Comment by willseth
2 years ago
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.
That still depends on what the split is. If the average fee is 3% and the high-end customer is getting 2% back, the merchant could be passing on e.g. 2.1% and causing you to come out behind while still passing on only 70% of the cost.
And for anyone getting less cash back the math is even worse, which from the same premise will be the majority of people or else the merchant's costs (and so the amount they pass on) would be even higher.
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Other customers bear most of the cost of merchants raising prices because of the 3% fee, not you.