Comment by time0ut
2 years ago
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.