have (for example) excluded American Express or Discover from their available payment methods for just this reason.
> It’s obviously a win for all involved or they wouldn’t be so popular.
Why is it obvious that it's "a win for all involved", as opposed to some big powerful financial companies taking advantage of a bunch of less organized merchants while providing benefit to some subset of cardholders? Obviously the merchants benefit overall from accepting credit cards, but I don't think it's anywhere near obvious that they benefit from funding the rewards programs. If there was any way for them to opt out, I feel a lot of them would. And it's hard to see how the non-rewards cards customers are benefitting from the current system---would any of them choose the current system if given a choice?
I definitely agree that someone is winning from the current system, but I don't think it's obvious that it's everyone.
As the article says, those who get rewards are richer people who spend more money. so merchants are indirectly rewarding their customers who spend the most money.
> That affiliate programs inspire gamification... It’s obviously a win for all involved or they wouldn’t be so popular.
It's not a win for consumers having to spend their time learning the "game" in order to not be left behind and essentially lose money.
I use basically a single credit card with a simple, universal cash-back scheme. I do some extremely simple and low-touch investing on the side. I choose not to waste my time attempting to do a billion other things that everyone else is doing to extract more value from the system, but I'm well aware that I'm probably coming out behind a lot of people as a result. That's not a "win," it's a race to the bottom that I've partially conceded.
My problem with the system is the fact that merchants are prohibited from handling different cards differently, for example by passing reward fees to the consumers.
If that were not the case I would be happy and let the market pick the preferred way. My 2c.
>low-friction electronic payments are feeding back to the consumer, vs. having all the value derived from that technology captured by the banks and merchants.
Are you talking about the cash back? Isn't that just a shell game? If the consumer is getting 2% cashback, but the merchant is charging consumers 2% more to pay for it as well, how is it "feeding back to the consumer"?
> Are you talking about the cash back? Isn't that just a shell game? If the consumer is getting 2% cashback, but the merchant is charging consumers 2% more to pay for it as well, how is it "feeding back to the consumer"?
One of the issues is that the cash back rate is not evenly distributed across the buying population.
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I wish stripe or some company would create a zero fee credit card that is truly equivalent to using cash. The wealth transfer from cash payers, merchants, and some card users to other card users and the cc companies is one of those gross injustices, a small and persistent leech on society. Surely there’s a way to do cc transactions for near zero? What is the point of all this tech otherwise?
There's still fraud detection / prevention, card terminals, and other various infrastructure to pay for. Someone's going to pay for it, somehow.
Also, suppose Stripe did offer a low / zero transaction cost card. What's the incentive for me (a customer) to get it? It isn't any better than the other no-monthly-fee CCs, and is strictly inferior to a rewards card.
For merchants, yes, they are incentivized to accept Stripe's new card. But they can't stop accepting the other ones until Stripe has a significant share of the transactions. And may not be able to do so even then.
And meanwhile Stripe is eating the cost of running this new zero fee card system, which effectively takes away money that they could invest in their own business.
Sounds like a lose, lose, lose all around.
The real solution is to have a law that caps the CC transaction fee. Or allow merchants to add a surcharge for rewards CCs.
Just ask your parliament to limit the fee? It's 0.3% for credit cards and 0.2% for debit cards in the European Union:
https://www.consilium.europa.eu/en/press/press-releases/2015...
They already started trying. The Credit Card Competition Act was introduced last year [1]. It doesn't explicitly limit interchange fees though. Instead it allows merchants to choose the payment network that payments go through which legislators hope would create a race to the bottom.
[1] https://www.congress.gov/bill/118th-congress/senate-bill/183...
One side of this is cash isn't zero fee.
It has to be minted and circulated, we see it as "free" but in practice the gov foots the bill. And, for cards it would be issuers footing the bill.
Then moving cash isn't free either. Merchants handling a lot of cash also pay to get their cash moved, processed, exchanged etc. It's an aspect where card could be lower, but zero is also an impossoble goal.
Agree but maintaining the infrastructure has a cost someone has to pay and I as a customer won’t see any benefit.
I think it would be healthy to be able to have options with near zero cost but I guess this would only happen with strong regulations, which seems almost impossible in this space (in the US)
> Agree but maintaining the infrastructure has a cost someone has to pay
The bank? Keeping money in your account allows the bank to take out credit. Providing digital payments sounds like a reasonable service for a bank to provide. As well as fraud prevention. This is how it works in Europe, most people have debit cards. The insanity is having to take out a loan you don’t need to prove that you’re responsible.
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The leech is the point, there is no "otherwise."
We have something similar in India.
[below text is from google search results]
To facilitate the penetration and usage of RuPay Credit Cards on UPI, there will be no charge for transactions up to ₹2,000, an NPCI circular said. For transactions upwards of ₹2000, the applicable MDR amount will be borne by merchants and no additional charges will be levied upon the customers.
Disadvantages of Rupay Cards Limited International Acceptance: One of the main disadvantages of RuPay cards is their limited acceptance outside of India. ... Restricted Usage: RuPay cards are primarily designed for domestic use within India.
Isn't that called a debit card?
I wonder why no bank offers a debit-network-processed card that is backed by a line of credit.
Probably because there’s no money in it.
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The AI generated cover image was kind of distracting to be honest. If having a full-screen image to go with the post was so important, one would have contracted a designer or just purchased something cool.
The post was informative though.
The image content and size is annoying, agreed, but I imagine that, like myself, they would go without an image if it meant contacting a designer and spending time negotiating rates, ideating on designs, and waiting on project completion. It takes seconds and is free to generate a neat image with AI that can be very additive to something like this, but unless you’re NY Times or WSJ doing a long form article, it’s probably unreasonable to expect anyone to get something explicitly designed and paid for in this context.
I believe the parent was hinting at the other possibility: not use an image at all.
When I see these AI-generated cover images in posts I'm left with a bad taste in my mouth. They look "ok" when glanced but pay more than a second of attention and they're terrible and uncanny.
If you truly care about the image's place in relation to the post, you'd go through the process that you mention and most likely you will end with a chess board and piece set that make sense, as opposed to whatever the image in the OP actually represents.
I agree with the folks behind iA Writer on this:
> Average AI images drag down everything around them. An AI hero image is a comedian opening the show with a knock-knock joke. Good images enrich your article, bad images steal its soul.
[0]: https://ia.net/topics/ai-art-is-the-new-stock-image
> it’s probably unreasonable to expect anyone to get something explicitly designed and paid for in this context.
Besides the obvious answer of "then don't use an image", they could also use a stock image.
Well, in that case I'd say it's better to publish a post without a cover image. There are plenty of websites that offer the choices between high-quality, royalty-free images or make it easy to buy one.
It also takes seconds, and is free, to Google for copyright-free photographs.
What do you think people were doing before Dall-E came along lmao
in 2013 we had generic unsplash bokeh-rich images for blog posts. Now, we have generic AI generated images. There's not that much different. I agree - in both cases they're fairly distracting.
The common wisdom among a number of publications I've written for is that you need some sort of graphic, even if generic, mostly for reasons of social media sharing (and, these days, because a lot of blog templates assume a post has an image).
Those publications usually had a contract with some provider of public domain or CC-licensed fairly generic graphics.
You don’t like the upgraded variety of kings or the brand new bishopknoght that can move in a W shape?
The bishopknight beast is my favorite for sure!
I also wonder if in future search engines would rank pages containing AI generated images or content lower.
Google cites the problem of LLM powered SEO spam. They were very careful to avoid saying "AI" or to mention who developed this new technology. https://arstechnica.com/gadgets/2024/03/google-wants-to-clos...
The search engine companies are the ones shoving AI down our throats the hardest because they're the ones set up to profit most from it.
It would be great if they were not ranked at all and discarded.
Often times you will find cash only businesses, especially in Chinatown and restaurants that will give you a discount on the final bill if you pay in cash. I have been to some mid-range restaurants that will knock 10% off my bill if I pay in cash instead of credit. This is the merchant fighting back using their own stratagems.
In many cases in my experience the vendors who can successfully pull off this strategy have a high quality, high value product and operate in a no-frills store front and are often family owned, maybe a generation or two already. There is a Vietnamese banh mi sandwich vendor where I live who has been around for 30 years only accepts cash - they have the history and patronage to pull this off.
And then there are plenty of other merchants that are 100% cashless, presumably because they don’t want the hassle (and perhaps cost) of handing, exchanging, storing, and transporting paper cash and coins to and from a bank.
> I have been to some mid-range restaurants that will knock 10% off my bill if I pay in cash instead of credit. This is the merchant fighting back using their own stratagems.
Not sure how things are in the USA, but in Germany, that has nothing to do with "fighting back" and everything with dodging VAT.
Cynically that's probably often the case but if you're offering <$10 food items at a mom & pop shop the credit card fees are non-trivial so there probably is a very legitimate incentive to take cash. There's also benefits to getting immediate cash that you can put in the bank for expenses at the end of the day vs waiting a day or two for credit card money.
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The sort of obvious thing is that taking cash doesn't just save the merchant credit card fees but enables them to play games with the income they report for tax. Same with like repairmen that will give you a much better deal if you pay cash - it's not just CC fees they are avoiding.
Fun fact, this is actually illegal here in Sweden! That is, merchants aren't allowed to adjust prices based on payment method. Not sure what the reasoning is.
Because the main purpose of cash payments in small businesses is tax evasion - not just VAT but also paying family members in cash and thus dodging even more.
Fun fact, credit card merchants successfully made it illegal in the USA too, but that legislation expired and now it is legal to charge more for credit card usage (though credit card companies prefer that you offer a "cash discount" than an equivalent "credit card fee").
In Costa Rica this is illegal too but going through the hassle of reporting it to the local authorities is a pain and you won't gain much, just annoy the dealership.
Usually the POS rate is around 2% so at the end of the day you'll split it evenly and get a 3% discount. A few years back it was even highter and I bought several home appliances and saved around $100 so it's worth for both parties.
Now imagine people that deal with ranges from 10K to 100K - It's definitely worth it shaving a few bucks here and there
My local restaurant instituted a surcharge for card users. Kind of irritating but I understand why, considering the margins in the restaurant industry.
It used to be a violation of their merchant agreement but it seems a 2013 court case made it that as long as it's disclosed in a certain way, it seems to be ok. About 4 states still outlaw it, based on some digging, but none of the card rules that I could dig up allowed applying that fee to debit cards containing the logo (e.g. https://www.mastercard.us/en-us/business/overview/support/me... )
Pretty verbose article that can be summarized as “Credit cards charge merchants a fee, sometimes more when co-branded, to entice customers to use their credit card in favor over others.”
Agreed. I read it hoping to learn something I didn't already know. He kept teasing us with the promise of some inside baseball but didn't really deliver.
While this focuses mainly on the consumer-credit card company relationship, I wanted to add this interesting study on the relationship between consumers across socioeconomic strata:
``` Since retailers usually charge the same price regardless of payment method, payment card rewards programs with different levels of rewards effectively cause some customers to subsidize the consumption of others. The research presented confirms that households with income less than $75,000 per year collectively transfer over $3.5 billion to those making more than $75,000 per year. Furthermore, the cost of interchange fees to retailers can be significant, especially in competitive sectors such as gasoline and groceries. This study demonstrates that interchange costs are typically about 17 to 19 percent of retailer profit. Variance in these costs may induce risk-averse retailers to set higher prices, thus generating additional economic inefficiencies and hurting retail consumers. Negative impacts on low income and minority households and small businesses have become “entrenched” and are likely to get worse as interchange fees continue to increase. This economic inefficiency will not change unless there is a “sufficiently large shock” in the form of policy or technology to change the dynamics of the monopolies holding sway over the credit card system. ```
https://hispanicleadershipfund.org/wp-content/uploads/2022/0...
A valid interpretation but not the only way to describe it. If a merchant offers a 10% discount for spending $1000 or more, are they making lower-spending customers subsidize the purchases of higher-spending ones? Are they transferring wealth from poor to rich?
Technically yes. But what would the impact be of outlawing the practice of volume discounts through a “policy change”?
> In industry, we sometimes distinguish interchange—which mostly goes to the issuing bank—and scheme fees—which mostly go to the credit card brand itself—but as interchange is much larger, let’s just call them both interchange for simplicity.
It’s frustrating to read an article that acknowledges (indirectly) that payment networks don’t earn revenue from interchange nor have anything to do with reward programs, but then goes on to say that for simplicity they will refer to it as if it did.
> gibbering madness
If there is a better name for the table of rates (or the list of rates on a monthly CC transaction table for your business) I don’t know it. It’s absolute madness and near impossible to make sense of.
Often I feel like they exist only to confuse the merchant into just throwing up their hands and saying “I mean, I guess it’s right”. It also means that almost none of them can tell you how much they’re paying for credit card transactions. All they know is the sales person said “I can get you the best rates” which may or may not be true, those people will lie to you and tell you anything that you want to hear, I know this from personal experience. These people are snakes and dealing with them makes my skin crawl.
I’m aware that there’s a chance that I’m leaving money on the table, but this is one of the main reasons I use Stripe. I prefer predictability an inscrutable of data that may or may not show that I’m saving a little bit more. It’s also why I normally avoid credit cards that have rotating categories or this or like. I prefer a flat, easy to understand rate that I can compare to other cards instead of having to keep track of which card I’m using which month. Again, this means I’m leaving money on the table, but I do it for my own sanity.
The big news in credit card rewards (that I was hoping this article would address) is that Robinhood just announced a 3% flat cash back card, highest I've ever seen, where the only catch is that the money is deposited into your Robinhood account.
At 3% they are clearly losing tons of money on every transaction. There is an annual fee but it is only $60. The money can be withdrawn from Robinhood as soon as it is deposited. How can they possibly afford this? What are people doing with their money in Robinhood that they are willing to pay people over 1% (I'm assuming) just to deposit money there in a roundabout way?
recently relevant: https://news.ycombinator.com/item?id=39909035 (How can Robinhood afford 3% cash back on its new credit card?; Apr 2024; 21 comments)
Thanks, I missed that one. Seems like the answer is nobody really knows and it's all unsatisfying speculation.
Fidelity has flat 2% no fee "deposit to fidelity" card since forever. Probably Robinhood is competing in "small customer" segment and just passes all rewards to customers since it's attractive for their target customer?
2% I can understand. 3% is a big loss to take.
They take a loss from every transaction and make up for it with volume. /s
My guess is that since Robinhood Gold gives you a lower margin interest rate, enticing people to use more margin, they hope to reap all the money back and then some.
Since the rebate money goes directly into your Robinhood account, rather than a checking account, they encourage it to stay in Robinhood.
> They take a loss from every transaction and make up for it with volume. /s
https://youtu.be/KodqIPMbyUg?t=54 (First CityWide Change Bank 2 - Saturday Night Live)
Well written and pretty interesting. Somewhat obvious I suppose.
I was hoping he would go into detail on how programs like Citi double cash work. In that program you get the normal 1% back at purchase and then 1% at payment. I assume the latter is subsidized from interest payments, but what about card holders that never pay interest? Are they subsidized by those that do?
Yes. Rewards are subsidized by anyone paying a fee for their card, and by everyone with higher prices. Reward programs incentive consumers to make that card “top of wallet” and prioritize spend on it, which is why the entire rewards system is afraid of interchange cram down and free instant payments in general.
(Work at a fintech, I see the financials but those I cannot share)
Yes and note that from a marketing pov, Citi looks like a "good player" by incentivising payback. But if everyone paid back in the grace period, the care would fail as transaction fees can't offset the costs of managing the process (payouts, fraud, chargebacks, limit management, etc). Interest and "nuisance" charges are the real money makers.
So, you pick a balance of how much to return assuming that you get a mix of revolvers (borrowers) and transactors, and recognize that if you hit it right, some folks will skip the "best outcome" (for most) option of grace-period payback and faster rewards, due to choice or need (running low on cash, etc). And that's how you get the 1 and 1: folks love to spend, and Citi estimates that the 1 on payback sounds good but can be spread out as folks still pay the minimum to revolve, garnering interest and fees along the way.
It's illegal in the US to reward for debt directly (you can't incentivize folks to revolve instead of paying in full), and this card is at least a step in the right direction of doing the opposite. But if they really incentivized best behavior for consumers, we'd see all the % rewards focused on payback (and none for spend), with a reduced reward for payback on revolving debt, to incentivize reducing avoidable debt where it makes sense.
But that card would fail as a business for most banks and fin companies. While the early trans fees would be great, it would self-select responsible payback folks who never generate interest or nuisance fees. Such a card would need a massive annual fee or have to be tied to some other profit driving product, at least in most companies I've seen.
But maybe somebody will figure a clever way to make it work.
Citi DC is also a mastercard world elite which charges a higher fee for merchants. Afaik most (all?) 2% card are visa signature or mc word elite.
Quite interesting. I've had one encounter with such a credit card, which I only used for making a rather large payment over the course of four months without having to pay interest. To me, that was the attraction, not having to adjust my monthly budgeting much and also not having to dip into savings. My bank would have said 'yeah, lol, you pay our 8% interest if you want a loan you could actually cash out at any time'.
Where I live credit cards are still relatively uncommon, most cards in use are debit, and from the article it seems they have a simpler scheme behind them. The idea to have a 'book-buyers credit card' seems quite foreign, though I think some people have gas-station-related cards.
I love this guy but some of his sentences, as a native speaker, are phenomenally difficult to parse; or is this just me?
nope, i love patio11 too and i feel the exact same way
Before, the American economy has been built on excess consumption. Assuming that the rising tide lifts all boats, rewarding and encouraging excess consumption helped everyone, not just the wealthy. That's almost the opposite case when most goods purchased are now overseas imports. If the model doesn't make sense anymore, it should be replaced. Remove the ban on charging based on payment method.
Stripe is relevant. If customer and merchant incentives are aligned, I would say Stripe probably just wants to have low or minimum interchange? Have I misunderstood?
Remember: there is no such thing as a free lunch.
If they're rewarding you with something, either you or someone else is paying for it. Someone else, in this case, means another cardholder. Maybe the merchant the rewards program is through is counting on you to spend on something you otherwise wouldn't. Sure as hell isn't the bank offering the card.
The credit-ification of everyday purchases in the United States since the 1980s has been a disaster for the average American's financial health.
What do you mean another cardholder? It's the vendors paying the credit card tax.
And where does the vendor get their money?
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I don’t pay attention to “points” systems at all. I sense that this is the right decision but I’ve never been able to quantify whether this is true.
My logic is that the people who design credit card reward systems are smarter than I am about the topic they spend 8 hours a day on. So, every rewards system they offer is designed to trick me into suboptimal purchase decisions. Even the perception of beating the system is built into the system.
patio11 seems to confirm some of this, but I’d love it if someone who is informed about the design of these programs would say it to me straight. (Experts in “hacking” rewards systems will be disregarded because according to my thesis you are victims of mind control.)
For context I’m one of those never-carry-a-balance credit card users.
Part of the point of rewards cards is to encourage people with more choice (ie you) to use cards from that issuer. If the rewards are bad then you use a competitor card. If the rewards are good you use the issuer’s card and they make money on interchange. The cost of paying out the rewards decreases the amount the issuer makes from interchange, but they still make a profit. So never gaining from the points is probably bad – you’re basically giving that money to the issuer – and you could be better served by cashback instead. The point of using points from an issuers perspective is that they can have companies subsidise the cost of the rewards by treating the available rewards as ad space. They have eg some hotel chain pay the issuer to create some ‘money off these hotels’ reward, potentially also offering a higher-than normal value for the points. The hotel chain is happy because they expect this promotion is made to people who are more likely to spend more at their hotels even after the discount (or just because it brings people to their hotels rather than competitors). The card issuer is happy because they make more money for a given % of interchange paid out in rewards. The consumer is potentially happier with the card because they now get slightly more valuable rewards. The competing hotels now getting less custom are unhappy about it.
I think it’s reasonable to think points systems are, in some sense, trying to trick you, but also silly to ignore them because of this. Coupons are also trying to trick you in a similar way but that similarly doesn’t mean they’re a bad deal.
>Almost everybody writing about credit cards on the Internet receives some sort of spiff if you sign up after clicking through tagged links in their material.
This is something that really can't be said loud enough. The vast majority of credit card content on the Internet is just shilling for referral money. Like almost all of it. There's so much money in this space, and most people have no idea.
That's why Doctor of Credit is the only site I'll ever visit/use - https://www.doctorofcredit.com/were-removing-all-credit-card...
About a decade ago I found some blog about credit card rewards and signed up for their mailing list. The owner of the blog emailed me directly saying how he's going to "guide me through the process" and was pushing me to sign up for certain credit cards for sign up bonuses and wanted to know if I had any questions. He was acting like he was a friend just trying to guide me. I was a little taken aback but replied I was going to spend a large amount of money soon and I wanted to earn a sign up bonus for it and I found a sign up bonus that was comparable to what he was pushing on me from Navy Federal. I asked what he thought of it. He said it was no good and I needed to use the cards he was pushing for XYZ reason, blah,blah,blah. It was so fucking sketchy, I stopped responding, unsubbed from the mailing list, and sent all his emails in the trash. Never visited the blog again.
I didn't realize until later how much money he stood to earn from me using his sign up links and the only thing wrong with Navy Federal offer was it wouldn't earn him anything.
I ended up becoming really familiar with the major credits after that.
Bottom line: Pay cash if you want to support your local shops. Use credit cards if you love enriching your local megacorporation.
This is mostly not true of the local shops near me. They’ve stopped taking cash because costs of cash are higher than cards.
There seems to be a split in my area with small businesses, mostly along generational lines.
The ones run by younger people are very credit-card-first, love not dealing with cash, etc. They usually have one of those Stripe iPad things. If you do pay with cash, they'll get a bit flustered because it breaks their flow.
The ones run by older people are either cash-only or try hard to disincentivize customers from using credit cards, sometimes with signs guilting customers about how much money card companies take from businesses.
It really feels like a generational thing depending on what people are used to. The older shop owners remember when cards were a lot more rare, and they've seen their swipe fee expenditure go up over the years. While the younger owners have only ever lived in a credit card oriented world and just bake the swipe fees into their prices from the beginning.
My experience lines up with yours. I love paying with cash when I can, but even in my smaller city, so many places won't accept cash. My assumption is that handling cash is a cost they'd rather not deal with.
For food, most places will accept cash here. Hell, even a bookstore near me won't accept cash anymore.
How do they get around the rules regarding cash? E.g. "This note is legal tender for all debts, public and private"?
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Debit cards?
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This is actually a lie.
Using a credit card is always cheaper to the merchant, maybe the merchant doesnt realize it but cash is a bad deal like Uber is a bad deal - They money is up front so you never realize the costs. In the case of user, it is fuel, vehicle wear and tear, and shifting demand.
In the case of cash, it is the cost of counting and keeping the drawer, security, deposits, change, and internal training/theft. Most estimates show it to be ~10-20% of income of a business is wasted. Always less than the cost of credit.
Well...that is...if you didn't do what maybe 50% of small businesses do: Screw the taxpayer. Sure, these credit card companies take 3%. Many small businesses take cash so they can do cash accounting and keep "money in" away from the IRS. They dont report it, they pay workers with it under the table and you, the customer and tax payer, may pay less, but you are getting screwed.
Only from some indignant-irate viewpoint. Paying less is a win. Taxes are a fraction of what you would pay (in th other imaginary scenario) - a percentage of the margins on the transaction. If those are apparently reduced to zero through some chicanery as suggested, you still pay less than what those 'missing tax dollars' would have been. You participate in the savings.
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Kinda hard to incentivize when a responsible credit card user will come out ahead financially by using a rewards card. I get roughly 2k a year in rewards for doing nothing more than swiping.
So what's the deal with the Chase Sapphire Reserve card he mentions almost everyone having? I don't shop for credit cards often and when I Google it I see it's myriad of rules for points and perks, but nothing really jumped out at me as the killer feature that would lead to that sort of adoption.
When it came out, its signup bonus was quite generous, and its points could be redeemed for a lot of value if you used them right (travel). It's less generous now, but still pretty solid.
The big one is that points can be used for 1.5x travel or something like that. So 100 points buys $1.50 of travel, which can add up pretty quickly. The signup bonus was worth something like $1200. And its 'better than normal' categories fit well with professionals in cities who eat out a lot, with a high point-accumulation from that use.
I think their point was that it was the first card of its kind outside of American Express. Back in 2016 there wasn't anything else really like it other than Amex's high tier cards. It also had a really generous sign up bonus when they first released it, 100,000 points if you spent a certain amount on the card in the first few months. Since then other issuers have been playing catch-up so the CSR stands out less.
An article from 2016:
https://www.bloomberg.com/news/articles/2016-09-02/chase-sap...
(Non-paywall link: https://archive.ph/vba5Y)
The rewards seem fairly normal these days, what with rewards inflation happening. Some cards now are offering 250k rewards points as a sign up bonus.
I would prefer no rewards. Rewards transfer wealth from poorer people to wealthier people, because the latter spend more absolute dollars on rewards cards. This regressive effect is a big turn off imho in addition to the stupid points optimization games that rewards card owners have to play.
What a fascinating article. Probably an unsophisticated model but the way I approach my credit card rewards program is as a “forced savings” deal. I’m aware that they are subsidized, I’m also aware that I’ll pay the same thing if I were to pay with cash (at least in all the places I buy).
Would we be better off by having capped swipe fees? Idk. Would merchants actually lower their prices instead of keeping the extra revenue that everybody is now used to pay? Idk either. I don’t trust in the goodness of the heart of merchants or credit cards issuers.
But, would I have an unexpected 3 or even 4 figures “unexpected” rewards at the end of the year that I can only use for vacations? I don’t think so. I could possibly set up something with my bank, but I don’t need to think or plan rewards… they just happen.
I’m seeing restaurants charge a credit card fee as a line item on receipts like a tax, with a percentage. I wish there were real time information what a particular card will cost the merchant, and that fee is what’s charged. The idea most people should subsidize other people’s kickback is obscene.
Also, I’m confused about the federal law flat rate fee on debit cards. I know merchants using Square and report that they’re charged the same fee for debit and credit cards, no discounted rate. For small businesses, I’d like to use my debit card, but not if the payment processor is going to pocket the difference between the discount debit fee and their fee to the merchant, and thus me.
An "advisor" (not a regulated adviser with an e) at my bank here in Canada asked me how often I travelled because a rewards VISA card pays blah blah.
I said I don't travel. She literally froze for five seconds it looked like her head was going to implode. After that my bank practically abandoned me.
There was a recent story here how all banks in Canada push services to the point of daily meetings and managers tell staff to aggressively push products. Even ignoring federal banking rules obligating bank employees to tell customers to pay off debt first before investing.
If you take a look here you can see how this type of tiering system works out:
https://usa.visa.com/content/dam/VCOM/download/merchants/vis...
Some of the tiers for Visa cards:
Visa Infinite Spend Qualified Visa Infinite Spend Not Qualified Visa Signature Preferred Visa Signature Traditional Rewards All Other Products
CC Rewards programs are amusing to me (because of time effort spent on them). At any rate, I haven't seen those in Europe/EU for ages, probably because they slashed intercharge fees so they make much sense (the main reason was making card payment accepted everywhere without dumb sticker: "card payments only for shopping above x [currency]"
Good article, I wondered about the details of card rewards schemes as a kind of meta commentary on the financial system. Interesting to see that patio11 has left stripe now to work (seemingly) on this newsletter full time. I do miss the days when the articles were technical; there’s a deep software and writing skillset that we’ve lost to the financial system which isn’t nearly as fun.
I would recommend Payment Systems in the US and, Global Payments: And the FinTech Innovations Changing the Industry, for anyone looking to learn more about how value (aka payments) gets transferred, and the various players / their incentives along the value chain.
I’ve read previously that folks who pay their card in full monthly are internally known as “deadbeats”, because there is no interest to be gained from them.
This seems to run counter to that - there is revenue, perhaps less?
Is this wholesome market optimization or cancerous busywork that would benefit all to be killed by capping the fees by "regulatory fiat"?
I honestly cannot decide.
credit card transaction fees should be charged to the customer not the merchant.
I’m really curious about how the T-Mobile dining program works where by registering my credit card (which already gives 3% cashback on restaurant purchases), I get another 5% cashback through T-mobile.
It's fascinating to me how much people discount their privacy.
> There are many, many other sucker buttons.
Sucker buttons? How about (this is addressed to a certain group of people not everyone) spend your time trying to make money in some way rather than trying to max small amounts that you get from credit cards, reward programs what not. As if everyone is just some kind of retired person with time on their hands to think about miles, rewards etc as a way to keep busy.
> Due to long-standing practice, I am (homeopathically) exposed to the common equity of financial services companies that my family uses, so that I can call up Investor Relations if I ever need to escalate a routine banking issue.
For this to be effective, what parts-per-billion concentration do I need?
What are these rewards programs? is this a USA specific thing?
Depending on the card, you get around 1 or 2 or even 3% back in cash or other types of rewards like airline miles on your purchase. Basically the credit card company charges a merchant something like 3% on a transaction they accept through a credit card, and the credit card company decides to pass on a portion of that fee to the credit card user as an incentive to use that credit card over another form of payment.
In my case, I pay for as much as I possibly can using a credit card and then pay it off at the end of the month so that I can get that % reward back and am not charged any fees.
>In Europe, card acceptance is cheap by regulatory fiat and so rewards are far less common (or commonly lucrative) than in the U.S.
Once is while the EU does something right.
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I find it odd that a person who understands the madness of our current financial system so well, still is violently opposed of anything blockchain related.
Blockchains are costly and don't solve these problems.
It is as evidenced by the way blockchains are used now. Cryptocurrencies are the most important applications, and few people actually own them, and by "owning" I mean being able to make a blockchain transaction. In most cases, they have an account with a third party who does the blockchain stuff. In other words, a bank. In fact, it may be an actual bank, which is probably for the best because actual banks are highly regulated and are less likely to just take your money and disappear.
Cryptocurrencies quickly became just another financial product that is being integrated in our current system. And for the other ways cryptocurrencies are used, these are mostly illegal (drug trade, ransoms, scams, tax evasion, etc...) and governments are working on that.
Other prominent applications of blockchains: NFT, DAO, etc... are even crazier than cryptocurrencies. All the madness of our current financial system without the regulations that make it somewhat usable to grownups.
Remind me again, what concrete, non-criminal financial problem does blockchain solve better than the alternatives?
Not op, but I want to make private payments through the internet in the same way I can privately use cash in the real world.
I’m not enamored with crypto per se, but as far as I know only crypto in general (and Monero in particular) are working on solving that problem.
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Say you are from a third world country. Your family back home needs money, but a bunch of red tape and fees in the traditional finance system (sending money to a third world country often raises KYC/AML questions and wire transfer fees are high) make it difficult and expensive. Moreover, in some countries with unstable currencies such as Lebanon and Argentina, the banks have to offer government mandated exchange rates that are wildly off the effective rates; there have even been cases where FX deposits were forcibly converted to the local currencies at these unrealistic rates. Rather than go through all this, you can just send BTC and sidestep all the issues.
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It solves the same problem gold does, except it is easier to transport and exchange.