How airlines plan to make billions from rewards cards
blog.privacy.com
blog.privacy.com
The only way to get rid of this racket is to pass a law that bans credit card rewards. Watch the chaos that ensues after that.
The more positive way to look at this is that a consumer using a CC is paying 2-3% extra for a product to have an isolation between their bank account and the business charging them. The reward thing is a distraction to lure consumers. 2-3% doesn't sound like a bad deal for fraud protection, isolation and some perks. Someone has to take on liability risk and that's what CC companies do. It also polices businesses from defrauding and exploiting the consumer - I would guess that if a business has a very high percentage of charge backs, they'll be investigated and reprimanded, if not blocked by the CC company.
I can't remember where (might have been HN or patio11), but it was a business owner arguing that the rewards to incentivize card use are better for the businesses overall.
What I found was that at least in the US you must accept cash for the payment of a debt. This means in restaurants and stuff where you pay after you're served they must accept cash, but when you pay first they don't have to (unless there are other state laws that require it).
I'm not super confident I have this right, but I thought it was interesting. Some states allow workarounds like cash to card machines at the location (you can input cash and get a gift card to use) - I think Amazon was doing this for some of their GO stores so they don't exclude people without bank accounts.
IANAL but I'm not sure how big a factor this is. There's a lot of mythology around the "legal tender for all debts" language but I'm not sure how much of it has a real legal (or practical) basis. In the real world, if you eat your meal at a credit card only place and you then tell them you don't have a card, I imagine they'll find a way to take your money--not because of some arcane legal reason but because cash is better than nothing.
Are there any not like this?
I've always wondered if these cash transactions even make it onto the books, I suspect that many of them are not only merchant fee free, but also untaxed.
For a meal, that's fine. For a $2000 computer from a shady seller on the streets of Hong Kong, I would gladly pay $40 as an insurance against fraud. Peace of mind is nice and good CC companies (American Express) got your back.
Your reputation is worth more than anything else in a small community. If you start ripping people off its known very very quickly and scammers end up moving away, or just get well known enough that nobody sane does business with them. Eventually bad enough apples get encouraged by the local brutha's to stop being a problem or have their limbs broken.
With an exception: for all your expenses that get reimbursed for work. If you're putting flights and hotels on your personal rewards card, then it adds up to a very nice little bonus at the end of the month. (But this is also why at some companies, you're required to use a corporate card if your expenses start going above a certain limit -- the company wants the rewards.)
Just like frequent flyer miles, it's an odd little tax-free trick that transfers a little bit more of your employer's money to you. And since people generally identify more with employees than with companies... nobody's really looking to change it.
Really the only real loser here is people who pay cash. It used to be that credit card companies prohibited stores from charging more for using a card (or less with cash). BUT... that was made illegal a number of years ago in many states, and you can now get a 3-5% cash discount at a lot of places, though not everywhere.
I personally feel much safer using a card -- I hate carrying cash, the risk of losing it, not hygienic, etc. -- but I totally understand some people prefer it, or very disadvantaged people don't have access to cards.
Meanwhile, my credit cards have cash rewards: I know x% of my credit card statement I can credit back to my account. There's a direct cash value I glean from spending with my credit card versus cash and I know what it is up front.
> Really the only real loser here is people who pay cash.
Indeed. Since the price is the same either way most places, if you can buy with a credit card, that's the right choice.
They lose because rather than spend slightly less money and having that money available (or consumers charging slightly less because they don't have as large of processing fees), they get some targeted benefit that constrains how they gain.
As a simple example, anyone that saved a bunch of frequent flyer miles to use around this time would probably be better off with the extra cash, since most people aren't traveling.
There are of course cases where the thing that would benefit a person the most is also what is offered as a reward, but as we're seeing, circumstances change, and in most cases the reward with the most utility (i.e. cash, or not being charged as much in the first place) is often the most beneficial overall.
(Also, a lot of places let you exchange miles for things like Amazon gift cards as well, practically as good as cash, though the "exchange rate" is often closer to a 1% reward in the end.)
I'd be happy to stop having rewards if all prices went down 2% accordingly. But that doesn't seem likely to happen.
Or are they just going to say "awesome, lower processing fees", and keep their prices the same?
Perhaps over the course of decades, new businesses and new products would take the change into account, so it would probably be a net win long-term, but in the short-term, consumers would just lose that 2%.
Now, on the other hand, I'd be quite happy to see a prohibition on the credit-card-company practice of preventing merchants from charging a surcharge for credit card use. If merchants were free to charge the consumer whatever the credit card processor charged them, then if you used a credit card with lower processing fees, you'd immediately reap the benefits.
The market competition still apply. If I see one product priced as 3.99 and same quality product priced as 3.98. I will choose the 3.98 like many other people will.
CC rewards are a strategy to limit competition. It makes it harder for new players because merchants don't need them, they need Visa and the other big ones. So the negotiation power is small. You seek for more customers, but you can't convince anyone because you don't have rewards.
When competition and choice is limited, you, as a customer, are on the loosing side of the deal. Always.
For better or for worse, there are some legal obstacles to surcharges for certain payment instruments, but discounts are always an option. I.e. merchants could pad sticker prices with the max fee they might pay, then discount depending on the instrument used.
I'm sure this is also why Target tried to get you to sign up for their own card, and offers you a percent off all purchases at target with it.
But those merchants are not allowed to accept both but pass through their fees.
Rather than seeing a prohibition on rewards, I'd rather see a prohibition on the anti-competitive terms that prevent merchants from passing through credit card processing fees. Then a card that charges less to the merchant would be just as good as a rewards card.
Credit cards companies are in a very strong oligopoly and are able to essentially demand bundling of all their cards, regardless of the fees charged. If the credit cards companies were forced to charge a single rate for all cards in a bundle, it would allow merchants to either selectively drop higher priced bundles or the card company would have to start balancing the additional cost of higher rewards on their side, moving the incentives back where they belong.
* No significant rewards because the fee is capped at 0.3%.
* Chip and pin because that decreases fraud more than chip and signature.
For many businesses, a 2-3% fee is so much of their total profit margin. For example, Google tells me a full service restaurant averages a 3-5% profit margin.
Dropping a transaction fee 2%->0.3% would mean a 3% margin turns into a 4.7% margin. All else equal, 56% increase in profit!
There are other considerations, like would people spend as much if they didn't get rewards. I don't know the answer, but another question is "what's best for society?". In my opinion, credit card companies commonly act as a low-value-add intermediary and a wealth transfer from the poor to the rich. [1] People are paying more because that fee is baked into every single transaction, whether credit, debit, cash, or check.
They do provide a great indisputable paper trail for many transactions, and going 100% cash probably isn't best for society because there would inevitably be more "untaxed revenue", but 2-3% is outrageously large fee to pay.
[1] https://www.bostonfed.org/publications/public-policy-discuss...
There are a bunch of choices that EMV makes which seem dumb, and then a bunch of choices for issuers that invariably get selected for the overall economic impact for the issuer (typically a bank) not the cost of fraud to individuals.
I don't want to oversell this. Automatically EMV's chips are safer than magnetic stripe because the whole point of magnetic stripe is that writers are a cheap commodity. A bad guy who wants to clone magstripe credit cards can buy everything needed in a hobbyist electronics store, assemble it at home and they've got a cottage industry. Cloning modern protected microchips is by no means impossible, but it's not a viable plan as a side hustle for your job waiting tables.
BUT EMV could have been significantly less fragile, and consumers could have come away from this with all the same protection and the knowledge that this helps them as much as the banks.
Example: An EMV card can be dumb. It can offer Static Data Authentication. SDA is something you could copy from a real card and play back, not so different from the magnetic stripe problem - whereas the more expensive Dynamic Data option prevents this. Why is SDA allowed? Because it makes the cards slightly cheaper. For end users the card seems the same, for the issuer they just saved a few bucks. But now the end users have less fraud protection. Maybe your bank uses these cheaper "dumb" cards for accounts it deems at lower risk, or with smaller credit limits, or at random, you have no way to know.
Another way would be to mandate disclosure of the exact fees on every receipt. Let the market do what it wants with that information.
Seems like the opposite of privacy to me. :(
But yes, I think you are right. The "privacy" part of privacy.com is a bit misleading.
In fact, I used their card to pay my water bill, because I didn't trust the city security, and in fact discovered a massive citywide fraud because of it.
One of the nice things about privacy.com cards is the cards are assigned to a vendor, so if there is a charge from another vendor it rejects the charge no matter how small and warns you.
I got a 56 cent charge from a "gardening service" on my water bill card. Usually most banks won't let you set charge alerts below $1, so they use a $0.56 charge to fall below the limit. But since I had a privacy card I got notified, so I notified the city, and after their investigation they found that their entire credit card database had been compromised.
So it saved me from fraud and it saved everyone else in the city too!
(I have no affiliation to privacy.com, I've just been using them since their alpha and I'm a big fan)
Also, they report total marketing spend of $2.9B in 2019 - seems like they could still be sitting on quite a few unused miles.
Point of order, cash is not profit. You can’t (or shouldn’t) book unredeemed loyalty credits as income; on the contrary, they sit on the balance sheet as a liability under “unearned revenue” or similar journal.