Healthcare and college are "Baumol cost disease": because they depend on skilled workers, much of that is the same as "American salaries are higher than in the rest of the world", and unlike manufacturing or software (+) you can't outsource it to lower-wage countries.
(+) there still seems to be a massive wage premium for "being physically in a San Francisco office" even if most of the work is being done by an AI, which cannot be sustainable
Bit for bit, internet access is cheaper in America than it is in Canada or Australia.
Canadians like myself have ~40% of our provincial taxes spent on healthcare, so in my case about ~8% of my gross income. Somewhere in the tune of $20k/yr. While I was living in Seattle and filing American, quite a bit less of my gross income went to healthcare. Just food for thought.
Internet access isn't particularly expensive in the US.
Healthcare, education, and housing are expensive in the US for the same primary reason: political interventions that simultaneously subsidize demand and restrict supply.
Places around me have been starting to itemize the credit card fee. Only car dealerships so far have waived the fee for debit over credit in my experience.
It's not unheard of. Gas sometimes. My car dealer for one. (Whether it's a credit surcharge or a debit discount is semantics.) Though with the cashback on my usual credit card I use for domestic credit card purchases, the difference is pretty much not worth worrying about.
It's partly true: this only applies to consumer cards. That's why many EU banks still offer corporate credit cards with huge cashback etc. For example, revolut offers no cashback in France on their metal cards if you have a consumer account, but up to 1% cashback on the same card if you have a "freelance" account. https://www.revolut.com/fr-FR/metal/
Second thing: interchange fees are not the only fees that your typical store has to pay, the total fees are much higher. I think the EU essentially capped Visa/Mastercard profit in the EU, more than they capped small business fees for card payment.
> That's why many EU banks still offer corporate credit cards with huge cashback etc. For example, revolut offers no cashback in France on their metal cards if you have a consumer account, but up to 1% cashback on the same card if you have a "freelance" account.
If 1% is huge, that's a lot better. 2% cashback is my baseline for normal in the US and I currently use a 4% on everything card (no longer available for new customers).
I don't like the cashback system, but the economics insist I use it while it's available.
> That's why many EU banks still offer corporate credit cards with huge cashback et
We're a business in the UK and the charges for accepting Business credit cards is much higher.
I don't have current charges to hand, but in 2023 Personal Credit Cards were 1.97% whilst for Business Credit Cards we were charged 3.43%. That's probably how they afford such high cashback/loyalty schemes.
I think we're paying about half those rates now. I know Amex is somewhere between Personal and Business charges.
EU only capped fees for 4 party systems, and only for consumer credit cards. business credit cards and 3 party systems (American Express for example) are not part of the cap and you can get more rewards with these card types.
> A U.S. retailer told me the credit card companies won't allow that in the U.S.?
That used to be the case, but it's not current. Merchants can charge a credit card fee, and many do. Many merchants near me (washington state) don't, but those that do add a fixed fee of 1-3% for credit.
They can't make it an explicit line item of "3% surcharge" or whatever. Instead, the business will raise prices across the board and offer a "cash discount" of 3%
With sumup I get 0.5% cashback up to a whopping 10€/ month lol. There are other cards giving cashback, I think Amex blu has a 1% with no upper bound of monetary cashback
There are basically none, because the fees are low and card issuers are not allowed to rob retailers with insane fees. If you have a cafe or restaurant where margins are already low then it would be crazy to pay additional 2-3% tax on every payment.
My understanding is that they are much less generous on average compared to U.S.
E.g. for now I have the most premium card offered by my bank (50€/mo), and it gets me extra product insurance, rental car insurance, travel insurance, free lounge access, and some other things like that, but no cashback or similar.
I think some premium cards do offer cashback nowadays, but they are in the minority. Some cards also offer airline reward points. My experience is limited to Finland, though.
In the UK (which broadly follows the same rules), I get 0.25% with a Visa and 1.25% with Amex. Sometimes there are introductory offers for a few months.
Patrick McKenzie (patio11 fame) had a great blog post in credit card rewards
There is a lot that goes into it, and it is interesting how customers like me who literally never have carried interest and have to made thousands of $ in rewards over the years still make the banks money....
It's a mess, much like tip culture[1], because it just real equalized like this:
1. Merchant sells for price X
2. Credit card is invented
3. Merchant has to sell for price > X (say, 1.02 X) to cover some buyers using CC
4. Credit card offers 2-3% rewards on some goods
5. Merchant has to sell for prices even > X (say 1.04 X) to cover nearly all customers using cards. Customers who do not use the cards pay 1.04X and do not get rewards to compensate.
6. Merchant loses because they're beholden to processors, Customers lose because they're getting 2-3% of semi-currency for the cost of ~4% cash currency.
7. Processors get their profit
[1] - Employees deserve good wages for good work, tipping is just a bad algorithm to accomplish that
Credit card points/miles are an interesting topic, and I have found them to be kind of useful cyclically myself over last 20 years.
They are a way for airlines to create value out of thin air with their own fiat currency. For the average consumer the miles create less of a pure economic efficient benefit and more of a psychic benefit - funny money bucket that accumulates to defray some trip expenses. Economically they'd be best off with an outright 2% back card.
For the minority of customers who are flexible on dates/locations and willing to plan in advance - most airline/hotel programs have sweet spots at the more premium level.
I use them to fly overseas business class refundable fares at discount. It's not free, but the taxes paid + foregone $ I could have gotten with a cash-back card ends up being 2-3x economy non-refundable fare instead of the 5-7x listed cash price if I bought the business class ticket outright.
It's generally a time-vs-money thing though in that to maximize airline/hotel programs you need to pay attention to various limited time offers for signup bonuses, spending bonuses, conversion bonuses, redemption bonuses, etc. Without those it's a very uphill battle.
> It's generally a time-vs-money thing though in that to maximize airline/hotel programs
Credit card hotel booking portals are often much worse than what's available too.
For example, you might end up paying 30-100% more for a hotel booked through Chase Travel. At the very least you'll have way less selection. Even if price matching exists, you could still end up paying more.
I am traveling to Mexico next month and I do have a Chase Sapphire Preferred card (the one with the $95 annual fee). You get $100 in hotel credits per year if you book through Chase Travel.
In one of the spots I'll be at, there was (1) selection. It was $92 for 2 nights in a pretty low populated town that I'll be passing through. That hotel was rated 3.2 stars on Google.
If I use Google search or any hotel aggregator site, there were over 10 hotels available for half the price with much better ratings.
In this case it cost me about $50 extra to use the card's benefits.
Many people don't understand how rewards work when it's marketed towards your annual fee. The $100 credit doesn't offset the $95 annual fee. You pay $95 out of pocket for the fee. As soon as you book that hotel for $100 you've now paid $195 total out of pocket of which $100 gets credited back, so you're still out $95. If you instead didn't have the card and got the hotel at the cheaper rate, you'd only be out $45 or whatever you paid.
I mainly got the card because it had a really good sign up bonus, 0% international exchange fees and reasonable rental car coverage. Other cards can cover these benefits without an annual fee.
> They are a way for airlines to create value out of thin air with their own fiat currency. For the average consumer the miles create less of a pure economic efficient benefit and more of a psychic benefit - funny money bucket that accumulates to defray some trip expenses. Economically they'd be best off with an outright 2% back card.
“Saving” airline miles is definitely suboptimal, like you said, getting 2% cash back and redeeming it immediately is the optimal strategy. Money is fungible and cash depreciates.
Plus, the “deals” you have access to with airline miles are not slanted in your favor.
> For the minority of customers who are flexible on dates/locations and willing to plan in advance - most airline/hotel programs have sweet spots at the more premium level.
What does this mean? I'm not clear what the sweet spot is - are you talking about buying points/miles/etc outright with cash rather than earning them as credit card rewards? Everything I've read is that these are almost always bad deals.
Credit cards and cash have their place but the story being told doesn't track with experience.
First, businesses are increasingly differentiating pricing between cash and credit card - this is most obvious in gas stations where the price you see on the big sign is the cash price and not what you practically end up paying. Or the various restaurants and other businesses that offer cash discounts. While this is relatively new, the earlier manifestation of this is the credit card fee - eg try paying your tuition or utilities using a CC and you'll immediately find this option costs more.
Interestingly all the above usually hover around 3% so it's tellingly the rate the merchants themselves perceived CC use and infrastructure cost them.
Second, credit cards are clearly good for business volume. Most people have had the experience of wanting to buy something unplanned and not having the cash on them, but buying it anyway via credit card. On a larger scale, hard to imagine on-line shopping without a credit card.
Third, I don't find cash-only businesses cheaper. In my town there's a cash-only barber, pizza place, and ice cream shop and they cost just as much as the credit card taking ones. In every case the dynamic is there are long running businesses with sufficient clientele that they never bothered, but they don't use absence off CC fees/infrastructure to generate a consumer savings.
Fourth, poor people can play the point game too. As a broke college student I was very fond of my Exxon Mobil card that gave me cheaper gas. Now I don't really care about an extra ten cents on a gallon as much.
I was confused by this (because I rarely carry cash) until I saw your response below. I think OP might be using credit/debit card interchangeably? I don't use my credit cards unless I have to, but my debit card is used daily.
Literally between posting the above and now, I went to a rural bike ride with my family. Didn't bother to bring cash. Ended up riding past an antique shop and bought my son an old school tractor toy via Google Wallet.
This ignores the aspect of consumer data.
Credit issuers generate profit through issuing rewards programs in part due to the sale of their customer’s behavioral spending data. Cash and debit users largely retain their data privacy here.
It’s hard to put a real world number on what the cost to the consumer is for losing this data ownership, but it is not zero: these data are increasingly used for targeted pricing practices which extort additional margins from the consumer at a later date.
Is't the fact that data is valuable for somebody, does not mean that it has a cost (price) for me? Spending data is definitely valuable for seller / corporation to know what to produce. I, on the other hand, cannot get money by saving information.
It's not zero sum game, that either I have it or seller have value out of it. Just like with garbage - for me old broken furniture might be a garbage, while for other it's a burning fuel.
I think the OP is right in that spending data is valuable as a mechanism to figure out how extract more profit, which in the end will have customers paying that price.
However, it doesn't need to be exclusively negative. The data will both show where you can price gouge but also simply where demand is.
Put your coffee shop near a metro stop and sell sourdough bread and people will buy that because they want it isn't exactly negative.
Why wouldn't a bank sell debit data just the same as credit data? For that matter, I would expect them to be selling everything they can: credit, debit, written checks, ACH transfers, etc.
What incentive is there for them to not do that? Laws? I'm asking sincerely, not rhetorically.
I think one factor missing in such discussions is that consumer data can be used for political means
And I don't mean "politicians can use it" - but instead, as corporations are more and more involved in the politics, you get targetted and directed based on their needs
It can also be weaponized. Israel uses these sorts of datasets to systematically murder the families and neighbors of their targets. The operation name is something like “Where’s daddy?” They use commercial datasets to figure out where the kids are, then wait for the parent (generally a civilian) to return home, then level the apartment block when it is most likely their are children and neighbors present.
Presumably, the same is being done in Ukraine and Russia too.
Yes, but typically only on the retailer/ Point of Sales side. Your bank is not selling that information. Of course, things get weird when you have additional intermediaries like Apple or Google pay.
In principle at least, there should be some measurable difference vs credit.
Would be very curious to see studies on this if anyone finds one!
Frankly, it’s everywhere— if a company is large enough, they will leverage consumer data to increase profits as much as the consumer will bear.
There are many other examples, but I’ll just link you this as a jumping off point if you want to go further:
https://epic.org/krogers-surveillance-pricing-harms-consumer...
The study methods are closer to advocacy than science or policy.
Sure, take any slice of a vast number, and you get a big number.
It's not a "wealth transfer" when everyone gets what they bargained for and can opt in or out.
Most importantly, the transaction value of using credit cards or rewards systems - what the user actually gets - is not enumerated.
Beyond what others have noted (mainly deferred payment), credit cards offer legal transaction protections: my legal liability for fraud is limited (unlike debit or Zelle transfers), and I can challenge any transaction even later, which gives the vendor an incentive to ensure I'm happy even after they have my money. While reputation provides some incentive for repeat customers, the ability to retract a transaction governs even non-repeats. I would submit this alone has improves quality of service for everyone anywhere credit cards are accepted.
Rewards vary by type. Cash-back rewards reflect the fact that interchange fees were set to recapture initial investments, but servicing costs have plummeting (thanks to computing); governance-wise, it's almost impossible for a "representative" political system to extract a large cost from a small number of powerful agents with vested interests to provide a tiny amount of benefit to a very large numbers of other people. But that's a much more extensive governance issue.
So where does the benefit go? To competition between credit providers, initially as cash-back, and then to tying rebates to future purchases within controlled channels. For airline point systems that give free flights or upgrades, it improves retention, but other forms of rewards would seem to verge on tying, where power in one market is extended into another.
Politically-mediated wealth transfers are a political issue. Economically-mediated wealth transfers should raise market-regulation policy issues, in particular whether the law is inducing or protecting them, and then whether they are good or bad. Tallying that requires not just seeing the money flow, but seeing all the value received or cost exported.
As others have mentioned this is particularly prevalent in the US. I always liked that Australia's vision for a peer-to-peer payment system (note cards are mainly for merchants, hence the rewards) has inclusivity [1] as one of its core tenets "continue to transact ... without disproportionate burden or risk ... those experiencing financial hardship". They also just stopped surcharging [2] and have capped interchange fees since a long time.
Im really surprised the number of comments here who think the rewards are free money they're getting. The stores are paying 3-5% transaction fees for you to use credit cards then they give you 2-3% back and force you to spend it on things they deem can be redeemed. You're paying for that 2-3% back in higher prices for everything. The whole thing is a giant scam and should be shut down.
Anyone who likes economics or money should see it for what it is, a tax on every transaction. Of course you don't want anyone to lodge themselves into your market and get 3% skimmed off on every transaction. This, for the good of the free market, the fees must be limited to sub 1%, preferably zero.
The cost of accepting cash is not necessarily lower - you have take into account higher theft risk, miscounts and cost of delivering it to the bank. Also there is no incentive for businesses to pass saved fees to customers.
>When merchants raise prices for all consumers in response to these costs, users of low-cost payment methods (e.g., cash and debit) cross-subsidize high-reward credit card users who shop at the same merchant"
Cash handling is not a low-cost payment method, Cash handling can cost businesses between 4% and 15% of each transaction, when factoring in labor, security, bank fees, and risks like theft and counterfeit bills.
One could argue that credit card users have been lowering prices for cash payers as business avoid cash handling pitfalls and get their funds safer and faster.
I always wondered why people in America would ever pay by cash or credit card - unless they are laundering that cash.
Otherwise, you're giving up 1-3% discount.
Set auto-pay on your credit card to pay in full every month. I've never once paid for credit card interest. I think there's a term inside credit card companies for people like me: leeches or something like that.
When I and my (still fairly young) family needed to move cross-country, my wife and I accepted a credit card offer with 0% APR for the first year and put all our moving expenses on it. Then once we settled, we paid it down a bit at a time each month, and then right before it would have started charging interest we paid the rest as a lump sum.
Really helped us float the moving company and also some DIY renovations on our house that we didn't have all the cash on hand to pay for outright. And we didn't pay a thin dime for the privilege.
> I think there's a term inside credit card companies for people like me: leeches or something like that.
They genuinely don't care because they offer different products for different groups of people.
Poorer people typically use credit cards to borrow money. The amount they spend in a month is typically much lower than the balance on the card. This means that the company makes most of their money from interest payments. Cards meant for this audience typically have few or no rewards, and instead use the interchange fees to allow for a lower APR.
Meanwhile, wealthier people typically use credit cards as a payment instrument. They pay off the balance in full each month like you do. This group of people is responsible for the majority of credit card spending, and the credit card company makes most of their money from interchange fees. Cards meant for this market have higher APRs, and use some of the interchange to pay for the rewards. The cards meant for the top end of the market with the best rewards (i.e. Chase Sapphire) even charge retailers more in interchange, with the argument being that it's worth it because you get to bring in wealthy people who will buy more stuff.
Well, one reason is the one described in TFA —- credit card rewards amount to a regressive wealth transfer, and if you think that is bad, you may not want to participate in it.
Another reason is that credit card companies sell your purchase data to aggregators and advertisers, and cash affords more privacy.
If the alternative was paying cash, cash has an even more demanding level of confidence of sufficient funds required and it applies earlier with no flexibility.
Credit card companies are still charging merchants a transaction fee for your purchases though. The fact they're only charging one side of the transaction is probably annoying for them, but you still make them plenty of money.
I paid a lot of credit card interest, as a yute, but, since getting married, I have paid in full. Been over 30 years. Leeches rule!
At one time, credit card companies forced vendors to charge the same, whether cash or credit, but that seems to have fallen by the wayside.
The problem is, is that cash is becoming less and less acceptable.
In a nearby town, you can't pay for parking, with cash. I have seen credit-card-only vending machines. A lot of restaurants have iPads at the table, and you never see anyone but the bus[boy|girl|whatever], bringing you your food.
Credit cards are cheaper than cash for most merchants. Most people forget about all the costs of cash because they are hidden, but they add up to more than the couple % credit cards cost.
> I think there's a term inside credit card companies for people like me: leeches or something like that.
that's some odd classism there.
credit card companies love your data. they can package it, sell it, analyze it.
this is real data of actual behavior, not whatever people say or click -- money where the mouth is.
even if they never make a cent off of you from an interest perspective they 1) still get fees from the merchants, and 2) get all of that juicy juicy transaction info -- and that info alone might be worth the costs.
Long term average? Sure, it goes up, that's inflation. But do you know what causes inflationary pressure? Visa and MasterCard adding unjustified fees because they're a duopoly and control most of the payments market, and your government won't regulate them and cap fees.
The UK and the EU both cap debit card fees at 0.2% and credit card fees at 0.3%. When the UK left the EU, Visa and Mastercard jacked up their fees over 5x for UK-EEA payments. Not because they had to, but because they could, and they love sucking money out of other peoples' businesses. https://www.psr.org.uk/our-work/market-reviews/market-review...
Retailers in competitive industries absolutely do use a reduction in card fees to lower their prices. Maybe not all the way, but they definitely don't give it all to themselves as margin; their competitors don't.
I prefer my debit card because I'm more aware of how much I'm spending. Money taken out of my account is immediate and feels real. Ultimately, I spend less.
One isn’t more real than the other. They are both numbers in an online database. In one case your assets are going down, in the other your liabilities are going up. The net result is the same.
Problem with a debit card is that if something goes wrong (product broken, or worse, debit card skimmed) it's my debit card, and thus my money.
Credit card? I file a charge-back which is a forcing mechanism for the vendor. Credit card skimmed? I get a new one, and I don't need to wait for my $ to be re-imbursed.
I always ask for a discount but for some reason I almost never get it.
The rational move then is to pay in as many installments as I can get without any additional interest. Then time itself gives me the discount. My actual money stays invested and I only pay later. My credit card gives me 1.1% cashback on all purchases. Inflation too does some of the work.
You shouldn't get a cash discount - cash costs the merchant MORE than credit card fees. You have to count all the costs of cash that credit cards don't have: counting, and recounting the cash and change. Then the manager counts and recounts everything in the back room at the end of the shift. Then the manager counts everything twice again to write up the deposit forms. Plus you need a cash register with the extra cash drawer that acts like a safe. Plus other security systems just to prevent robbery (this can get elaborate in areas where robbery is common). Those all add up.
I would be curious what percentage of people actually qualifies for a card with over 2% cashback especially without a monthly fee. My guess is that that percentage is very low.
High earner/spender, sure but that's not most people
It's not hard at all. Citi Custom Cash has 5% on the highest category spend each month for the first $500 (I use it on groceries). American Express Blue Cash Everyday has 3% on groceries/gas/online purchases for up to $6000 purchases each year. Chase Freedom Flex and Discover It have rotating categories every quarter, sometimes groceries, gas, Amazon, PayPal, etc. None of these required much income to be approved.
I know that Discover has a card with a 5% discount category that changes once a quarter. Everything not in the category gets 1%. It's not hard to get the card (or at least wasn't) and was frequently advertised to college students.
If you combine that with a card that gives 2% on everything than it wouldn't be hard to average over 2% cashback as long as you were mindful about using the discover card for qualifying purchases and the 2% card for everything else.
I have a 2% cash back credit card from my bank, with no monthly fee. It started as a 1% cash back card around a decade ago, and slowly crept up to 2%. It's a nation wide credit union that has certain requirements to join though.
My first US credit card was a 4-3-2-1% rewards program and I had literally zero income at the time. I was told by the banker, "oh you can't do that right away, you must first get a secured card to build your credit score, after a year you can try applying for real", but I told them I don't care and to send the application anyway, and I've got it.
Ever since then, I wondered how much of the "not qualifying" is due to misinformation like this.
Once in a while. However the truth is the large people who collect the 1% and pay off their card every month are the people who don't. These people are customers year after year, and often spend more on their cards (they tend to be higher income), and the bank gets their 2-3% from them (2-3% after rewards)
People who don't pay their card off also are on the look out for lower interest rate cards and switch all the time. they in reality are not paying the very high rates on cards, they are paying the lower introductory rates (which is still a lot of money). These people are also more likely to default and stop paying leaving the bank to write everything off. Combine that with the fact that they typically don't spend as much over several years (they hit their credit limit and their income won't allow an increase so they have to stop spending), and they are not as profitable as it seems.
Credit cards also transfer wealth from people who pay interest to people who don’t.
It’s a silly system, where everyone has to invest their time (optimizing for rewards, avoiding interest) in an ultimately negative sum game. I hate it so much.
What does that graph tell you? Because I think patio11 wanted to send one message and people accidentally misunderstand the graph.
That's the interchange income corresponding to wealthy people. Interchange is paid by the card-accepting business, not by the buyer. The buyer pays interest and other fees and that graph looks very different.
From that original study the full picture table says in % of ADB that the "poorest" (below 620 FICO) pay ~45% interest and fees but bring only 2% additionally in interchange income. The wealthy (at 800+) pay ~10% interest and fees but bring another almost 10% interchange income, on 4 times higher spending, and 3 times higher rewards (so the wealthy get ~12 times higher rewards in $ value than the "poor").
Just the percentages paid by each group more than offset the difference in spending. There are also way more "poor" accounts than wealthy accounts. Intuitively you can tell that the banks are effectively subsidizing the fees and interest for the wealthy with the income from the poor, for the sake of the interchange income which is mostly generated by the wealthy but doesn't come from their pocket.
Those poorest of people (<620 FICO) pay more interest and fees (percentage and absolute terms) than any other group. There's a range in the middle on the wealth scale where the customers are actually a net loss for the banks (the 660-760 FICO range).
I think that's out of date. He links to a study showing interchange revenue net of rewards showing up to 3% by high FICO scores. (Just at a gut check that seems crazy to me, since interchange revenue doesn't really go much above 3%!). But that's from 2013. I remember when Fidelity launched its 2% flat cashback AmEx back in 2003. People didn't really know if it would be sustainable. Now 2% is a dime a dozen.
The most recent I've seen otherwise is this Federal Reserve study[0] from 2022. It finds that the marginal return on swipes is actually slightly negative because of how juicy rewards have gotten, and 80% of their profitability comes from interest (with most of the rest fees):
> we find that, on average, the credit function makes up approximately 80 percent of the credit card profitability, whereas the contribution of the transaction function is slightly negative, as rewards and other expenses on credit card transactions outpace banks' interchange revenues.5 In addition, fees—in particular late fees—comprise approximately 15 percent of credit card profitability.
I gave up long ago trying to optimize any rewards, it just ended up being stressful and not really worth it ultimately.
Now I just use my apple card everywhere, pay it off every month and get whatever rewards I get.
It feels like a weird situation, those that stand to gain the most from credit cards are also the ones that should feel a difference of under $100 in rewards the least.
The one exception I see is bonus sign up rewards since those can be fairly significant, or making sure you use an airline card at the airline since those bonuses can be fairly significant (with sometimes other benefits). But outside of those exceptions, just choose a card with good rewards and stick with that and pay it off every month.
I gave up on optimizing and just use the Robinhood Gold 3% cashback card everywhere (except Amazon/WF, where I use their 5% Chase card). I can probably get more than 3% cashback in some categories on other cards, or more ROI by switch to points, high-tier cards like Chase Sapphire, and churning, but I just don't care.
The gain of a few thousand per annum is not worth the mental distraction.
I've generally tried to stay with cash back rewards in categories that don't change, that's been the best way to balance complexity with rewards for me while not nudging me to buy stuff I don't actually need. I don't like messing with points or rotating categories or included subscriptions. With one exception I avoid annual fees as well.
So like, I have a card that's 6% on groceries, another that's 3% on gas and restaurants, Apple Card does 2% on Apple Pay transactions, and I have a 1.5% card for everything else.
> It feels like a weird situation, those that stand to gain the most from credit cards are also the ones that should feel a difference of under $100 in rewards the least.
It’s expensive to be poor. Higher interest rates, no credit card rewards, higher unit prices at places like Dollar General, etc.
I don't bother with rewards either, be it cards or memberships or whatnot - too much hassle if you're also working full time. BUT: one thing I use the credit card for and that is for the pay and travel insurance attached to it. Could I get it otherwise? Maybe, no idea. But if you don't carry debt (and I never do) there's no downside.
In the US you have several legal safeguards that are not provided by debit cards. Fraud liability limitations, chargebacks, and so on.
You can still implement “if I can’t afford something, I don’t buy it” with a cc. I pay mine off every month so it’s financially the same s a debit card but use a premium card for its purchase benefits.
If you shop at places where many customers user credit cards, and those places don't change an extra credit card processing fee to customers, then you are effectively paying for those credit card fees whether or not you use one.
Try to pay for SaaS online. Tons of them accept nothing but credit cards; and then some of them accept direct withdrawals from bank account but it takes days to verify. Services using Stripe seems to be the worst at this. (I’ve never carried a credit card balance my whole life.)
I assume you've somehow gotten access to stable housing though via that bank account (possibly a home loan, or something else), or accessed a large line of credit before 'modern' credit scoring came into play (FICO scores and the Big Three).
I see many commercials for local banking up here that pulls out 30-40+ year members of the banks boasting about the prosperity the bank provided them, but at the same time, when they'd walked into the bank back in the day A Guy just said "yeah he's good for it" and wrote out the loans they needed.
You can't opt out of the modern credit scoring system and if you fuck it up even once with a bad line item you're out of the running for quite a few things and become virtually poor.
If you are traveling and need to rent a car in the airport - sometimes it is not possible to do without credit card. Otherwise you don't need a credit card.
I’ll never understand this credit card debt thing... and why should businesses eat the credit card commission cost? Is it 5%? You pay for it, why should I?
I don't have to invest any time at all. I just use the (US) card that gives me the greatest benefits, be it cash back or services. Usually I just look at the reward rate, which is a base 2% for me right now going up to 5% for some things.
I love it. As someone who never carries a balance I get paid by banks for doing pretty much nothing at all.
And I don't worry about US retailers, I don't live there.
I should add that rewards are not the best benefits. Sign up bonuses are much more lucrative, running to hundreds of dollars per card, and can often be repeated. Same applies to bank accounts.
Imagine a world where the pipeline from extra fees back to hoop-hopping cashback didn't exist and your services were just cheaper by the same percentage points instead. It's designed to make money off people slipping up instead of serving customers.
Assuming you have sufficient income, paying your balance off in full every month and instantly redeeming the rewards each month doesn’t take a whole lot of time. I just use a card that gives 1.5% cash back.
Agreed. I have my rewards configured to automatically convert to cash to reduce my bill. The button was buried deep in the website, but once I found it, I've never had to go back to the rewards site again.
Credit isn't negative sum, it is a positive sum game. "Negative sum" has a specific meaning here and just because wealth is being transferred isn't that significant; positive sum games also have wealth transfers.
It is risky and it is very easy to lose great amounts of money on a bad decision when credit is involved. Arguably that makes it bad. But still not negative sum.
Alternatively CC companies could cut off people over certain credit risk and then be able to charge interest in line with the lower overall credit risk…
Borrowers can also keep from overextending their credit and go on debit cards instead…
Obviously these things can have an impact on people but before the 80s credit cards were not widely available to people with high credit risk and the world still functioned.
Why is it so hard lol? I have the Bank of America Rewards card for 25+ years. 2.62% cashback on everything, 3.5% on dining/travel. Maybe there are better ones out there but this is good. I have auto-pay setup so I don't have to worry. I have not spent a second of my time optimizing anything in last 15 years
I don’t have any data, but my intuition is that overall high-fee, high-reward cards increase propensity for consumer spending by at least a few % beyond the fees/rewards.
The merchants think so, too, or they wouldn’t accept the processors that let their banks hand out these cards.
> The merchants think so, too, or they wouldn’t accept the processors that let their banks hand out these cards.
Visa / Mastercard / American Express all have lines of premium credit cards (Visa Infinite, World Elite Mastercard, Amex Platinum), and they're very much too big to ban. You'd just be left with one processor in the US (Discover, now owned by Capital One).
There is literally no time involved in avoiding interest. You pay your complete balance when it's due. As far as rewards go, I can't be bothered with them so I always just opt for cash back which I do maybe twice a year. Time involved: 5 minutes / 6 mo.
There's plenty of time: the time you waste by not spending money you don't have. You have to wait longer until you make more money in order to spend more without interest.
That is a spurious argument. You have a choice in whether you pay interest, you do not have a choice about a purchase including the cost of paying payment processor fees since the price is the same if you use paper money.
One of the most corrupting yet hidden forces in America today are the payment networks MC/Visa etc. due to their bribing and corruption of the government in order to prevent things like making payment processor fees separate/independent of the cost, i.e., similar to how taxes are added after the fact, not included in the price; and also preventing merchants from having two different prices, cash vs card.
I’m a bit surprised that HBR does not seem to even really have an accurate mental model if the matter, unless they’re making an editorial choice to speak in vernacular turns to relate it to the audience.
The problem is not really the cards, it even credit cards, it’s actually the payment processing networks that are the corrupting force.
If America has a legitimate government, there would have been a federal alternative payment processor that charges nothing as an accompaniment and based on the authority to mint the currency, which is what a payment processor today is, a digital currency mint.
To put it into perspective, when you purchase something by credit card, a merchant may have to l pay a little under 3% on a $100 purchase. When you purchase something cheaper let’s say $5, a merchant may pay 6.5%. And no, they don’t just say “awe shucks, I guess I’ll lose that money”, They increase the prices by some averaged amount.
Some may say that they can’t do that because competition, well, because there is no real competition and because the payment processor de facto monopoly/cartel has basically every single company in lockdown and you have no real alternatives, especially in places like Europe where they’ve foolishly and enthusiastically started forcing everyone into digital payment, all the merchants simply roll what is effectively a kind of organized crime/mob extortion into the prices of the goods and services the common person pays and never knows is paying.
That is not a positive. I'm fine with splitting up a price if you want to show how much tax gets added, but having to continuously do the mental math of "no this item is 10.99 it's 10.99 + tax" is very frustrating. When I pick up a $11 item, I want to spend $11.
> Because merchants charge everyone the same price regardless of how they pay, those fee costs are factored into prices for all shoppers. However, credit card users get that money back and then some through rewards, while cash and debit users get little or nothing.
>The result: People paying cash face the equivalent of a 26% higher sales tax than premium credit card users shopping at the same store.
I am surprised this never occurred to me or has come up at all in discussions with people (in the context of rising costs/inflation specifically). I’ve literally never considered this compounding effect until now. It’s so obvious of course, it just never even crossed my mind.
Many restaurants I’ve eaten at lately surcharge credit cards with a 3% fee, offering a discount if you pay cash. This is the way to nullify this regressive policy until the US commercial banking system offers instant payments for merchants, internalizing the externality of the interchange fee. If you pay with card, you
US FedNow instant payments went live three years ago, and can move $10M per transaction for a few pennies per transaction.
(A gap in legislation was not mandating offering FedNow capabilities to your customers as a condition of your banking license as a bank; I expect this to be patched eventually)
The problem is the way the US credit/debit card systems are setup, there's not much of a discount/surcharge that would make me switch usage to debit.
If my credit card number gets stolen, zero money ever leaves my account. It simply gets contested before the monthly bill is even due, and cancelled. I have probably had number stolen 5 times in 20 years, and its never cost me a cent. Zero dollars every left my accounts even temporarily.
If my debit card number gets stolen, the money is out of my checking account immediately. Mortgage payments and other bill payments might fail, and the onus is on my to chase up the bank to get charges reversed and money returned to my account.
Not only would the 3% fee not make me blink, as my cards have 3% cash back for dining, I doubt I'd change my behavior even at a 5% discount. If anything it'd dissuade me slightly from patronizing the restaurant.
Credit cards are convenient and cash isn't. The genie is out of the bottle, no way to make people move back to cash.
Car mechanics, dealerships, house fixing contractors, city (property taxes), these are the ones that I can think of in the past year I've come across charging a fee for credit card payments. What's most irritating is that most of them do not setup for and drop the fee if you pay by debit card.
In small restaurants, that’s just a tax grift for the owner. The “smarter” ones underreport income, the dumb ones steal the sales tax and the hammer eventually drops. Over time, they’re probably paying a lot more than 3% for shrink, Due to screw ups and employees skimming the till.
Credit cards have a really high ROI. The 3% drives 10-20% more spend, sometimes even more. When I was on the board of a small private school, we bought a square terminal and used QRs for flyers. That drove 30% increases in fundraiser expenses and helped us reduce mailings and nags. We would cross-sell stuff - could buy your youth soccer registration at the fall fest or whatever.
The things where ach, check, cash make sense are where there’s no discretionary spend at point of sale or recurring payments. If you pay 75 bucks a week that have your apartment cleaned dog groomed or whatever. You’re not getting value beyond taking the payment in advance with a credit card. Those are the areas where Venmo and Cash app have really dominated.
I was surprised by this number too - and I’m pretty sure it’s a clever wording trick to inflate the percentage:
> equivalent of a 26% higher sales tax than premium credit card users shopping at the same store.
I do not think the sale price is increased by 26% - which doesn’t square with a 1% to 3% fee - I think they pay approximately 26% more in “sales tax” so you’re paying 26% more than the 7% tax.
I believe a similar thing happened with fast food and food delivery fees. It costs money to be listed on the food delivery app so fast food chains started charging everyone the same price to offset the cost of being listed on the apps.
Delivery apps don’t mandate that the price on their apps be the same as on the actual menu. If you walk in and order you’ll pretty much always get a lower price.
It also means stratifying card users, even if you actually make all the card users pay more than those with cash. The people who can just barely qualify for a card are paying to fund the "rewards" for the wealthy who pick the best options.
"It's expensive to be poor" is a more or less universal experience under capitalism and it's amazing how many novel ways we've come up with to make it more expensive for poor people.
"Means testing" is one of the fun ones. The wealthy will often justify this as "People like me shouldn't get this help" which sounds even generous, and then you realise, oh, because we're testing if you're worthy to receive help now to get help you need to expend some time and effort to pass the test. When this "I shouldn't get benefits" is offered to you as a reason to means test, ask them why they're taking a benefit they don't think they should have and why they can't pay society back in other ways rather than inflict more misery on the poor...
Then they get angry when the other side of the coin is discussed - they can’t get certain benefits because they’re above the threshold too, but they’re different of course.
You’re right but that’s actually not the part I’m talking about. Specifically the fact that even though we are all “being charged the same price,” as prices increase, the amount I am saving increases as well due to cashback or other benefits on a credit card. And because I am spending less money, I ostensibly have more money to make my credit better, which means the benefits only increase on top of that.
It’s a variation on a theme we are all very familiar with. It’s expensive to be poor. But this is another angle I hadn’t really considered. It’s a little more complicated than just “I can have better cards with better benefits.”
TL;DR: The actual cost per item for me is, in very literal and quantifiable terms, lower as a result - and the more expensive things get, the steeper my discount gets while the person next to me paying cash is paying a little more than I am every transaction for the same items.
Put another way: As price/inflation increases, the real number I am saving increases as well. So we aren’t just paying different prices, but their increase is also higher the higher prices get.
The only way I can interpret the percentage is that they are stating the increased cost as a percentage of sales tax rather than a percentage of the sale, such that "26% higher sales tax" in a state changing 10% sales tax would mean paying 2.4% more in total. That choice seems misleading, but does make the percentage make sense.
One factor that never seems to come up in these discussions is that while businesses might not like credit card fees, they also don’t like all the issues with cash: managing it, transporting it, losing it to employee theft, etc. The cost of cash transactions isn’t 0.
Same argument for people: managing cash is a pain, swiping a card is easy. Contesting a transaction or fraud is way easier (infinitely easier?) with a card than cash. Having day to day liquidity even without ever carrying a balance is nice.
Is all this worth $9.2B across the economy? Maybe not, but again, certainly worth more than 0.
>Is all this worth $9.2B across the economy? Maybe not, but again, certainly worth more than 0.
Nobody's arguing that credit card companies are proving zero value, only that they're charging more than what can be "justified" (whatever that means). That's why in europe the interchange rates are capped at some amount to reflect that.
Europe is artificially capping the interchange rates - that doesn’t mean that’s the market price for that service.
As for America, there’s 4 card networks, and no explicit regulation preventing you from starting another (just the huge regulatory burdens involved with any money-processing business, PCI, etc).
If they were charging so much more than is “justified”, couldn’t one of the dozens of well-funded players in the fintech space swoop in? Couldn’t Walmart fall back to cash and a “Walmart card”?
Instead, we see even goliaths like Walmart spending money and time to support newer features like tap to pay because it reduces fraud losses and customers just prefer it.
The “justified” thing is silly - is Apple charging more than is justified because they make a profit?
I don’t really care what businesses want at this point: my default position is that they are trying to scam me in some way and must be handled appropriately. Credit cards are a must-have in this situation, since they provide a mechanism other than hope to deal with recalcitrant merchants without wasting my time.
More actually. Generally those rewards happen by using your credit (there are exceptions). Meaning you are more likely to pay for something that you'd probably otherwise not have spent money on.
The most defensible framing that I came across (maybe from patio11?) in favor of credit card rewards is that they're a "bulk discount" on interchange fees. People who spend more on their cards also pay more fees (passed through the stuff they buy), so it kinda makes sense to give them a discount[1]. That's what credit cards do. Cards with the highest rewards are geared towards high spenders, with corresponding credit score and/or minimum income requirements. It's not unlike how the 2 quart (1.89L) bottle of mayo at costco is cheaper than the 8oz (0.24L) bottle from dollar general, but nobody would frame that as a "wealth transfer".
[1] of course, this doesn't need to rely on some principle that people are entitled to discounts if they buy more, because in reality discounts arise from complex market dynamics such as competition and price discrimination.
I was working with a team pitching a new marketing database system to Discover Card decades ago. When we were first shown around their HQ which was a kind of hybrid open floor plan with lots of cubicles there was a large office with fancy Queen Anne? style furniture in it, IIRC an EA or two sitting outside. it looked nice but kinda out of place in a sea of cubicles and standard office furniture. I asked who's office that was and was told it's Nancy Donovan's (we were meeting with her team). But they did not describe Nancy as the head of Marketing and Sales etc., they described her as "the person who developed the cashback program". I liked their clarity about recognizing what worked.
While they’re probably right from a consumer perspective, the article skips over the fact that accepting and handling cash is a significant cost for businesses, way more than the credit card fees. Delays in checkout, making change, counterfeit bills, employee theft, external theft, safe transport, added accounting burden…all add up to an estimated 5-15% (https://plainscapital.com/blog/the-cost-of-accepting-cash/). In fact merchants can now legally pass through credit card surcharges to customers but very few choose to do so, because they’d prefer you pay by card.
One thing that happened is The Copenhagen Interpretation of Ethics, right? Mark Zuckerberg is panned for having 'defunded' a school. What happened was he paid for it for a while and then stopped in a planned manner. Those who didn't ever pay were better off. In general, at the margin you move some guy who was ambivalent to opposed. Jordan Henderson spoke for gay rights, and got panned when he moved to Saudi Arabia, while many footballers did not speak out about gay rights ever and received no censure over this.
The general rule with many of these causes is that unless you're willing to be absolutely committed, it's better not to be involved. If you cannot prove to yourself absolute fidelity perpetually into the future, it's better to not do it at all. The punishment for the apostate far outweighs the punishment for the infidel.
So your commitment has to be at least high enough to be willing to bear the resulting punishment for your apostasy. And if it is any less than that, you are strongly encouraged to just stay out of it. It's not that anyone is mean or anything. It's just that on the margin not-participating costs nothing and participating incurs a massive liability. That causes a shift in the window.
It becomes a scorecard. Success in life is strictly about making the number go up. It doesn't matter if they could spend $100K a day for life and never go broke. They must have a bigger number and be higher on the Forbes (e.g.) list. Some people are so obsessed with it they lie and make up things to claim their number is much higher than it actually is.
> everyone else around at every possible opportunity?
How exactly to become wealthy then?..
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> What happened to noblesse oblige?
Some things made noblesse oblige way harder to manifest.
Meritocracy. "I deserve what I have", versus "I got lucky have what I have" made harder to share back.
Globalization. When you use one community to produce and another to consume, and third to register a company, and owner lives in fourth it's hard to associate yourself with the community. Where exactly to give back? You won't even see those people.
Secularizarion. Though USA is still significantly religious place comparing to europe.
Easiness to move. Today you're here, tomorrow you're there in new zealand bunker.
Culture. Somehow the rich are in the people who are heavily interconnected, spend time together at the khe khe pedoisland.
Natural selection. The ones who care less about others mathematically have more advantage than those who care enough to spend resources on non-resource-aggregation activities.
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So. There is no intristic motivation to do so (with majority), there is no external motivation, and there is no repercussions of not giving back.
The only way to solve this is to have the user of the credit/debit card pay the fee. Sure, you can do an EU thing of 0.2-0.3% or whatever it is, but this might still be 0.2-0.3% more than it could be in a competitive market.
Australia tried this, but it led to a different problem of payment processors being able to gouge card payers because merchants were allowed to pass on whatever their costs were, and consumers didn't really have a real choice of paying the fee or not. Also since the fee had to be stated before the card was presented for tap and go payments, it didn't solve the OP problem: debit cards and premium cards all got hit with the same surcharge.
Interesting. I guess one would then ask why was it not the case that the merchants were not also behaving in a similar way and looking for the cheapest payment processors (as long as they were also asked to eat their own side of the fees).
Perhaps forcing everyone to just implement free payments between any bank accounts, like pix, is actually the only viable solution here (and i just accept that this is one of those market failure things).
> Because merchants charge everyone the same price regardless of how they pay, those fee costs are factored into prices for all shoppers. However, credit card users get that money back and then some through rewards, while cash and debit users get little or nothing.
And they charge everyone the same price because credit cards contractually force them to. Merchants can either accept these terms, or forego credit cards entirely. This way credit cards prevent other payment methods from competing on price. Free markets for thee, contractually forbidding competition for me.
I have several credit cards and pay them off at the end of the month. I get mostly free hotel stays when I take my family on vacation and have had many free airline tickets.
I also used a credit card to bootstrap my business 15 years ago. At it's height, I was brining in $1 million/year. The bank would have never given me a loan for the amount I was able to use on a credit card. I ended up shutting the business down a few years ago, with no debt.
Most people can't handle spending and rack up tons of debt. Credit cards can also be used to make money, instead of buying stupid things you can't afford.
Ridiculous. I suppose I’m also making a wealth transfer when I buy in bulk while poor people can’t afford to, or I drive to a discount store while people with bad transportation options have to shop at an expensive local place, or I use a loyalty card.
The store still makes a profit on my purchase. My rewards are my own money coming back to me. I’m not sticking my hand in a poor person’s pocket just because I use a fancy card.
Because merchants charge everyone the same price regardless of how they pay
Not at many gas stations. Cash gets a discount usually $.10 per gallon. I’ve also started to see restaurants either give a discount for cash, or charge extra for credit card purchases. Business suppliers from tiny shops to large national companies tack on 3% for people paying with credit cards, or like T-Mobile, a $5/line monthly fee in order to get people to pay by direct debit.
It goes a step further... previously, card agreements (between merchants and the networks), required the prices to be the same between cash and credit (with the well known gas carve-out), but Durbin made that tying illegal, so now retailers are free to charge different prices for cash, credit, and debit.
The article has one thing mistaken, because it says that Durbin lowered costs for transactions, but credit owners got to keep their perks... That's not technically true (I worked at a supermarket when debit rails first went into effect, and I worked in payments when Durbin went into effect).
There are no benefits to credit users who use the debit rails, and the merchants would really rather you use the debit rails, because it is much cheaper for them. Durbin was mostly a win for the merchants, not a win for the customers.
However, if you take that to believe that the merchants lowered prices overall because they were paying less for transactions, than you might try to read into it that credit users kept their perks, while cash and debit users paid.
The true story, however, is that it's an equilibrium... When the costs go down, the saved money goes somewhere in between the two (supply and demand), and as long as there is competition, the savings are shared.
However, the real problem is that credit companies are allowed to invest interchange fees in perks at all. Credit card companies decided to take their low-risk pool, and offer them incentives, splitting the money they saved between themselves and their users, and using it as a way to pull more low-risk users. The more that happens, the more expensive it becomes for credit companies that serve mid-to-high-risk users... and since we can't stop offering credit to those users as well, those companies push for and get increases to interchange fees to cover the additional cost... which creates more room for benefits for the low-risk users, and the cycle begins anew. It's a vicious cycle that can't be fixed by changing amounts on the existing fee schedule... The only possible fixes would be in either disallowing these kinds of perks, or splitting the rail charges, and specifically charging less interchange for low-risk users (which dries out the benefit pool)
So if anyone is trying to picture what 9.2 would buy. The new bridge between US and Canada (Gordie Howe) was 4.6 billion. So that is 2 giant bridges + related infrastructure ... worth of wealth transfer. That bridge had some corruption / payoffs, so we should discount that by 10% wealth transfer as well.
They mention "premium credit cards" in the article, is there a general understanding of which cards are premium? I clicked through to the study and the only example they cited in there was Chase Sapphire Reserve but I didn't see, like, a list or something.
Credit card rewards are not a mechanism to shift wealth towards premium card holders (this is a negligible distraction), they exist purely to increase revenue/conversion rate, by decreasing customer price sensitivity (compared to cash payments) and encouraging financially irresponsible spending. If this did not actually work in practice, every merchant would just insist on cash and pocket the difference.
"Poor people" are hurt much more from the changes in spending behavior induced by credit card use than by paying for card rewards.
No. I do embedded software engineering for a living.
I use (in my view) HN appropriate levels of jargon (because lots of people here are involved with getting people to pay for some newfangled cloud thing or other, so I use their terminology).
In simple words:
People pay more for the same (and spend more recklessly) when you let them pay by credit card, and this causes much more economical "damage" to poor peolpe than any "wealth transfer from card rewards".
I'm the one on receiving end of this game, and I'm sick and tired of playing it. I would so much rather pay full price and stop wasting my time looking what credit card to use for what purchase. This game benefits nobody but banks, and the total amount of time it wastes unproductively is staggering.
Merchants pay the transaction cost. In my parents business in the early 2000s customers would ask in advance if they could use a CC. Some places installed ATMs in the corner (still a thing in some places), but quite unpopular. Rather than lose a customer the merchant will accept payment with credit card and pay the fee.
One consequence of this system is the large merchants have more bargaining power and can negotiate lower fees. So large retailers, gas station chains, etc. are able to reduce the overhead of accepting CC payment. While smaller merchants have the same higher cost.
From a capitalism perspective, this is the most egregious example of "you have capital, so you can make more capital". Banks holding the capital in this case.
Fun fact: when credit cards were first introduced only to people with good credit, which paid the balance in full. this was not profitable. Only after opening the pool to other credit levels did CC start printing money for banks.
This applies to cash as well. It takes a lot of time to count change for everyone. Plus all the ways there are to steal cash.
Your fun fact is wrong. Credit cards were always profitable. They were not in the beginning because scale is what makes them profitable. Anyone who uses their cards for a couple meals a month (which is what it was first started for) is going to cost money because of all the overhead to have you as a customer. In those days that was a stamp to send the bill, someone to open the payment and cash the check - now that everybody works electronically the overhead is lower, plus people are using it for more and so there is enough left over to pay for it.
"Because they receive a rebate, credit rewards-card users often effectively pay less than the posted or cash register price for equivalent goods or services."
Credit card systems are a Ponzi scheme that favors those who already hold a lot of capital, at the expense of those who weren't lucky enough to be born heirs.
This is even more true of the American brands that are getting Trump to attack modern, open, cost-free systems from other countries—like Brazil's PIX, maintained by the Central Bank of Brazil.
What a silly article. Don’t buy things you cannot afford. Wealth transfer is a ridiculous framing. Is any heterogeneous situation involving money a wealth transfer?
It's clearly more complex than the story these authors are telling, in particular the highest income consumers get the worst returns on their interchange payments. So stores and services catering to wealthy consumers are actually subsidizing an opportunity for savvy customers, many of whom are not wealthy
One note on patio11’s opinion on this is that he really overweights the ongoing work and innovation required for electronic payment processing. It WAS a great novelty and deserves to have made a lot of money for 30 years. But the reason they make so much money today is monopolistic low behaviors to lock in their advantages. It’s not a free marlet because of deals over time, some of the most famous of which are their prohibition on charging different rates for cards or even disclosing the rates on cards.
I think the most simple piece of legislation to solve a lot of problems is to allow merchants to pass along the interchange rate to their customers. If they could do this legally and operationally, this would solve most issues here. If a credit card wants to be expensive, fine the consumer should pay for it. Because of contractual and operational limitations, credit card companies have gotten themselves into the current arms race.
If stripe implemented this, it would make me appreciate them as a force for good instead of being a part of the problem.
>in particular the highest income consumers get the worst returns on their interchange payments
That's not what the article says:
>High-income consumers with high FICO scores benefit the most from reward credit cards compared to mid- and low-income consumers with high FICO scores. At the lower end of the FICO distribution, however, this pattern is reversed. On average, net rewards are far more negative for high-income consumers with low FICO scores than for middle- and low-income consumers with low FICO scores.
>Or, to put that another way: if there is redistribution happening, it necessarily includes redistribution from unsophisticated high income customers to sophisticated low income customers.
While it's true that wealth customers with low FICO scores are getting hosed, it's not clear whether that is enough to cancel out the effect that richer people (presumably) have higher FICO scores on average
To be clear though, the higher FICO scores get hosed the most, see the graph earlier on. Your quotes are conditional on FICO so they don't take that into account.
The only way I can put these things together is that at the high FICO end, both wealthier and poorer consumers get hosed a lot but wealthier consumers not quite as much. On the other hand, lower FICO band doesn't get as bad of a deal overall but it is worse for wealther people (plausibly because they have high interchange fees and don't use their rewards).
It's complicated, but... this is not a wealth transfer right? It is a transfer mostly just from consumers to credit card companies that provide them a service.
Important context: this is US thing. EU capped interchange fees at 0.2% for debit and 0.3% for credit cards.
So in US card processing is x5-x10 more expensive.
Things that are more expensive in the US for no reason:
sighs and adds "The very act of making a purchase"
At least we have cheap gas? farts
Healthcare and college are "Baumol cost disease": because they depend on skilled workers, much of that is the same as "American salaries are higher than in the rest of the world", and unlike manufacturing or software (+) you can't outsource it to lower-wage countries.
(+) there still seems to be a massive wage premium for "being physically in a San Francisco office" even if most of the work is being done by an AI, which cannot be sustainable
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Bit for bit, internet access is cheaper in America than it is in Canada or Australia.
Canadians like myself have ~40% of our provincial taxes spent on healthcare, so in my case about ~8% of my gross income. Somewhere in the tune of $20k/yr. While I was living in Seattle and filing American, quite a bit less of my gross income went to healthcare. Just food for thought.
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Internet access isn't particularly expensive in the US.
Healthcare, education, and housing are expensive in the US for the same primary reason: political interventions that simultaneously subsidize demand and restrict supply.
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You can add Pre-K education to that list. It's on par in terms of costs with sending your kids to college.
This is why people are moving out of the US in droves, the universities are empty and nobody goes to the doctor.
Internet access sort of has a reason: the US is geographically huge and more sprawled out. But that's not enough to explain all of the difference.
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To be more specific, this is a US credit card topic.
Debit card fees are capped in the US, yet I’ve never received a discount from a merchant for paying with debit instead of credit.
As such, I just pay with credit and have never understood this argument.
That's what makes it a wealth transfer, from debit card users to you.
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> As such, I just pay with credit and have never understood this argument.
Because the merchant pass the higher processing cost to all customers.
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In NYC, most independent shops give a debit card discount / credit card surcharge.
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Places around me have been starting to itemize the credit card fee. Only car dealerships so far have waived the fee for debit over credit in my experience.
Until 2013, visa and Mastercard forbade merchants from charging more for credit card payments if they accept their credit cards.
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It's not unheard of. Gas sometimes. My car dealer for one. (Whether it's a credit surcharge or a debit discount is semantics.) Though with the cashback on my usual credit card I use for domestic credit card purchases, the difference is pretty much not worth worrying about.
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Once ever I was requested to either pay cash or via debit in a cafe in Montreal
Good for you as you're smart but less smart people don't do this and then get scammed legally.
It's partly true: this only applies to consumer cards. That's why many EU banks still offer corporate credit cards with huge cashback etc. For example, revolut offers no cashback in France on their metal cards if you have a consumer account, but up to 1% cashback on the same card if you have a "freelance" account. https://www.revolut.com/fr-FR/metal/
Second thing: interchange fees are not the only fees that your typical store has to pay, the total fees are much higher. I think the EU essentially capped Visa/Mastercard profit in the EU, more than they capped small business fees for card payment.
> That's why many EU banks still offer corporate credit cards with huge cashback etc. For example, revolut offers no cashback in France on their metal cards if you have a consumer account, but up to 1% cashback on the same card if you have a "freelance" account.
If 1% is huge, that's a lot better. 2% cashback is my baseline for normal in the US and I currently use a 4% on everything card (no longer available for new customers).
I don't like the cashback system, but the economics insist I use it while it's available.
> That's why many EU banks still offer corporate credit cards with huge cashback et
We're a business in the UK and the charges for accepting Business credit cards is much higher.
I don't have current charges to hand, but in 2023 Personal Credit Cards were 1.97% whilst for Business Credit Cards we were charged 3.43%. That's probably how they afford such high cashback/loyalty schemes.
I think we're paying about half those rates now. I know Amex is somewhere between Personal and Business charges.
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EU only capped fees for 4 party systems, and only for consumer credit cards. business credit cards and 3 party systems (American Express for example) are not part of the cap and you can get more rewards with these card types.
Quite a few places do not accept Amex and many that do probably don't know they do or they would disable it.
In Germany I saw they charged extra for using my credit card. A U.S. retailer told me the credit card companies won't allow that in the U.S.?
They charge you extra, they just make it invisible. The store has to pay the fees and it causes prices to go up for everyone to cover them.
> A U.S. retailer told me the credit card companies won't allow that in the U.S.?
That used to be the case, but it's not current. Merchants can charge a credit card fee, and many do. Many merchants near me (washington state) don't, but those that do add a fixed fee of 1-3% for credit.
They can't make it an explicit line item of "3% surcharge" or whatever. Instead, the business will raise prices across the board and offer a "cash discount" of 3%
How does it work if I have a US credit card and use it abroad? Do I still get the kickback even though the merchant fee is capped?
This feels like a potential arbitrage opportunity... I live in Sweden, but if I can use a US credit card I can get high rewards?
Issuing banks typically add an FX fee to the cardholder for cross border transactions. Not always, but many times they do.
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In Denmark most retailers will pass on the surcharge they get from accepting a foreign (non-EU) card with higher fees.
You see at the bottom of restaurant menus a note stating this.
It also applies to Danish business credit cards, as those aren't covered by the consumer credit card fee limits.
Most credit cards charge fat fees for foreign transactions (3% is common) and make some extra money on the exchange rate as well.
A lot of places in the Netherlands (particularly the low margin ones like supermarkets) don't accept credit cards.
At least in Finland merchant contracts often specify higher rates for non-EU cards.
Yes, you have outsmarted the entire US credit card industry and all of their actuaries!
How generous are credit card rewards in the EU?
With sumup I get 0.5% cashback up to a whopping 10€/ month lol. There are other cards giving cashback, I think Amex blu has a 1% with no upper bound of monetary cashback
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There are basically none, because the fees are low and card issuers are not allowed to rob retailers with insane fees. If you have a cafe or restaurant where margins are already low then it would be crazy to pay additional 2-3% tax on every payment.
No one wants to accept amex here.
My understanding is that they are much less generous on average compared to U.S.
E.g. for now I have the most premium card offered by my bank (50€/mo), and it gets me extra product insurance, rental car insurance, travel insurance, free lounge access, and some other things like that, but no cashback or similar.
I think some premium cards do offer cashback nowadays, but they are in the minority. Some cards also offer airline reward points. My experience is limited to Finland, though.
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Presumably not very, because the large majority of Europeans do not use credit cards.
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Normal cards not very generous. Fintech can sometimes give 1% cashback capped at 30-50-100 EUR.
Some weird crypto stuff can give more cashback, but it mostly for scheming nerds.
In the UK (which broadly follows the same rules), I get 0.25% with a Visa and 1.25% with Amex. Sometimes there are introductory offers for a few months.
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Usually ~1%. Some direct cashback, some via rewards points (e.g. 1.5 AMEX MRP earned per EUR are roughly worth 1ct).
There are similar caps in the UK and most credit card rewards seem to be low after an initial offer period.
There are some specific discounts and benefits but not cash rewards.
It is illegal (not banks will not let you, actual legislation) here to charge more for card payments or discount for cash or bank transfer.
Still affects us as sticker prices are not set independently. Even if you exclusively buy locally, $ = € is extremely common for MSRP.
That's because the $ prices are without VAT
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Patrick McKenzie (patio11 fame) had a great blog post in credit card rewards
There is a lot that goes into it, and it is interesting how customers like me who literally never have carried interest and have to made thousands of $ in rewards over the years still make the banks money....
https://www.bitsaboutmoney.com/archive/anatomy-of-credit-car...
It's a mess, much like tip culture[1], because it just real equalized like this:
1. Merchant sells for price X
2. Credit card is invented
3. Merchant has to sell for price > X (say, 1.02 X) to cover some buyers using CC
4. Credit card offers 2-3% rewards on some goods
5. Merchant has to sell for prices even > X (say 1.04 X) to cover nearly all customers using cards. Customers who do not use the cards pay 1.04X and do not get rewards to compensate.
6. Merchant loses because they're beholden to processors, Customers lose because they're getting 2-3% of semi-currency for the cost of ~4% cash currency.
7. Processors get their profit
[1] - Employees deserve good wages for good work, tipping is just a bad algorithm to accomplish that
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Credit card points/miles are an interesting topic, and I have found them to be kind of useful cyclically myself over last 20 years.
They are a way for airlines to create value out of thin air with their own fiat currency. For the average consumer the miles create less of a pure economic efficient benefit and more of a psychic benefit - funny money bucket that accumulates to defray some trip expenses. Economically they'd be best off with an outright 2% back card.
For the minority of customers who are flexible on dates/locations and willing to plan in advance - most airline/hotel programs have sweet spots at the more premium level.
I use them to fly overseas business class refundable fares at discount. It's not free, but the taxes paid + foregone $ I could have gotten with a cash-back card ends up being 2-3x economy non-refundable fare instead of the 5-7x listed cash price if I bought the business class ticket outright.
It's generally a time-vs-money thing though in that to maximize airline/hotel programs you need to pay attention to various limited time offers for signup bonuses, spending bonuses, conversion bonuses, redemption bonuses, etc. Without those it's a very uphill battle.
> It's generally a time-vs-money thing though in that to maximize airline/hotel programs
Credit card hotel booking portals are often much worse than what's available too.
For example, you might end up paying 30-100% more for a hotel booked through Chase Travel. At the very least you'll have way less selection. Even if price matching exists, you could still end up paying more.
I am traveling to Mexico next month and I do have a Chase Sapphire Preferred card (the one with the $95 annual fee). You get $100 in hotel credits per year if you book through Chase Travel.
In one of the spots I'll be at, there was (1) selection. It was $92 for 2 nights in a pretty low populated town that I'll be passing through. That hotel was rated 3.2 stars on Google.
If I use Google search or any hotel aggregator site, there were over 10 hotels available for half the price with much better ratings.
In this case it cost me about $50 extra to use the card's benefits.
Many people don't understand how rewards work when it's marketed towards your annual fee. The $100 credit doesn't offset the $95 annual fee. You pay $95 out of pocket for the fee. As soon as you book that hotel for $100 you've now paid $195 total out of pocket of which $100 gets credited back, so you're still out $95. If you instead didn't have the card and got the hotel at the cheaper rate, you'd only be out $45 or whatever you paid.
I mainly got the card because it had a really good sign up bonus, 0% international exchange fees and reasonable rental car coverage. Other cards can cover these benefits without an annual fee.
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> They are a way for airlines to create value out of thin air with their own fiat currency. For the average consumer the miles create less of a pure economic efficient benefit and more of a psychic benefit - funny money bucket that accumulates to defray some trip expenses. Economically they'd be best off with an outright 2% back card.
“Saving” airline miles is definitely suboptimal, like you said, getting 2% cash back and redeeming it immediately is the optimal strategy. Money is fungible and cash depreciates.
Plus, the “deals” you have access to with airline miles are not slanted in your favor.
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> For the minority of customers who are flexible on dates/locations and willing to plan in advance - most airline/hotel programs have sweet spots at the more premium level.
What does this mean? I'm not clear what the sweet spot is - are you talking about buying points/miles/etc outright with cash rather than earning them as credit card rewards? Everything I've read is that these are almost always bad deals.
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Economically they'd be best off with an outright 2% back card.
Robin hood is pushing a 3% card right now. Not holding my breath for the rate to last more than a year though.
Discussion of patio11's article:
https://news.ycombinator.com/item?id=39928604
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Credit cards and cash have their place but the story being told doesn't track with experience.
First, businesses are increasingly differentiating pricing between cash and credit card - this is most obvious in gas stations where the price you see on the big sign is the cash price and not what you practically end up paying. Or the various restaurants and other businesses that offer cash discounts. While this is relatively new, the earlier manifestation of this is the credit card fee - eg try paying your tuition or utilities using a CC and you'll immediately find this option costs more.
Interestingly all the above usually hover around 3% so it's tellingly the rate the merchants themselves perceived CC use and infrastructure cost them.
Second, credit cards are clearly good for business volume. Most people have had the experience of wanting to buy something unplanned and not having the cash on them, but buying it anyway via credit card. On a larger scale, hard to imagine on-line shopping without a credit card.
Third, I don't find cash-only businesses cheaper. In my town there's a cash-only barber, pizza place, and ice cream shop and they cost just as much as the credit card taking ones. In every case the dynamic is there are long running businesses with sufficient clientele that they never bothered, but they don't use absence off CC fees/infrastructure to generate a consumer savings.
Fourth, poor people can play the point game too. As a broke college student I was very fond of my Exxon Mobil card that gave me cheaper gas. Now I don't really care about an extra ten cents on a gallon as much.
“Most people have had the experience of wanting to buy something unplanned and not having the cash on them, but buying it anyway via credit card.”
I believe you, but this experience is totally alien to me and I don’t know of anybody who has done this. I wonder if it’s a generational thing.
I was confused by this (because I rarely carry cash) until I saw your response below. I think OP might be using credit/debit card interchangeably? I don't use my credit cards unless I have to, but my debit card is used daily.
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Literally between posting the above and now, I went to a rural bike ride with my family. Didn't bother to bring cash. Ended up riding past an antique shop and bought my son an old school tractor toy via Google Wallet.
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I am almost 50 years old and I struggle to imagine anyone younger than I am being any more familiar with what cash is than with what a landline is
how much cash do you walk around with?
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This ignores the aspect of consumer data. Credit issuers generate profit through issuing rewards programs in part due to the sale of their customer’s behavioral spending data. Cash and debit users largely retain their data privacy here.
It’s hard to put a real world number on what the cost to the consumer is for losing this data ownership, but it is not zero: these data are increasingly used for targeted pricing practices which extort additional margins from the consumer at a later date.
Is't the fact that data is valuable for somebody, does not mean that it has a cost (price) for me? Spending data is definitely valuable for seller / corporation to know what to produce. I, on the other hand, cannot get money by saving information.
It's not zero sum game, that either I have it or seller have value out of it. Just like with garbage - for me old broken furniture might be a garbage, while for other it's a burning fuel.
I think the OP is right in that spending data is valuable as a mechanism to figure out how extract more profit, which in the end will have customers paying that price.
However, it doesn't need to be exclusively negative. The data will both show where you can price gouge but also simply where demand is.
Put your coffee shop near a metro stop and sell sourdough bread and people will buy that because they want it isn't exactly negative.
That data is used in some alarmingly manipulative ways that directly affect your life.
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The only reason it's valuable is because of it's utility to extract value from you. Not just money either but for instance the power to manipulate.
It's not a scientific discovery.
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Why wouldn't a bank sell debit data just the same as credit data? For that matter, I would expect them to be selling everything they can: credit, debit, written checks, ACH transfers, etc.
What incentive is there for them to not do that? Laws? I'm asking sincerely, not rhetorically.
There are laws, even for credit card data. They used to be enforced and largely obeyed.
I think one factor missing in such discussions is that consumer data can be used for political means
And I don't mean "politicians can use it" - but instead, as corporations are more and more involved in the politics, you get targetted and directed based on their needs
It can also be weaponized. Israel uses these sorts of datasets to systematically murder the families and neighbors of their targets. The operation name is something like “Where’s daddy?” They use commercial datasets to figure out where the kids are, then wait for the parent (generally a civilian) to return home, then level the apartment block when it is most likely their are children and neighbors present.
Presumably, the same is being done in Ukraine and Russia too.
Debit card usage is also used for data brokering.
Yes, but typically only on the retailer/ Point of Sales side. Your bank is not selling that information. Of course, things get weird when you have additional intermediaries like Apple or Google pay. In principle at least, there should be some measurable difference vs credit.
Would be very curious to see studies on this if anyone finds one!
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I don’t think the credit/debit privacy split you’re imagining works like you think.
Do you have evidence to support your claim of targeted pricing practices? In what areas?
FTC study, Jan 2025 https://www.ftc.gov/system/files/ftc_gov/pdf/p246202_surveil...
Frequently sited investigative video journalism on grocery delivery prices (and more): https://youtu.be/osxr7xSxsGo
Airlines: https://fortune.com/2025/07/16/delta-moves-toward-eliminatin...
Insurance: https://www.insurancebusinessmag.com/us/news/technology/gm-l...
Frankly, it’s everywhere— if a company is large enough, they will leverage consumer data to increase profits as much as the consumer will bear. There are many other examples, but I’ll just link you this as a jumping off point if you want to go further: https://epic.org/krogers-surveillance-pricing-harms-consumer...
Ongoing US house oversight committee investigation http://pallone.house.gov/media/press-releases/pallone-launch... https://oversight.house.gov/wp-content/uploads/2026/03/Lette...
See also: https://lpeproject.org/blog/surveillance-pricing-exploiting-... https://en.wikipedia.org/wiki/Surveillance_pricing
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The study methods are closer to advocacy than science or policy.
Sure, take any slice of a vast number, and you get a big number.
It's not a "wealth transfer" when everyone gets what they bargained for and can opt in or out.
Most importantly, the transaction value of using credit cards or rewards systems - what the user actually gets - is not enumerated.
Beyond what others have noted (mainly deferred payment), credit cards offer legal transaction protections: my legal liability for fraud is limited (unlike debit or Zelle transfers), and I can challenge any transaction even later, which gives the vendor an incentive to ensure I'm happy even after they have my money. While reputation provides some incentive for repeat customers, the ability to retract a transaction governs even non-repeats. I would submit this alone has improves quality of service for everyone anywhere credit cards are accepted.
Rewards vary by type. Cash-back rewards reflect the fact that interchange fees were set to recapture initial investments, but servicing costs have plummeting (thanks to computing); governance-wise, it's almost impossible for a "representative" political system to extract a large cost from a small number of powerful agents with vested interests to provide a tiny amount of benefit to a very large numbers of other people. But that's a much more extensive governance issue.
So where does the benefit go? To competition between credit providers, initially as cash-back, and then to tying rebates to future purchases within controlled channels. For airline point systems that give free flights or upgrades, it improves retention, but other forms of rewards would seem to verge on tying, where power in one market is extended into another.
Politically-mediated wealth transfers are a political issue. Economically-mediated wealth transfers should raise market-regulation policy issues, in particular whether the law is inducing or protecting them, and then whether they are good or bad. Tallying that requires not just seeing the money flow, but seeing all the value received or cost exported.
It's a bullshit guilt-trip piece, already paraded here last month. Might as well be talking about supermarket coupons.
Just the 150 billion from "interchange" (merchant fees) would be enough reason to fund the 15 billion (estimated) rewards.
And those same American companies want the US government to intervene in other countries to try to kill their local alternatives
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As others have mentioned this is particularly prevalent in the US. I always liked that Australia's vision for a peer-to-peer payment system (note cards are mainly for merchants, hence the rewards) has inclusivity [1] as one of its core tenets "continue to transact ... without disproportionate burden or risk ... those experiencing financial hardship". They also just stopped surcharging [2] and have capped interchange fees since a long time.
1) https://a2apaymentsaustralia.com.au/wp-content/uploads/2026/...
2) https://www.rba.gov.au/payments-and-infrastructure/review-of...
Im really surprised the number of comments here who think the rewards are free money they're getting. The stores are paying 3-5% transaction fees for you to use credit cards then they give you 2-3% back and force you to spend it on things they deem can be redeemed. You're paying for that 2-3% back in higher prices for everything. The whole thing is a giant scam and should be shut down.
Anyone who likes economics or money should see it for what it is, a tax on every transaction. Of course you don't want anyone to lodge themselves into your market and get 3% skimmed off on every transaction. This, for the good of the free market, the fees must be limited to sub 1%, preferably zero.
The cost of accepting cash is not necessarily lower - you have take into account higher theft risk, miscounts and cost of delivering it to the bank. Also there is no incentive for businesses to pass saved fees to customers.
> force you to spend it on things they deem can be redeemed.
Cards that redeem to cash or payment credit are readily available. You only get miles or flooz if that's what you want.
The system is bad, but if I'm buying stuff within the system, a rewards card is usually the least cost out of pocket.
At an individual level it is. I could use cash or debit card and get 0% back, or use a rewards card and get 5% back. Easy choice.
From the study...
>When merchants raise prices for all consumers in response to these costs, users of low-cost payment methods (e.g., cash and debit) cross-subsidize high-reward credit card users who shop at the same merchant"
Cash handling is not a low-cost payment method, Cash handling can cost businesses between 4% and 15% of each transaction, when factoring in labor, security, bank fees, and risks like theft and counterfeit bills.
One could argue that credit card users have been lowering prices for cash payers as business avoid cash handling pitfalls and get their funds safer and faster.
I always wondered why people in America would ever pay by cash or credit card - unless they are laundering that cash.
Otherwise, you're giving up 1-3% discount.
Set auto-pay on your credit card to pay in full every month. I've never once paid for credit card interest. I think there's a term inside credit card companies for people like me: leeches or something like that.
When I and my (still fairly young) family needed to move cross-country, my wife and I accepted a credit card offer with 0% APR for the first year and put all our moving expenses on it. Then once we settled, we paid it down a bit at a time each month, and then right before it would have started charging interest we paid the rest as a lump sum.
Really helped us float the moving company and also some DIY renovations on our house that we didn't have all the cash on hand to pay for outright. And we didn't pay a thin dime for the privilege.
> I think there's a term inside credit card companies for people like me: leeches or something like that.
They genuinely don't care because they offer different products for different groups of people.
Poorer people typically use credit cards to borrow money. The amount they spend in a month is typically much lower than the balance on the card. This means that the company makes most of their money from interest payments. Cards meant for this audience typically have few or no rewards, and instead use the interchange fees to allow for a lower APR.
Meanwhile, wealthier people typically use credit cards as a payment instrument. They pay off the balance in full each month like you do. This group of people is responsible for the majority of credit card spending, and the credit card company makes most of their money from interchange fees. Cards meant for this market have higher APRs, and use some of the interchange to pay for the rewards. The cards meant for the top end of the market with the best rewards (i.e. Chase Sapphire) even charge retailers more in interchange, with the argument being that it's worth it because you get to bring in wealthy people who will buy more stuff.
Well, one reason is the one described in TFA —- credit card rewards amount to a regressive wealth transfer, and if you think that is bad, you may not want to participate in it.
Another reason is that credit card companies sell your purchase data to aggregators and advertisers, and cash affords more privacy.
This presupposes the ability to get a credit card and the confidence of sufficient funds when that auto payment hits.
If the alternative was paying cash, cash has an even more demanding level of confidence of sufficient funds required and it applies earlier with no flexibility.
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How is this different than paying with cash or debit?
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Credit card companies are still charging merchants a transaction fee for your purchases though. The fact they're only charging one side of the transaction is probably annoying for them, but you still make them plenty of money.
Most people can’t optimize for 1-3%. Life is flooded with 1-3% choices.
Even as someone who is a credit card optimizer, I also ignore numerous 1-3% choices a day.
Many people also spend more than they can cover on it.
I paid a lot of credit card interest, as a yute, but, since getting married, I have paid in full. Been over 30 years. Leeches rule!
At one time, credit card companies forced vendors to charge the same, whether cash or credit, but that seems to have fallen by the wayside.
The problem is, is that cash is becoming less and less acceptable.
In a nearby town, you can't pay for parking, with cash. I have seen credit-card-only vending machines. A lot of restaurants have iPads at the table, and you never see anyone but the bus[boy|girl|whatever], bringing you your food.
Credit cards are cheaper than cash for most merchants. Most people forget about all the costs of cash because they are hidden, but they add up to more than the couple % credit cards cost.
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> At one time, credit card companies forced vendors to charge the same, whether cash or credit, but that seems to have fallen by the wayside.
I miss that. I really dislike that it is allowed to charge extra for a credit card. It shows that the company doesn't understand the cost of cash.
> I think there's a term inside credit card companies for people like me: leeches or something like that.
that's some odd classism there.
credit card companies love your data. they can package it, sell it, analyze it.
this is real data of actual behavior, not whatever people say or click -- money where the mouth is.
even if they never make a cent off of you from an interest perspective they 1) still get fees from the merchants, and 2) get all of that juicy juicy transaction info -- and that info alone might be worth the costs.
FYI, Chase Sapphire Reserve made their rewards drastically worse recently. They were losing money on people like me.
Prices don't go down, they only ever go up.
There is no situation in which interchange fees get slashed and prices go down across the board by 3% to make it worth it for card users.
Prices do, in fact, go down. For example, eggs in the USA went down from $6 to $2 in the past few months. https://www.macrotrends.net/3052/us-egg-prices
Long term average? Sure, it goes up, that's inflation. But do you know what causes inflationary pressure? Visa and MasterCard adding unjustified fees because they're a duopoly and control most of the payments market, and your government won't regulate them and cap fees.
The UK and the EU both cap debit card fees at 0.2% and credit card fees at 0.3%. When the UK left the EU, Visa and Mastercard jacked up their fees over 5x for UK-EEA payments. Not because they had to, but because they could, and they love sucking money out of other peoples' businesses. https://www.psr.org.uk/our-work/market-reviews/market-review...
Retailers in competitive industries absolutely do use a reduction in card fees to lower their prices. Maybe not all the way, but they definitely don't give it all to themselves as margin; their competitors don't.
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> Prices don't go down, they only ever go up.
Well, there was that time in the 1930s.
I prefer my debit card because I'm more aware of how much I'm spending. Money taken out of my account is immediate and feels real. Ultimately, I spend less.
One isn’t more real than the other. They are both numbers in an online database. In one case your assets are going down, in the other your liabilities are going up. The net result is the same.
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Problem with a debit card is that if something goes wrong (product broken, or worse, debit card skimmed) it's my debit card, and thus my money.
Credit card? I file a charge-back which is a forcing mechanism for the vendor. Credit card skimmed? I get a new one, and I don't need to wait for my $ to be re-imbursed.
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it's just as easy to check a debit balance as a CC balance.
and once debt is spent you cannot get it back. you get scammed you can dispute the credit card, and if the CC gets stolen you can fight any charges.
debit means the money is gone and that's it.
> Otherwise you're giving up 1-3% discount.
I always ask for a discount but for some reason I almost never get it.
The rational move then is to pay in as many installments as I can get without any additional interest. Then time itself gives me the discount. My actual money stays invested and I only pay later. My credit card gives me 1.1% cashback on all purchases. Inflation too does some of the work.
You shouldn't get a cash discount - cash costs the merchant MORE than credit card fees. You have to count all the costs of cash that credit cards don't have: counting, and recounting the cash and change. Then the manager counts and recounts everything in the back room at the end of the shift. Then the manager counts everything twice again to write up the deposit forms. Plus you need a cash register with the extra cash drawer that acts like a safe. Plus other security systems just to prevent robbery (this can get elaborate in areas where robbery is common). Those all add up.
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> Otherwise, you're giving up 1-3% discount.
I would be curious what percentage of people actually qualifies for a card with over 2% cashback especially without a monthly fee. My guess is that that percentage is very low.
High earner/spender, sure but that's not most people
It's not hard at all. Citi Custom Cash has 5% on the highest category spend each month for the first $500 (I use it on groceries). American Express Blue Cash Everyday has 3% on groceries/gas/online purchases for up to $6000 purchases each year. Chase Freedom Flex and Discover It have rotating categories every quarter, sometimes groceries, gas, Amazon, PayPal, etc. None of these required much income to be approved.
I know that Discover has a card with a 5% discount category that changes once a quarter. Everything not in the category gets 1%. It's not hard to get the card (or at least wasn't) and was frequently advertised to college students.
If you combine that with a card that gives 2% on everything than it wouldn't be hard to average over 2% cashback as long as you were mindful about using the discover card for qualifying purchases and the 2% card for everything else.
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If you have Amazon Prime, I recommend getting the no-fee Chase Amazon card. 5% on Amazon and Whole Foods; 6% on some Amazon “no rush” deliveries.
No affiliation; just a happy user.
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I have a 2% cash back credit card from my bank, with no monthly fee. It started as a 1% cash back card around a decade ago, and slowly crept up to 2%. It's a nation wide credit union that has certain requirements to join though.
My first US credit card was a 4-3-2-1% rewards program and I had literally zero income at the time. I was told by the banker, "oh you can't do that right away, you must first get a secured card to build your credit score, after a year you can try applying for real", but I told them I don't care and to send the application anyway, and I've got it.
Ever since then, I wondered how much of the "not qualifying" is due to misinformation like this.
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A lot of it is to enable the small business owners to hide their real income. At least that's how it works in immigrant communities.
That's how it works in established US communities, too. Contractors often give cash discounts (off the record).
My lawn mower asks me to write "gift" on checks when I can't pay in cash.
Huh?
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I've heard such people referred to as deadbeats.
Once in a while. However the truth is the large people who collect the 1% and pay off their card every month are the people who don't. These people are customers year after year, and often spend more on their cards (they tend to be higher income), and the bank gets their 2-3% from them (2-3% after rewards)
People who don't pay their card off also are on the look out for lower interest rate cards and switch all the time. they in reality are not paying the very high rates on cards, they are paying the lower introductory rates (which is still a lot of money). These people are also more likely to default and stop paying leaving the bank to write everything off. Combine that with the fact that they typically don't spend as much over several years (they hit their credit limit and their income won't allow an increase so they have to stop spending), and they are not as profitable as it seems.
Credit cards also transfer wealth from people who pay interest to people who don’t.
It’s a silly system, where everyone has to invest their time (optimizing for rewards, avoiding interest) in an ultimately negative sum game. I hate it so much.
Patrick McKenzie rebuts this here: (podcast) https://open.spotify.com/episode/2E2KRPcDvh1LcRw5bIsBms or here (article): https://www.bitsaboutmoney.com/archive/anatomy-of-credit-car...
The intuition being: people who carry balances and pay interest don't actually spend very much; they are not wealthy.
What does that graph tell you? Because I think patio11 wanted to send one message and people accidentally misunderstand the graph.
That's the interchange income corresponding to wealthy people. Interchange is paid by the card-accepting business, not by the buyer. The buyer pays interest and other fees and that graph looks very different.
From that original study the full picture table says in % of ADB that the "poorest" (below 620 FICO) pay ~45% interest and fees but bring only 2% additionally in interchange income. The wealthy (at 800+) pay ~10% interest and fees but bring another almost 10% interchange income, on 4 times higher spending, and 3 times higher rewards (so the wealthy get ~12 times higher rewards in $ value than the "poor").
Just the percentages paid by each group more than offset the difference in spending. There are also way more "poor" accounts than wealthy accounts. Intuitively you can tell that the banks are effectively subsidizing the fees and interest for the wealthy with the income from the poor, for the sake of the interchange income which is mostly generated by the wealthy but doesn't come from their pocket.
Those poorest of people (<620 FICO) pay more interest and fees (percentage and absolute terms) than any other group. There's a range in the middle on the wealth scale where the customers are actually a net loss for the banks (the 660-760 FICO range).
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I think that's out of date. He links to a study showing interchange revenue net of rewards showing up to 3% by high FICO scores. (Just at a gut check that seems crazy to me, since interchange revenue doesn't really go much above 3%!). But that's from 2013. I remember when Fidelity launched its 2% flat cashback AmEx back in 2003. People didn't really know if it would be sustainable. Now 2% is a dime a dozen.
The most recent I've seen otherwise is this Federal Reserve study[0] from 2022. It finds that the marginal return on swipes is actually slightly negative because of how juicy rewards have gotten, and 80% of their profitability comes from interest (with most of the rest fees):
> we find that, on average, the credit function makes up approximately 80 percent of the credit card profitability, whereas the contribution of the transaction function is slightly negative, as rewards and other expenses on credit card transactions outpace banks' interchange revenues.5 In addition, fees—in particular late fees—comprise approximately 15 percent of credit card profitability.
[0] https://www.federalreserve.gov/econres/notes/feds-notes/cred...
Credit card companies make 3/4 of their revenue from interest. From Capital One's 10k, Net Interest Income vs. Total Net Revenue:
https://www.sec.gov/ix?doc=/Archives/edgar/data/0000927628/0...
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That "intuition" is agreeing with the parent.
Discussion of Patrick's article:
https://news.ycombinator.com/item?id=39928604
Patrick McKenzie is a dishonest industry insider that cannot be trusted on this topic, and therefore probably any other. Sophistry to an extreme.
I gave up long ago trying to optimize any rewards, it just ended up being stressful and not really worth it ultimately.
Now I just use my apple card everywhere, pay it off every month and get whatever rewards I get.
It feels like a weird situation, those that stand to gain the most from credit cards are also the ones that should feel a difference of under $100 in rewards the least.
The one exception I see is bonus sign up rewards since those can be fairly significant, or making sure you use an airline card at the airline since those bonuses can be fairly significant (with sometimes other benefits). But outside of those exceptions, just choose a card with good rewards and stick with that and pay it off every month.
I gave up on optimizing and just use the Robinhood Gold 3% cashback card everywhere (except Amazon/WF, where I use their 5% Chase card). I can probably get more than 3% cashback in some categories on other cards, or more ROI by switch to points, high-tier cards like Chase Sapphire, and churning, but I just don't care.
The gain of a few thousand per annum is not worth the mental distraction.
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I've generally tried to stay with cash back rewards in categories that don't change, that's been the best way to balance complexity with rewards for me while not nudging me to buy stuff I don't actually need. I don't like messing with points or rotating categories or included subscriptions. With one exception I avoid annual fees as well.
So like, I have a card that's 6% on groceries, another that's 3% on gas and restaurants, Apple Card does 2% on Apple Pay transactions, and I have a 1.5% card for everything else.
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> It feels like a weird situation, those that stand to gain the most from credit cards are also the ones that should feel a difference of under $100 in rewards the least.
It’s expensive to be poor. Higher interest rates, no credit card rewards, higher unit prices at places like Dollar General, etc.
I don't bother with rewards either, be it cards or memberships or whatnot - too much hassle if you're also working full time. BUT: one thing I use the credit card for and that is for the pay and travel insurance attached to it. Could I get it otherwise? Maybe, no idea. But if you don't carry debt (and I never do) there's no downside.
The rewards differences can be significant. Eg 4% vs 1% cash back is $3k difference on an annual spend of $100k.
On the one hand, relative to our income it's not so important, but on the other it feels bad leaving $3k on the table.
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I'm 46. I've never had a credit card. I have a bank account and a debit card. If I can't afford something, I don't buy it.
You can just opt out of using credit cards.
In the US you have several legal safeguards that are not provided by debit cards. Fraud liability limitations, chargebacks, and so on.
You can still implement “if I can’t afford something, I don’t buy it” with a cc. I pay mine off every month so it’s financially the same s a debit card but use a premium card for its purchase benefits.
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If you shop at places where many customers user credit cards, and those places don't change an extra credit card processing fee to customers, then you are effectively paying for those credit card fees whether or not you use one.
Opting out doesn't save you from those costs.
Whole Europe does this.
I never understood why whole nation wants to live in debt just to have one extra month of cash flow (which they’ll probably squander soon).
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Honorable but foolish. You could effectively get a discount and still use it the same way as your debit card.
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Try to pay for SaaS online. Tons of them accept nothing but credit cards; and then some of them accept direct withdrawals from bank account but it takes days to verify. Services using Stripe seems to be the worst at this. (I’ve never carried a credit card balance my whole life.)
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I assume you've somehow gotten access to stable housing though via that bank account (possibly a home loan, or something else), or accessed a large line of credit before 'modern' credit scoring came into play (FICO scores and the Big Three).
I see many commercials for local banking up here that pulls out 30-40+ year members of the banks boasting about the prosperity the bank provided them, but at the same time, when they'd walked into the bank back in the day A Guy just said "yeah he's good for it" and wrote out the loans they needed.
You can't opt out of the modern credit scoring system and if you fuck it up even once with a bad line item you're out of the running for quite a few things and become virtually poor.
If you are traveling and need to rent a car in the airport - sometimes it is not possible to do without credit card. Otherwise you don't need a credit card.
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I’ll never understand this credit card debt thing... and why should businesses eat the credit card commission cost? Is it 5%? You pay for it, why should I?
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I don't have to invest any time at all. I just use the (US) card that gives me the greatest benefits, be it cash back or services. Usually I just look at the reward rate, which is a base 2% for me right now going up to 5% for some things.
I love it. As someone who never carries a balance I get paid by banks for doing pretty much nothing at all.
And I don't worry about US retailers, I don't live there.
I should add that rewards are not the best benefits. Sign up bonuses are much more lucrative, running to hundreds of dollars per card, and can often be repeated. Same applies to bank accounts.
Imagine a world where the pipeline from extra fees back to hoop-hopping cashback didn't exist and your services were just cheaper by the same percentage points instead. It's designed to make money off people slipping up instead of serving customers.
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You're not paid by the banks you're paid by other, usually poorer, customers
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Assuming you have sufficient income, paying your balance off in full every month and instantly redeeming the rewards each month doesn’t take a whole lot of time. I just use a card that gives 1.5% cash back.
Agreed. I have my rewards configured to automatically convert to cash to reduce my bill. The button was buried deep in the website, but once I found it, I've never had to go back to the rewards site again.
Credit isn't negative sum, it is a positive sum game. "Negative sum" has a specific meaning here and just because wealth is being transferred isn't that significant; positive sum games also have wealth transfers.
It is risky and it is very easy to lose great amounts of money on a bad decision when credit is involved. Arguably that makes it bad. But still not negative sum.
Alternatively CC companies could cut off people over certain credit risk and then be able to charge interest in line with the lower overall credit risk…
Borrowers can also keep from overextending their credit and go on debit cards instead…
Obviously these things can have an impact on people but before the 80s credit cards were not widely available to people with high credit risk and the world still functioned.
Why is it so hard lol? I have the Bank of America Rewards card for 25+ years. 2.62% cashback on everything, 3.5% on dining/travel. Maybe there are better ones out there but this is good. I have auto-pay setup so I don't have to worry. I have not spent a second of my time optimizing anything in last 15 years
Lol because in order to get 2.625% cashback at BoA you need to have $1,000,000 in your BoA accounts, maybe that's why it's hard?
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countries ditching those companies are making themselves a favour.
Why do you think it’s a negative sum game?
I don’t have any data, but my intuition is that overall high-fee, high-reward cards increase propensity for consumer spending by at least a few % beyond the fees/rewards.
The merchants think so, too, or they wouldn’t accept the processors that let their banks hand out these cards.
> The merchants think so, too, or they wouldn’t accept the processors that let their banks hand out these cards.
Visa / Mastercard / American Express all have lines of premium credit cards (Visa Infinite, World Elite Mastercard, Amex Platinum), and they're very much too big to ban. You'd just be left with one processor in the US (Discover, now owned by Capital One).
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It has no relation to paying interest, only to making transactions with the credit card.
If you use a credit card, but can’t pay it immediately then you pay interest. It’s a trap the less wealthy fall into.
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This isn't correct, rewards and benefits are not 100% funded by interchange fees. They wouldn't be possible without many customers paying interest.
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The relationship is that the service and rewards you get are subsidised by generally poorer people who mess up their financial planning.
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There is literally no time involved in avoiding interest. You pay your complete balance when it's due. As far as rewards go, I can't be bothered with them so I always just opt for cash back which I do maybe twice a year. Time involved: 5 minutes / 6 mo.
There's plenty of time: the time you waste by not spending money you don't have. You have to wait longer until you make more money in order to spend more without interest.
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That is a spurious argument. You have a choice in whether you pay interest, you do not have a choice about a purchase including the cost of paying payment processor fees since the price is the same if you use paper money.
One of the most corrupting yet hidden forces in America today are the payment networks MC/Visa etc. due to their bribing and corruption of the government in order to prevent things like making payment processor fees separate/independent of the cost, i.e., similar to how taxes are added after the fact, not included in the price; and also preventing merchants from having two different prices, cash vs card.
I’m a bit surprised that HBR does not seem to even really have an accurate mental model if the matter, unless they’re making an editorial choice to speak in vernacular turns to relate it to the audience.
The problem is not really the cards, it even credit cards, it’s actually the payment processing networks that are the corrupting force.
If America has a legitimate government, there would have been a federal alternative payment processor that charges nothing as an accompaniment and based on the authority to mint the currency, which is what a payment processor today is, a digital currency mint.
To put it into perspective, when you purchase something by credit card, a merchant may have to l pay a little under 3% on a $100 purchase. When you purchase something cheaper let’s say $5, a merchant may pay 6.5%. And no, they don’t just say “awe shucks, I guess I’ll lose that money”, They increase the prices by some averaged amount.
Some may say that they can’t do that because competition, well, because there is no real competition and because the payment processor de facto monopoly/cartel has basically every single company in lockdown and you have no real alternatives, especially in places like Europe where they’ve foolishly and enthusiastically started forcing everyone into digital payment, all the merchants simply roll what is effectively a kind of organized crime/mob extortion into the prices of the goods and services the common person pays and never knows is paying.
> similar to how taxes are added after the fact
That is not a positive. I'm fine with splitting up a price if you want to show how much tax gets added, but having to continuously do the mental math of "no this item is 10.99 it's 10.99 + tax" is very frustrating. When I pick up a $11 item, I want to spend $11.
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> especially in places like Europe where they’ve foolishly and enthusiastically started forcing everyone into digital payment
In Europe (or at least the EEA, but the UK and I think Switzerland have their own capping) card interchange is capped at, generally, 0.3%.
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> Because merchants charge everyone the same price regardless of how they pay, those fee costs are factored into prices for all shoppers. However, credit card users get that money back and then some through rewards, while cash and debit users get little or nothing.
>The result: People paying cash face the equivalent of a 26% higher sales tax than premium credit card users shopping at the same store.
I am surprised this never occurred to me or has come up at all in discussions with people (in the context of rising costs/inflation specifically). I’ve literally never considered this compounding effect until now. It’s so obvious of course, it just never even crossed my mind.
Many restaurants I’ve eaten at lately surcharge credit cards with a 3% fee, offering a discount if you pay cash. This is the way to nullify this regressive policy until the US commercial banking system offers instant payments for merchants, internalizing the externality of the interchange fee. If you pay with card, you
US FedNow instant payments went live three years ago, and can move $10M per transaction for a few pennies per transaction.
FedNow Is Live - https://news.ycombinator.com/item?id=36801491 - July 2023 (1022 comments)
(A gap in legislation was not mandating offering FedNow capabilities to your customers as a condition of your banking license as a bank; I expect this to be patched eventually)
The problem is the way the US credit/debit card systems are setup, there's not much of a discount/surcharge that would make me switch usage to debit.
If my credit card number gets stolen, zero money ever leaves my account. It simply gets contested before the monthly bill is even due, and cancelled. I have probably had number stolen 5 times in 20 years, and its never cost me a cent. Zero dollars every left my accounts even temporarily.
If my debit card number gets stolen, the money is out of my checking account immediately. Mortgage payments and other bill payments might fail, and the onus is on my to chase up the bank to get charges reversed and money returned to my account.
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Not only would the 3% fee not make me blink, as my cards have 3% cash back for dining, I doubt I'd change my behavior even at a 5% discount. If anything it'd dissuade me slightly from patronizing the restaurant.
Credit cards are convenient and cash isn't. The genie is out of the bottle, no way to make people move back to cash.
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Car mechanics, dealerships, house fixing contractors, city (property taxes), these are the ones that I can think of in the past year I've come across charging a fee for credit card payments. What's most irritating is that most of them do not setup for and drop the fee if you pay by debit card.
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In small restaurants, that’s just a tax grift for the owner. The “smarter” ones underreport income, the dumb ones steal the sales tax and the hammer eventually drops. Over time, they’re probably paying a lot more than 3% for shrink, Due to screw ups and employees skimming the till.
Credit cards have a really high ROI. The 3% drives 10-20% more spend, sometimes even more. When I was on the board of a small private school, we bought a square terminal and used QRs for flyers. That drove 30% increases in fundraiser expenses and helped us reduce mailings and nags. We would cross-sell stuff - could buy your youth soccer registration at the fall fest or whatever.
The things where ach, check, cash make sense are where there’s no discretionary spend at point of sale or recurring payments. If you pay 75 bucks a week that have your apartment cleaned dog groomed or whatever. You’re not getting value beyond taking the payment in advance with a credit card. Those are the areas where Venmo and Cash app have really dominated.
I was surprised by this number too - and I’m pretty sure it’s a clever wording trick to inflate the percentage:
> equivalent of a 26% higher sales tax than premium credit card users shopping at the same store.
I do not think the sale price is increased by 26% - which doesn’t square with a 1% to 3% fee - I think they pay approximately 26% more in “sales tax” so you’re paying 26% more than the 7% tax.
I wasn’t questioning the number so much as saying I hadn’t considered the mechanics of what was happening
I believe a similar thing happened with fast food and food delivery fees. It costs money to be listed on the food delivery app so fast food chains started charging everyone the same price to offset the cost of being listed on the apps.
Delivery apps don’t mandate that the price on their apps be the same as on the actual menu. If you walk in and order you’ll pretty much always get a lower price.
It also means stratifying card users, even if you actually make all the card users pay more than those with cash. The people who can just barely qualify for a card are paying to fund the "rewards" for the wealthy who pick the best options.
"It's expensive to be poor" is a more or less universal experience under capitalism and it's amazing how many novel ways we've come up with to make it more expensive for poor people.
"Means testing" is one of the fun ones. The wealthy will often justify this as "People like me shouldn't get this help" which sounds even generous, and then you realise, oh, because we're testing if you're worthy to receive help now to get help you need to expend some time and effort to pass the test. When this "I shouldn't get benefits" is offered to you as a reason to means test, ask them why they're taking a benefit they don't think they should have and why they can't pay society back in other ways rather than inflict more misery on the poor...
Then they get angry when the other side of the coin is discussed - they can’t get certain benefits because they’re above the threshold too, but they’re different of course.
And there I was thinking it was obvious that merchants wouldn't just eat cc fees, and would cushion all prices to account for their costs.
You’re right but that’s actually not the part I’m talking about. Specifically the fact that even though we are all “being charged the same price,” as prices increase, the amount I am saving increases as well due to cashback or other benefits on a credit card. And because I am spending less money, I ostensibly have more money to make my credit better, which means the benefits only increase on top of that.
It’s a variation on a theme we are all very familiar with. It’s expensive to be poor. But this is another angle I hadn’t really considered. It’s a little more complicated than just “I can have better cards with better benefits.”
TL;DR: The actual cost per item for me is, in very literal and quantifiable terms, lower as a result - and the more expensive things get, the steeper my discount gets while the person next to me paying cash is paying a little more than I am every transaction for the same items.
Put another way: As price/inflation increases, the real number I am saving increases as well. So we aren’t just paying different prices, but their increase is also higher the higher prices get.
Same, that percentage seems absurd though.
The only way I can interpret the percentage is that they are stating the increased cost as a percentage of sales tax rather than a percentage of the sale, such that "26% higher sales tax" in a state changing 10% sales tax would mean paying 2.4% more in total. That choice seems misleading, but does make the percentage make sense.
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One factor that never seems to come up in these discussions is that while businesses might not like credit card fees, they also don’t like all the issues with cash: managing it, transporting it, losing it to employee theft, etc. The cost of cash transactions isn’t 0.
Same argument for people: managing cash is a pain, swiping a card is easy. Contesting a transaction or fraud is way easier (infinitely easier?) with a card than cash. Having day to day liquidity even without ever carrying a balance is nice.
Is all this worth $9.2B across the economy? Maybe not, but again, certainly worth more than 0.
>Is all this worth $9.2B across the economy? Maybe not, but again, certainly worth more than 0.
Nobody's arguing that credit card companies are proving zero value, only that they're charging more than what can be "justified" (whatever that means). That's why in europe the interchange rates are capped at some amount to reflect that.
Europe is artificially capping the interchange rates - that doesn’t mean that’s the market price for that service.
As for America, there’s 4 card networks, and no explicit regulation preventing you from starting another (just the huge regulatory burdens involved with any money-processing business, PCI, etc).
If they were charging so much more than is “justified”, couldn’t one of the dozens of well-funded players in the fintech space swoop in? Couldn’t Walmart fall back to cash and a “Walmart card”?
Instead, we see even goliaths like Walmart spending money and time to support newer features like tap to pay because it reduces fraud losses and customers just prefer it.
The “justified” thing is silly - is Apple charging more than is justified because they make a profit?
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I don’t really care what businesses want at this point: my default position is that they are trying to scam me in some way and must be handled appropriately. Credit cards are a must-have in this situation, since they provide a mechanism other than hope to deal with recalcitrant merchants without wasting my time.
A better comparison would be between debit cards (which have low fees) and credit cards.
Credit card owners benefit. But they also pay: With their data.
More actually. Generally those rewards happen by using your credit (there are exceptions). Meaning you are more likely to pay for something that you'd probably otherwise not have spent money on.
The most defensible framing that I came across (maybe from patio11?) in favor of credit card rewards is that they're a "bulk discount" on interchange fees. People who spend more on their cards also pay more fees (passed through the stuff they buy), so it kinda makes sense to give them a discount[1]. That's what credit cards do. Cards with the highest rewards are geared towards high spenders, with corresponding credit score and/or minimum income requirements. It's not unlike how the 2 quart (1.89L) bottle of mayo at costco is cheaper than the 8oz (0.24L) bottle from dollar general, but nobody would frame that as a "wealth transfer".
[1] of course, this doesn't need to rely on some principle that people are entitled to discounts if they buy more, because in reality discounts arise from complex market dynamics such as competition and price discrimination.
Discussion of patio11's article:
https://news.ycombinator.com/item?id=39928604
I was working with a team pitching a new marketing database system to Discover Card decades ago. When we were first shown around their HQ which was a kind of hybrid open floor plan with lots of cubicles there was a large office with fancy Queen Anne? style furniture in it, IIRC an EA or two sitting outside. it looked nice but kinda out of place in a sea of cubicles and standard office furniture. I asked who's office that was and was told it's Nancy Donovan's (we were meeting with her team). But they did not describe Nancy as the head of Marketing and Sales etc., they described her as "the person who developed the cashback program". I liked their clarity about recognizing what worked.
It's cheaper to be rich, and expensive to be poor.
While they’re probably right from a consumer perspective, the article skips over the fact that accepting and handling cash is a significant cost for businesses, way more than the credit card fees. Delays in checkout, making change, counterfeit bills, employee theft, external theft, safe transport, added accounting burden…all add up to an estimated 5-15% (https://plainscapital.com/blog/the-cost-of-accepting-cash/). In fact merchants can now legally pass through credit card surcharges to customers but very few choose to do so, because they’d prefer you pay by card.
How hard is it for the wealthy to not smack everyone else around at every possible opportunity? What happened to noblesse oblige?
(This is not a rhetorical question, I would love to hear others' take on the psychology and history of the subject. Really, how hard is it?)
One thing that happened is The Copenhagen Interpretation of Ethics, right? Mark Zuckerberg is panned for having 'defunded' a school. What happened was he paid for it for a while and then stopped in a planned manner. Those who didn't ever pay were better off. In general, at the margin you move some guy who was ambivalent to opposed. Jordan Henderson spoke for gay rights, and got panned when he moved to Saudi Arabia, while many footballers did not speak out about gay rights ever and received no censure over this.
The general rule with many of these causes is that unless you're willing to be absolutely committed, it's better not to be involved. If you cannot prove to yourself absolute fidelity perpetually into the future, it's better to not do it at all. The punishment for the apostate far outweighs the punishment for the infidel.
So your commitment has to be at least high enough to be willing to bear the resulting punishment for your apostasy. And if it is any less than that, you are strongly encouraged to just stay out of it. It's not that anyone is mean or anything. It's just that on the margin not-participating costs nothing and participating incurs a massive liability. That causes a shift in the window.
It becomes a scorecard. Success in life is strictly about making the number go up. It doesn't matter if they could spend $100K a day for life and never go broke. They must have a bigger number and be higher on the Forbes (e.g.) list. Some people are so obsessed with it they lie and make up things to claim their number is much higher than it actually is.
> everyone else around at every possible opportunity?
How exactly to become wealthy then?..
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> What happened to noblesse oblige?
Some things made noblesse oblige way harder to manifest.
Meritocracy. "I deserve what I have", versus "I got lucky have what I have" made harder to share back.
Globalization. When you use one community to produce and another to consume, and third to register a company, and owner lives in fourth it's hard to associate yourself with the community. Where exactly to give back? You won't even see those people.
Secularizarion. Though USA is still significantly religious place comparing to europe.
Easiness to move. Today you're here, tomorrow you're there in new zealand bunker.
Culture. Somehow the rich are in the people who are heavily interconnected, spend time together at the khe khe pedoisland.
Natural selection. The ones who care less about others mathematically have more advantage than those who care enough to spend resources on non-resource-aggregation activities.
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So. There is no intristic motivation to do so (with majority), there is no external motivation, and there is no repercussions of not giving back.
The only way to solve this is to have the user of the credit/debit card pay the fee. Sure, you can do an EU thing of 0.2-0.3% or whatever it is, but this might still be 0.2-0.3% more than it could be in a competitive market.
Australia tried this, but it led to a different problem of payment processors being able to gouge card payers because merchants were allowed to pass on whatever their costs were, and consumers didn't really have a real choice of paying the fee or not. Also since the fee had to be stated before the card was presented for tap and go payments, it didn't solve the OP problem: debit cards and premium cards all got hit with the same surcharge.
Interesting. I guess one would then ask why was it not the case that the merchants were not also behaving in a similar way and looking for the cheapest payment processors (as long as they were also asked to eat their own side of the fees).
Perhaps forcing everyone to just implement free payments between any bank accounts, like pix, is actually the only viable solution here (and i just accept that this is one of those market failure things).
Handling cash is expensive too, so what EU does is probably beneficial (as in cheaper) to the society as a whole.
I wonder if true transaction cost even reaches the 0.2-0.3% or could be further lowered.
> Because merchants charge everyone the same price regardless of how they pay, those fee costs are factored into prices for all shoppers. However, credit card users get that money back and then some through rewards, while cash and debit users get little or nothing.
And they charge everyone the same price because credit cards contractually force them to. Merchants can either accept these terms, or forego credit cards entirely. This way credit cards prevent other payment methods from competing on price. Free markets for thee, contractually forbidding competition for me.
I have several credit cards and pay them off at the end of the month. I get mostly free hotel stays when I take my family on vacation and have had many free airline tickets.
I also used a credit card to bootstrap my business 15 years ago. At it's height, I was brining in $1 million/year. The bank would have never given me a loan for the amount I was able to use on a credit card. I ended up shutting the business down a few years ago, with no debt.
Most people can't handle spending and rack up tons of debt. Credit cards can also be used to make money, instead of buying stupid things you can't afford.
Ridiculous. I suppose I’m also making a wealth transfer when I buy in bulk while poor people can’t afford to, or I drive to a discount store while people with bad transportation options have to shop at an expensive local place, or I use a loyalty card.
The store still makes a profit on my purchase. My rewards are my own money coming back to me. I’m not sticking my hand in a poor person’s pocket just because I use a fancy card.
Because merchants charge everyone the same price regardless of how they pay
Not at many gas stations. Cash gets a discount usually $.10 per gallon. I’ve also started to see restaurants either give a discount for cash, or charge extra for credit card purchases. Business suppliers from tiny shops to large national companies tack on 3% for people paying with credit cards, or like T-Mobile, a $5/line monthly fee in order to get people to pay by direct debit.
It goes a step further... previously, card agreements (between merchants and the networks), required the prices to be the same between cash and credit (with the well known gas carve-out), but Durbin made that tying illegal, so now retailers are free to charge different prices for cash, credit, and debit.
The article has one thing mistaken, because it says that Durbin lowered costs for transactions, but credit owners got to keep their perks... That's not technically true (I worked at a supermarket when debit rails first went into effect, and I worked in payments when Durbin went into effect).
There are no benefits to credit users who use the debit rails, and the merchants would really rather you use the debit rails, because it is much cheaper for them. Durbin was mostly a win for the merchants, not a win for the customers.
However, if you take that to believe that the merchants lowered prices overall because they were paying less for transactions, than you might try to read into it that credit users kept their perks, while cash and debit users paid.
The true story, however, is that it's an equilibrium... When the costs go down, the saved money goes somewhere in between the two (supply and demand), and as long as there is competition, the savings are shared.
However, the real problem is that credit companies are allowed to invest interchange fees in perks at all. Credit card companies decided to take their low-risk pool, and offer them incentives, splitting the money they saved between themselves and their users, and using it as a way to pull more low-risk users. The more that happens, the more expensive it becomes for credit companies that serve mid-to-high-risk users... and since we can't stop offering credit to those users as well, those companies push for and get increases to interchange fees to cover the additional cost... which creates more room for benefits for the low-risk users, and the cycle begins anew. It's a vicious cycle that can't be fixed by changing amounts on the existing fee schedule... The only possible fixes would be in either disallowing these kinds of perks, or splitting the rail charges, and specifically charging less interchange for low-risk users (which dries out the benefit pool)
So if anyone is trying to picture what 9.2 would buy. The new bridge between US and Canada (Gordie Howe) was 4.6 billion. So that is 2 giant bridges + related infrastructure ... worth of wealth transfer. That bridge had some corruption / payoffs, so we should discount that by 10% wealth transfer as well.
They mention "premium credit cards" in the article, is there a general understanding of which cards are premium? I clicked through to the study and the only example they cited in there was Chase Sapphire Reserve but I didn't see, like, a list or something.
Credit card fees is one of the main reasons why Brazil's Pix and India's UPI are destroying their market share in those countries.
For merchants, it just doesn't make sense to pay high fees to cater to a dwindling minority of consumers.
Credit card usage has been increasing in India.
Source: https://bfsi.economictimes.indiatimes.com/articles/credit-ca...
Besides, NPCI has introduced merchant transaction fee for UPI now causing decline in UPI transactions.
I interpret this article, and all related discussion, as an invitation to talk about my personal finance habits.
I think this is disingenuous framing.
Credit card rewards are not a mechanism to shift wealth towards premium card holders (this is a negligible distraction), they exist purely to increase revenue/conversion rate, by decreasing customer price sensitivity (compared to cash payments) and encouraging financially irresponsible spending. If this did not actually work in practice, every merchant would just insist on cash and pocket the difference.
"Poor people" are hurt much more from the changes in spending behavior induced by credit card use than by paying for card rewards.
You are an economist, aren't you?
I suspect that because I didn't understand what you wrote.
You used a lot of passive voice and complex jargon. That is economists favorite writing style: they write to confuse, not to explain.
> You are an economist, aren't you?
No. I do embedded software engineering for a living.
I use (in my view) HN appropriate levels of jargon (because lots of people here are involved with getting people to pay for some newfangled cloud thing or other, so I use their terminology).
In simple words: People pay more for the same (and spend more recklessly) when you let them pay by credit card, and this causes much more economical "damage" to poor peolpe than any "wealth transfer from card rewards".
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I'm the one on receiving end of this game, and I'm sick and tired of playing it. I would so much rather pay full price and stop wasting my time looking what credit card to use for what purchase. This game benefits nobody but banks, and the total amount of time it wastes unproductively is staggering.
Merchants pay the transaction cost. In my parents business in the early 2000s customers would ask in advance if they could use a CC. Some places installed ATMs in the corner (still a thing in some places), but quite unpopular. Rather than lose a customer the merchant will accept payment with credit card and pay the fee.
One consequence of this system is the large merchants have more bargaining power and can negotiate lower fees. So large retailers, gas station chains, etc. are able to reduce the overhead of accepting CC payment. While smaller merchants have the same higher cost.
From a capitalism perspective, this is the most egregious example of "you have capital, so you can make more capital". Banks holding the capital in this case.
Fun fact: when credit cards were first introduced only to people with good credit, which paid the balance in full. this was not profitable. Only after opening the pool to other credit levels did CC start printing money for banks.
> Merchants pay the transaction cost.
This applies to cash as well. It takes a lot of time to count change for everyone. Plus all the ways there are to steal cash.
Your fun fact is wrong. Credit cards were always profitable. They were not in the beginning because scale is what makes them profitable. Anyone who uses their cards for a couple meals a month (which is what it was first started for) is going to cost money because of all the overhead to have you as a customer. In those days that was a stamp to send the bill, someone to open the payment and cash the check - now that everybody works electronically the overhead is lower, plus people are using it for more and so there is enough left over to pay for it.
Honestly, TL;DR
I wrote a summary for you...
"Because they receive a rebate, credit rewards-card users often effectively pay less than the posted or cash register price for equivalent goods or services."
Credit card systems are a Ponzi scheme that favors those who already hold a lot of capital, at the expense of those who weren't lucky enough to be born heirs.
This is even more true of the American brands that are getting Trump to attack modern, open, cost-free systems from other countries—like Brazil's PIX, maintained by the Central Bank of Brazil.
I call it 21st-century American usury.
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So i may be an anomaly but I'd say 20-40% of all places I shop have a specific fee to cover CC transactions using a CC vs Cash.
There are places I go to that only accept credit or debit cards. No cash or cheques.
Yeah and a good smattering of cash only businesses as well
What a silly article. Don’t buy things you cannot afford. Wealth transfer is a ridiculous framing. Is any heterogeneous situation involving money a wealth transfer?
Patio11 covered this exact topic: https://www.complexsystemspodcast.com/episodes/credit-card-r...
It's clearly more complex than the story these authors are telling, in particular the highest income consumers get the worst returns on their interchange payments. So stores and services catering to wealthy consumers are actually subsidizing an opportunity for savvy customers, many of whom are not wealthy
One note on patio11’s opinion on this is that he really overweights the ongoing work and innovation required for electronic payment processing. It WAS a great novelty and deserves to have made a lot of money for 30 years. But the reason they make so much money today is monopolistic low behaviors to lock in their advantages. It’s not a free marlet because of deals over time, some of the most famous of which are their prohibition on charging different rates for cards or even disclosing the rates on cards.
I think the most simple piece of legislation to solve a lot of problems is to allow merchants to pass along the interchange rate to their customers. If they could do this legally and operationally, this would solve most issues here. If a credit card wants to be expensive, fine the consumer should pay for it. Because of contractual and operational limitations, credit card companies have gotten themselves into the current arms race.
If stripe implemented this, it would make me appreciate them as a force for good instead of being a part of the problem.
>in particular the highest income consumers get the worst returns on their interchange payments
That's not what the article says:
>High-income consumers with high FICO scores benefit the most from reward credit cards compared to mid- and low-income consumers with high FICO scores. At the lower end of the FICO distribution, however, this pattern is reversed. On average, net rewards are far more negative for high-income consumers with low FICO scores than for middle- and low-income consumers with low FICO scores.
>Or, to put that another way: if there is redistribution happening, it necessarily includes redistribution from unsophisticated high income customers to sophisticated low income customers.
While it's true that wealth customers with low FICO scores are getting hosed, it's not clear whether that is enough to cancel out the effect that richer people (presumably) have higher FICO scores on average
To be clear though, the higher FICO scores get hosed the most, see the graph earlier on. Your quotes are conditional on FICO so they don't take that into account.
The only way I can put these things together is that at the high FICO end, both wealthier and poorer consumers get hosed a lot but wealthier consumers not quite as much. On the other hand, lower FICO band doesn't get as bad of a deal overall but it is worse for wealther people (plausibly because they have high interchange fees and don't use their rewards).
It's complicated, but... this is not a wealth transfer right? It is a transfer mostly just from consumers to credit card companies that provide them a service.
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Discussion of patio11's article:
https://news.ycombinator.com/item?id=39928604