Comment by willseth
2 years ago
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.
> If the average fee is 3% and the high-end customer is getting 2% back ...
You're not picking realistic numbers. The fees range from around 1.5% to ~3%, and the 2.5%-3%+ fees are limited to ~10% of customers. An average fee of 3% doesn't make sense. Very basic napkin math would be 0.9((1.5+2.5)/2)+0.1((2.5+3)/2) = ~2.1% average. So only in the 100% passthrough case does the high end cardholder actually lose. That's not likely.
And if you look at the chart, if 740 is 10%, there are probably far fewer than 10% of transactions averaging 2.75%, so this is likely still way overestimating.
> The fees range from around 1.5% to ~3%, and the 2.5%-3%+ fees are limited to ~10% of customers. An average fee of 3% doesn't make sense.
That's just the interchange fee, not what merchants are actually paying. Stripe charges a flat 2.9% + $0.30 and this is considered competitive:
https://stripe.com/pricing
For a $20 transaction, that's 4.4%, and that's for everybody, not just the people with rewards cards.
18 replies →