Comment by nkurz
2 years ago
An interesting article, but it doesn't sufficiently emphasize the lede: When you use a reward card, the merchant is charged a higher fee than if you used a "normal" card. Simply by putting a different branding on the plastic you pay with, the credit card issuer gets more money from each transaction.
The article goes on to ask the question "Why isn’t every card a rewards card?", meaning why doesn't every card pay cash back, but I think the more interesting question is why every card isn't branded in a way that makes the issuer more money. Why do they bother to issue cards where they get paid less? Why not brand every card as a "Signature Preferred" and then pocket the money instead of giving it to the less discerning customers?
And the most interesting question only gets a handwave: "The basic intuition underlying rewards cards as a product is that highly desirable customers have options in how they spend their money." But how far does this go in explaining why merchants "choose" to participate in this program. The obvious answer would seem to be that they get no benefit from the system as it exists but have no real choice, but maybe there is a better answer?
I liked the topic, but wished the author could have given more insight on what's happening behind the scenes to produce the outcome we see.
> 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.
I wouldn’t assume everyone is happy with it. Consumers are going to prefer rewards programs over no rewards programs. And before you say it results in higher prices, that’s not necessarily true. Australia regulated away interchange and it didn’t result in lowering prices. Merchants kept the profit.
A lot of times these regulations are pitched as helping consumers, but it’s really merchants pushing for them. You could make a similar observation about the EU regulatory fight with Apple et al right now. It’s actually Spotify fighting for it, and they have different interests than consumers.
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I went to Stockholm last week for a couple of days, worried that I didn't have any local currency. It turned out that nobody takes cash, so everything worked out fine.
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As the result, most of the reward programs in EU are meaningless: too much friction with almost zero benefits.
Credit card in EU is only for rental cars.
Almost everything (electronics, subscriptions, goods) are expensive in the EU. People travel to the USA to save money on these items, often getting additional discounts and sales that far surpass those in the EU.
The lack of a high interchange in the EU has not made any positive impact on prices.
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It only means that they haven't managed to improve it yet.
"point in case" is a funny term. Are you a mathematician or programmer, using "case" in the sense of "branch of a proof", not "matter to be settled"?
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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.
Yes, merchant fraud is what I was referring to with “to some extent.” And you’re correct that card-present fraud is more likely to be borne by the bank these days (this was not always the case). But typical e-commerce fraud is usually eaten by the merchant.
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?
Unfortunately, as Lord Governor Supreme of a proud and prosperous micronation, I am disappointed to report that SWIFT does not recognize my sovereignty and regulatory authority.
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.
And this is why many small businesses in my area don't accept American Express cards full stop. Some don't even accept Discover.
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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.
They used to be but the law was changed to make it illegal for the card companies to demand that they don’t offer a cash discount (or charge more for credit). Smaller businesses are doing that more and more since the pandemic to try to hold to their prices as long as they can.
Big companies do a similar thing by offering you a store card. Costco likely makes more money from you when you pay with your Costco card than if you pay cash, because they get the interchange fee very very low and have to pay to handle cash. Rumor was AMEX was eating the interchange fee AND paying them … because they more than made it up by the customers who made the card Top Card.
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That's still a thing in Canada and the US in various places, generally "mom and pop" run business.
Credit card fees for small orgs are like 1-2% so for a small biz that could pinch. Cash also lets you, uh, "fudge" your numbers for tax purposes.
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They used to but got sued over it, and in 2012 settled it partially by ending the practice: https://www.barclaydamon.com/alerts/What-the-Credit-Card-Set...
All the CC contracts I have ever seen only prevented you from discriminating against a particular card/brand if you took credit cards. You could offer a cash discount as a policy, but you couldn't charge AMEX holders an extra 1%, as an example.
They can do it now. In the past you had to offer same prices, although you could negotiate.
It’s usually motivated more by mom and pops skimming taxes than 3% credit card fees. If you do any kind of volume, there isn’t a ton of savings as cash management ain’t free.
The electronic equivalent is people who take personal Venmo at retail.
It's pretty expensive to take cash. First, you have to keep a float of money for change. Then you have to secure the cash until you deposit it in the bank. Then sink some time into counting and depositing it, before being charged by your bank for depositing cash. That must very quickly add up to a percentage point or 2.
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Where I live it'd used to be possible to get a discount if you paid cash but it was deemed discriminatory against card holders and so it was banned. It's the same price regardless of payment method.
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Which is the reason the cut is now capped and card acceptance is higher, even for credit cards (0.3% for cc, 0.2% for dc). Though low-margin businesses like grocery store still don't accept them (credit cards) due to the marginally higher fees in some countries.
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.
It's already impossible in the USA to know what you're going to pay for something until you get to the checkout line. This just makes it worse.
Why not go even further? Itemize the marginal cost of maintaining your property's parking lot for those customers who visit your business by car? Charge customers a "store heating fee" in the winter? Customer support fee if they talk to anyone? Just as ridiculous. Processing credit cards is just one of many costs of doing business that you need to account for when you price your products.
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They eliminates your ability to advertise prices honestly, without overwhelming your customers with detail that will distract them.
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Do you actually want to do that? When a customer wants to make a purchase, I think it is best to get the hell out of their way and not go stand between their wallet and your wallet, blocking their money and yapping about fees or some other completely unimportant stuff.
Can't you just print up a sign for this?
I've seen signs that say stuff like "Prices listed are for cash, 3% surcharge for credit cards."
How many different fee tiers are you as a retailer really trying to charge?
Ahhh yeees, the Ryanair strategy. Everyone's absolute favorite airline.
How do i know you are being transparent with the surcharge? What if you add 2% for a card payment when your actual overhead is only 1%. I suspect this is the reason why EU made these type of schemes illegal many years back. It just creates bad incentives for stores to add random fees everywhere.
How do you even calculate the processing fee of cash on a single transaction? A lot of comment here seem to assume cash is free, when in fact you need a safe, take time to go to the bank, security transfers, counting it, and so on.
I think there's some technical reason you can't do this, because even gas stations don't. They just have a separate cash/credit price.
That just seems like an irrational amount of energy to spend on 1-3%. I guess you’d get a lot of payments nerds?
Some donation platforms do this! They show and add on the processing fee for VISA/MC and Amex separately, and Amex is a little higher.
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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.
Small merchants negotiate with Stripe for a flat fee to accept all cards. Big merchants negotiate with the networks and pay varying prices for varying rewards amounts (or however they get the deal structured).
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If only Walmart would take contactless payments.
It has more to do with making Walmart Pay the only contactless option to drive adoption of their mobile app.
I confess that I don't understand what the big deal is. It takes 5 seconds to slide the card into the machine. Personally, I find fumbling with my phone takes longer as does figuring out where the reader wants to tap the card if I'm not familiar with that particular store's system.
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Presumably they do not because they want to track you via your credit card number, and permitting Apple Pay (maybe others too) would hinder that.
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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".
Because of the stickiness of prices, passing through of cost savings usually manifest as slower inflation. Costco is rumored to have negotiated 0.3% from Visa in exchange for exclusivity. This is part of how they are able to sell goods at thin markups. Aldi USA used to only take debit cards. They caved and now take credit cards. Travelers Insurance offers two prices on every quote: by bank account or a higher one by credit card.
http://www.bloomberg.com/features/2015-how-amex-lost-costco/
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Do you think prices would remain the same if interchange fees doubled?
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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.
You used to be able to deduct any consumer debt. But that stopped in 1986. The reason was "Congress believed deductions for personal interest encouraged people to consume and stifle savings."
https://www.telegram.com/story/news/local/worcester/2007/03/...
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To a first approximation, no one actually takes advantage of the mortgage tax deduction any more because the standard deduction is so high and the cap on state tax/property taxes is so low that most people don’t itemize.
Only about 10% itemize.
https://www.taxpolicycenter.org/briefing-book/what-are-itemi....
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It was! Auto leases were deductible too which was a big subsidy for the auto industry.
Once rich people figured out how to get poor people to be angry about things like higher marginal tax rates for rich people and “death taxes”, we raised taxes on the suckers to benefit the richer people.
> While we're in this topic: why is unsecured credit card debt NOT tax deductible but secured debt like HELOC is?
AFAIK it's a carve out specifically for houses. Car loan interest isn't deductible despite being "secured".
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Granting a tax credit for something encourages that thing. So, from that perspective, I think it makes some sense to grant a tax credit for mortgage interest but not credit card debt.
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HELOC debt is (since 2017 TCJA) now only deductible if used to purchase or upgrade/repair the house. And now the vast majority of people are not going to be deducting any mortgage or HELOC debt anyway, since the standard deduction is so high now.
> While we're in this topic: why is unsecured credit card debt NOT tax deductible but secured debt like HELOC is?
HELOC interest is rarely deductible either. First, you now must be able to itemize deductions, which the recent tax changes have made very unlikely. Less than 12% of tax returns are able to itemize:
https://www.irs.gov/pub/irs-soi/soi-a-inpre-id2303.pdf
In addition, even if you are in that ~11% who can itemize, HELOC interest is only deductible if you use it to work on the same house being used to get the LOC. Any other use is not deductible.
> the ways the credit system holds back the poor
It would be good to understand this better. Doesn't everyone use a credit card? Not just the poor? Who are the poor in this case? Are tax deduction rules anything to do with the credit system?
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The population likely to use HELOCs votes more and/or is more populous, so they have more votes.
Same reason Medicare (old people) pays healthcare providers more than Medicaid (young and poor people).
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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.
There are definitely a good number of small businesses around me (cafes, and similar places) that offer a cash discount. They don't have a sign offering it, but when I pull out cash, they revise the price down.
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It is against VISA ToS. Small businesses can risk it but large businesses would get sued and VISA would refuse to do business with them
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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)
The real advantage for merchants is to take debit (assuming the payment is high enough). Much of the benefits of credit without the hassle of cash.
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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.
Almost every card with an annual fee has enough credits and perks to offset the annual fee without spending any money.
The second and third tier Delta cards come with a $250 and $650 Annual fee.
The second tier card (Delta Platinum) has an annual fee of $350. But it comes with a $150 Delta Stays credit for hotels and one round trip an economy companion pass - basically buy one get one free - for any place in the US, Mexico, Central America or the Caribbean.
The higher end Delta Reserve comes with similar benefits. But a first class companion pass. If you never use either card except for the credit, the benefits more than offset the annual fee. The Reserve also comes with airport lounge access
I have three Delta cards just for those benefits.
I could explain the Amex Platinum, Gold, Green, every cobranded hotel card, the high end Capital One cards the same way.
The credit card companies as the article says are betting that the typical customer will use credit cards in a suboptimal manner. They are banking on most credit card users not to be like the typical r/creditcards users who carry 6-8 credit cards including “sock drawer” cards that are just held for the outsized benefits to annual fees and aren’t their primary cards.
My wife and I travel a lot and yes I have nine cards and $2700 worth of annual fees. Most of those cards are “sock drawer” cards that are just used because the “coupons” make travel cheaper.
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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.
In this context, it’s important to the merchants: They want these customers, so they grit their teeth on the higher interchange fees demanded by the banks. If the banks started handing out these cards to everyone, the merchants would revolt.
Interchange. The fees go directly to the issuer not the network (which collects much smaller scheme fees). If you have 3 cards they’d almost certainly be for 3 different issuers so they’d split the interchange. Making you less valuable.
> for the rebates and profits
And salaries and pensions, etc.
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.
There's another side to this. By giving out rewards, wealthy people are given more on top. Things they otherwise would've paid for are now free to them. Whereas someone without those benefits has to pay for those things out of their own pocket.
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.
What's MA and V? Moving Average and Volatility? (genuinely don't know and unsuccessfully tried to google it)
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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.
Costco
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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.