Comment by oezi
2 years ago
The return you get is just taken from you without you knowing it. The rewards programs is taking your money and giving you back a part of it.
2 years ago
The return you get is just taken from you without you knowing it. The rewards programs is taking your money and giving you back a part of it.
No, it's taking the merchants' money and giving you back part of it. How much do merchants eat it vs passing on the cost? I don't think that's an easy question to answer and probably varies a lot by merchant type and product, but I think we can assume the answer is not always passes on 100% of the cost, so owners of the high end rewards cards are winning to some degree. You could argue that non-rewards cards are absorbing costs of rewards cards in the case where merchants do pass through costs, though.
Except that 100% of the cost isn't being transferred to the cardholder, either. You might have a 1% cash back card while the merchant is paying 3%. If only half of the cost is being passed on, you're still losing money. And price isn't the only variable. Even if the merchant ate the entire 3%, that might require them to cut costs in some way so you receive a lower quality product, or drive some competitors out of business and thereby allow the remaining companies to reduce quality without lowering prices because the company providing a better product for the same price was eliminated by the fees.
Right, but the interesting part of TFA is about how the rates paid by merchants are higher for the top 10% of cards. Your example assumes the same rate paid by everyone. Because only a small portion of transactions incur the high rate/high reward, it seems far less likely that the split between pass-through vs eat-it still won't benefit high end cardholders.
21 replies →
Other customers bear most of the cost of merchants raising prices because of the 3% fee, not you.
I thougt that it works like when you make a purchase using a credit card that offers rewards, the issuer earns money from the transaction through interchange fees, which are fees charged to merchants for processing credit card payments.