Who pays for your rewards? Redistribution in the credit card market [pdf]
federalreserve.gov
federalreserve.gov
Didn't the CTRC ultimately reject this? Or are you talking about broader legislation? https://www.canada.ca/en/radio-television-telecommunications...
Either way, it's a bit tone-deaf to say that people are crying about not getting free rewards. Many people are upset because companies like our notoriously anti-competitive telecom industry already factor merchant fees into the costs; adding on a separate charge is essentially double-dipping in a time of record inflation and profiteering.
I expect the first merchants to take advantage of the new rules will be some of those Mom & Pop stores that currently have the "minimum $10 for credit card" signs.
The funny thing is that, apart from the aforementioned post-secondary institutions, I haven't seen anyone else add this surcharge. Maybe I'm just not shopping in the right places, but so far this change has amounted to absolutely nothing.
I was not thrilled when I saw it on my receipt, after not being told there was a credit card charge. I don't mind a surcharge but it felt like a cash-grab because they didn't tell people (or ask them, which would be even better).
I learned one thing:
The amount a CC charges the business is not fixed - and cards with rewards result in a higher fee for the business.
At some point a retired CC industry shill (who clearly identified his background) called in and his explanation on all this was the most reasonable:
In the vast majority of cases, a business's revenue goes up by accepting CC payments. Some of it is because customers have become accustomed to paying with it and may not carry cash, but the bulk of it is due to the convenience - and this is heavily backed up by research: The easier and more convenient you make transactions, the more consumers spend. The amount businesses pay the CC company in fees is more than compensated for by the increased revenue.
Most businesses will treat these fees as part of the cost of doing business, and price their products accordingly. Just as they do when their utility rates go up or the price of gas goes up.
Businesses support the campaigns about this issue so that they can get the best of both worlds: Increased revenue due to CC usage as well as passing those fees on to the consumer. They are not waging this battle to benefit the consumer, but to offload a cost of doing business to the consumer. In principle, this is all fine, but the consumers need to be aware of it! Ultimately the consumer is paying those fees whether a business charges extra for it or not.
And of course, if the goods that business is selling is priced the same as other businesses not passing that charge on directly, then the consumer is "double paying" - the goods' price already has that fee baked into it even if they pay cash, and when they pay by card, they'll pay it twice at those businesses.
Having known some business owners, his take is highly believable :-)
As an example, the AirBnB cleaning fee is not just for cleaning, but a way for the host to make extra money (easy to Google, and I know multiple hosts personally). Almost any business that charges extra for optional amenities is using it as a way to make even more money.
And that was the CC shill's ultimate point. CC companies are doing things to increase their revenue, as are the businesses. A given business may say they're campaigning for this in order to benefit the consumer, but in most cases they're not really benefiting the consumer and are simply trying to increase their revenue. The exception is when they really do have reduced prices compared to other stores.
It should be noted that most businesses have limited visibility into that. The monthly bill from whatever company handles their card processing usually charges a fixed rate, or has multiple tiers of fixed rates, and all the merchant sees is that on their bill they are told the number and total amount of transactions for each tier.
I wish everyone would use just debit cards over ccs, faster than trying to count out coins, less fees.
I am 100% unwilling to use my debit card for any purchases.
Why?
Fraud. If I pay with cash, then fraud amounts to getting actually robbed. Identity theft and account compromising is literally impossible. If I pay with credit, it is MASSIVELY simple to get that fixed, and it becomes the cc company's problem.
With a debit card, any issues immediately become my issue, because the money is out of my account in that moment. Not good.
Getting robbed cash in your wallet you are 100% out of the money. But fraud on a debit card must be made whole by the bank within 30-60 days per “Regulation E”, which offers similar protections to debit cards that credit cards receive under “Regulation Z”
It acts as a capacitor/battery for my money. My spending fluctuates, but my income is steady.
Not that it buys you much; there's plenty of small / specialty merchants who might offer you a discount for paying with cash or check, but they treat credit and debit the same.
There is indeed usually not much difference in how banks handle the fraud on credit cards and debit cards.
But it is vital to understand that with credit cards, you are off the hook on fraud due to regulations (in the USA, don't know other countries laws). With debit cards, you're probably off the hook on fraud only because the bank wants to be nice in the name of customer service (usually and only up to a point).
So with debit card fraud the bank might decide they don't really want to keep you as a customer and things become your problem. With a credit card it'll never be your problem because the regulations make it so.
If your issuer contractually offers zero liability for debit fraud, that is just as binding as regulations – and most do.
And if they don't, from a regulatory point of view, the liability for debit cards is limited to $500 when reported within 60 days of receiving your statement, compared to $50 for credit cards: Certainly a difference, but definitely not as drastic as "you're always on the hook" vs. "never your problem" as it is often characterized.
> So with debit card fraud the bank might decide they don't really want to keep you as a customer and things become your problem. With a credit card it'll never be your problem because the regulations make it so.
The regulations say nothing about the issuer having to keep you as a customer going forward. I highly doubt that, given reoccurring fraud cases even after a couple of card/number replacements, credit card issuers would be keeping you as a customer any more than debit issuers.
Every bank card or account I've ever had regularly send out notices saying they have changed their terms of service and your continued use of the account indicates your agreement to the new terms.
In other words they can change those any time they want unilaterally and you probably won't even notice (because who reads those terms of service?)
You may also want to read all the fine print to see if they carve themselves any exceptions.
The great benefit of the protections under credit card regulations is not having to worry about any such shenanigans. The bank can't change the regulation so you know you're always protected, full stop.
Also remember that fraud on a debit card hits your account balance immediately, even if you can later argue to have it credited. Fraud on a credit card simply hits the credit card and can't touch your real money. Think of a credit card as cloudflare layer for your bank account agains fraud DoS.
I'm always very puzzled as why in the US one would ever use a debit card (I say US because I'm not familiar with regulations in other countries). A credit card offers stronger protections, stronger account isolation and cash back rewards.
It can touch your real credit score (if not resolved in your favor), which directly correlates with your ability to continue using credit cards.
And either way, you lose liquidity until the provisional credit (which is very soon in both scenarios, also required by law!), although admittedly money in a checking account is slightly more liquid since you can pay rent and cash-only expenses with it without incurring interest changes.
> I'm always very puzzled as why in the US one would ever use a debit card
Many people don't have credit, don't feel comfortable with the possibility of having to pay absurd interest rates in case they can't make a payment, or a combination thereof.
The topic of this thread is real fraud (as opposed to someone claiming fraud on a charge they actually made). So, it will always be resolved in your favor, that's my point here. Regulations on credit cards mean it will always be resolved in your favor (assuming actual fraud). So, no, it won't impact your credit score.
That's a load-bearing assumption here!
Yes, whenever a credit card fraud investigation will be resolved in your favor, so would it be for a debit card – and the outcome is "no money lost" in both scenarios as well.
But in the odd case a credit card issuer does not side with you, are you absolutely sure that they would just silently drop the pending balance and not report you for a missed payment if you decide to not pay? (Yes, there is recourse against that – but so is there against a Regulation E debit card fraud case, at least as far as I know.)
No, you're assuming the bank is obligated to refund you everything. As I mentioned at the top, this is always the case for credit cards but not necessarily always the case for debit cards.
As this is becoming circular, I don't wish to continue. Enjoy your debit card and I hope you never experience fraud.
I will say though as a tourist who was visiting my family but doesn't have a bank account, those QR codes are pretty nice but completely inaccessible to everyone outside of India :/
I don't really see how Apple Pay backed by a credit card or debit card is any different from how a QR code system would work in practice.
Using credit cards allows you to keep close to a zero checking account balance and manage your own cash flow, since credit card bill dates are deterministic.
Why would anybody want to keep _any_ amount of money in a non-interest bearing checking account right now especially when the risk free rate of interest (US treasury bills / equivalent money market funds invested in US treasuries) yields 4.00%+ APY now?
Many banks allow linking a savings account to a checking account as a backup funding source.
> Why would anybody want to keep _any_ amount of money in a non-interest bearing checking account right now
Conversely, why would any credit card issuer give you an interest-free loan for a month in a world of 4.00%+ risk-free APYs?
Leaving aside all concerns of repayment risk, somebody is paying for your interest-free loan already.
Depending on how you view it, that's either yourself (via 2-3% of credit card fees baked into all retail prices) or other credit card users that don't pay their credit card bills in full every month, or a combination of both.
And the average American can’t handle a $400 emergency. They don’t have a savings account with thousands of dollars
Also, there is nothing that says you couldn't use a debit card for normal spending and resort to using a credit card only for when you actually need credit (assuming that the rewards inefficiency gets fixed).
The only difference is lost interest payments for these ~5 business days (which the issuer might even have to reimburse as well; I'm not too sure about that though), as well as not being able to pay for cash-only expenses using the money in your bank account.
Also, nobody is saying that people can only have one single bank account, and a debit card linked to it with no spending limit attached to it.
In addition, credit cards increase how fast you can process customers. Given all that, I am not sure that credit cards are such a bad deal for merchants.
The idea is:
1. pay cash when there's a lower price for cash
2. pay with credit card when they're the same price
Many outfits will give you a discount for cash if you ask. That's even better for you than the cash back. All you gotta do is ask.
Individually or small business/franchised gas stations will usually have a cash/debit lower price, on east and west coast in my experience. Big company owned gas stations like Walmart, Costco, Kroger, etc will only have 1 price.
I'll repeat: just ask!
https://www.ftc.gov/business-guidance/resources/new-rules-el...
https://www.ftc.gov/business-guidance/resources/new-rules-el...
>Discounts to Customers
>A PCN cannot stop you from offering your customers a discount or another incentive for using a certain method of payment, as long as you offer it to all your customers and disclose the offer clearly and conspicuously. For example, you can offer your customers a discount or a coupon if they pay with cash or a debit card rather than a credit card. But the new rules do not address other PCN restrictions that may prevent you from offering discounts or similar incentives that vary based on the use of a card from a particular issuer or a particular PCN.
I never buy gas, so distinct credit vs. debit vs. cash pricing applies to 0% of my monthly spending. No merchant that I frequent offers a discount for debit cards over credit cards (some do offer a cash discount, but that's a different topic).
> Many outfits will give you a discount for cash if you ask. That's even better for you than the cash back. All you gotta do is ask.
Have you actually tried doing that at e.g. a grocery store? An online retailer? An airline?
Grocery stores have such thin margins, that isn't going to work.
> An online retailer? An airline?
There's nobody to negotiate with with online sales. Though if you're dealing with an agent at the airport, you can negotiate. Yes, I've done it.
I've successfully negotiated with doctors, dentists, repair shops, department stores, agents selling things, employees, employers, contractors, flea markets, pawn shops, furniture stores, anywhere there's a person with some authority to deal with. Although I haven't, you can also negotiate at restaurants and hotels and car rentals. Usually the higher priced the item, the more negotiation can be done (and is expected).
That doesn't make sense. Credit cards cost them some 1-3%; debit cards cost them 0.05%. The difference is exactly the same for high and low margin businesses.
> There's nobody to negotiate with with online sales.
Which makes your proposition to address the problem non-viable for a sizeable proportion of all transactions.
But at the risk of sounding like the “do people still watch TV” guy, do people still write checks?
I do when I get a discount for cash, or when they try a "convenience fee" of 3% for using a credit card.
Certainly, but given that it's how it is, you can participate in the game and get your 1-2% back (sometimes more), or not. Might as well get it back.
If everyone was using a reward card and they all had the same reward percentage you would be right that there is no redistribution.
But because most merchants charge the same price to every credit card user (and often also to cash users) there is a redistribution from those using lower rewards rate cards to those with higher rewards rate cards.
This is why I stay away from credit cards that offer rewards. Did you really think that big corporations give you pennies out of the goodness of their hearts? They might be people (according to Citizens United), but they have no heart.
1. Fees related to mode of transaction (credit, debit, cash) are separate from price of product.
2. Cash-backs need to be banned altogether to prevent this pseudo-regressive tax.
Due to US politics and the financial services lobby, it’s unlikely we’ll see interchange caps like Europe enacted, killing most rewards programs, so you’ll have to rely on merchant economics to drive the change.
If anything, using a credit card that doesn't offer rewards is even worse for redistribution... since it's redistributing credit card fees straight into the pocket of the big corporations. At least if you use a rewards CC properly, a portion of it is given back to you.
However I do withhold recommending these cards to others because they only make sense for people who don't carry debt or spend recklessly, and I usually cannot be certain that others meet those criteria.
No, you aren't making it more costly for the bank. Banks would be stupid to offer such a setup. The banks pass that cost on to the merchants, who have no choice in the matter.
https://merchantcostconsulting.com/lower-credit-card-process...
I sure am; almost all of my spending earns a rewards percentage that exceeds the rate charged to the merchant. (This is not even counting the significant sign-up bonuses.)
Anyone (with good credit) can do the same with a modest amount of research.
No, you are. Think about it, you as an individual can't change how this system works. But if you use a card with 0% rewards, you're gifting that extra 1-2% to the credit card company. If you use a 2% back card, you're taking that 2% that's on offer away from the bank.
Of course they're still making money, the fees are higher. But they make a tiny bit less if you use the rewards card. So might as well.
Why punish yourself like that?
I understand taking a moral stance even if makes your life harder, I do that with various things. But I guess I don't see it on this one since the vendor doesn't even know if you get any reward back when you hand them a credit card, so it doesn't show your posture in any way. All you're doing is gifting extra money to the credit card companies.
We will be in at least 13 cities this year. Some vacations. Some “nomadding” and some a little of both.
I also travel for business 7-8x a year (cloud consulting at $BigTech)
All that to say, credit card rewards and loyalty points makes traveling, staying on budget and being able to enjoy more expensive places possible.
For our major categories, we get the following “returns” from credit card points/loyalty points (miles, hotels, transferable credit card points)
- Hilton hotels - 20-25%
- Hyatt Hotels - 20%
- Delta/American Airlines - 14%
- Groceries/Dining Out - 5.5%
- Uber - 4.2%
- everything else 2.4%
Then there is also the concept of “churning” where you sign up for cards just for sign up bonuses. Those can be worth between $600-$1200 per card.
Ask me anything…
1) it's not just you, it's your partner too. So that's two seats x # flights/yr.
2) with the extra seat miles you are occupying, airlines can sustain their existing routes/itineraries or expand them if they're at capacity.
At a larger scope it can be viewed as: will the airline fly more flights with its existing fleet? Will the airline buy more aircraft to fly more flights? If yes to either, then your argument breaks down.
Having said that: fuck carbon footprint!
Again, I'll take having fun over saving the planet every time, let's just stop pretending that your travels add no carbon emissions.
Or should I also start a collective action to keep others from flying to reduce the number of flights overall? My refusing to ever fly is not going to stop one plane from flying.
I fly for both business and leisure myself, but arguing that "the plane will take off with or without me on it" is beyond ridiculous.
Are you alone going to make a difference by not flying? Like that neocon anti-environmental Obama said “we aren’t going to save the planet by throwing a bottle in the recycling bin”
The airplane takes off if, on average, the sum of dollars that all ticketed passengers are willing to pay for the benefit of being on it is larger than the operational and capital cost of the airline for operating that one flight.
Your contribution (in a purely causal sense, regardless of what moral statement you might read into it) to all of this is very indirect and diluted, but that does not make it zero.
Silly questions aren’t they?
> How much could you reduce your carbon footprint if you didn’t use HN? Google?
Again, I don't really subscribe to the idea of carbon footprints, but for the sake of the argument: Insignificantly little, compared to the emissions caused by the flights I take.
> Silly questions aren’t they?
Absolutely.
https://news.ycombinator.com/item?id=34494390
From just a brief Google search, 500,000 people are in the air at any given time.
When my wife an I fly we are
0.0004% of all of the people in the air. Is that percentage “significant”?
My point is, carbon footprint or not, that buying flight tickets and airplanes flying are in a causal relationship, which you seem to be denying, which in turn I find absurd.
You are responsible (again, no moral judgement or carbon footprint shaming implied; again, I fly too, and not too infrequently) for the consequences your actions, and dilution of responsibility seems like an extremely immature way of dealing with that.
Buying a flight ticket isn‘t the same thing as chartering a private jet, but it‘s also not the same thing as riding a bike around the block in terms of energy and resource expenditure. What we do about all of these things is a question completely secondary to the discussion at hand.
Are you not also “diluting” the responsibility by not taking into account all of the energy you use by being on your computer? By being on the internet?
At what point does it become silly? Or do you set the bar right above “the things I don’t do”?
No, I am accepting the responsibility for all of these actions (at least insofar as I am aware of their consequences) – which are not nearly in the same ballpark as flying in terms of energy expenditure, but again, you're the one counting/comparing, not me.
> Or do you set the bar right above “the things I don’t do”?
Like what, taking airplanes? You seem to be intentionally ignoring the fact that I have repeatedly stated that I do. I just don't engage in ridiculous logical acrobatics in trying to rationalize away the consequences of doing so.
You are part of the aggregate like it or not and this is aggregated demand that gets this plane flying.
You are free to do what you want but you can’t deny your impact. Given your post you probably have by yourself the carbon footprint of two to three families.
And you’re also assuming airplanes are flying at 100% capacity. I can tell you out of the 12 flights I was on between business and personal the last two months of last year [1] none of them were at capacity.
[1] ATL -> SFO -> LAX —> CHS -> CLT -> BNA -> CLT -> RDU -> CLT -> ATL -> SAV -> MCO
Of course, I also have a large bookbag with my laptop a second portable display, my iPad and often a client laptop since we aren’t allowed to install a customer’s VPN on our work computers.
It’s a very freeing experience
This doesn't work for long, IME. The banks quickly get wise to you, and won't give you any more bonus cards, at least for a while.
For instance signing up for business cards using your SSN as the EIN doesn’t show up on your credit report.
Once you have one card from Amex, they don’t do a credit pull for additional cards. Between personal and business, Amex has six Delta cards and four versions of the Platinum.
That means you can apply for as many Amex business cards as you want with no effect on your credit.
Chase has a hard 5/24 rule where you can’t have opened more than 5 cards with any issuer within 24 months. But that doesn’t include business cards.
You also have to space credit card applications out. It also helps that I have a long credit history. I opened my first card in 1996.
I've never been able to get a Chase card.
> You also have to space credit card applications out. It also helps that I have a long credit history. I opened my first card in 1996.
I think I applied for too many at once. Also I take advantage of those 0% introductory APRs and run a balance (only paying the monthly minimum for the duration, and paying the remainder as one lump sum before it expires), which adversely affects my score.
Sone companies like Amex have a “once per lifetime rule” and others make you wait four years and others don’t give you sign up bonuses for the same “family” of cards.
Marriott for instance has restrictions between Chase and Amex cobranded cards.
My point is, I think the banks actually want churners for the reasons I mentioned.
And they have what is colloquially known as “pop up jail” where when you try to sign up for a new card, they will allow you but pop up a warning saying you won’t get the bonus if you apply for the card. It’s based on your previous behavior with them.
But even while the algorithm for how they choose it is secret, it’s been reverse engineered for the most part via crowd sourcing.
Most credit cards also will deny you if you have opened too many recent cards no matter what your credit is. For instance I just got denied the CapitalOne SavorOne card that had 10% cash back for Uber and I have an 800+ Fico.
But as far as collecting points. Each time I stay at a Hilton, per dollar, I get:
- 10 base points
- 10 points for being Diamond (automatic with the Amex Hilton Aspire)
- 14 points on the Aspire card.
That’s 34 points minimum or around 24%.
But Hilton ran a 3x special the third quarter of last year followed by two 2x specials for 54x and 44x. At 54x that’s almost 38% back.
I don’t use more than 70K points per night or 280K points for 5 nights (fifth night free).
Our “housing budget” is $3500/month. We spend that on our own place during the winter and hotels the rest of the year and the income pays for our mortgage at our “winter home”. I’m also traveling for reimbursed work trips. That means at times, I’m collecting points for two hotels at once if my wife doesn’t come with me.
Seems like Amex Hilton Aspire card is the key here, just not sure how to get one, not living in the US, and having no credit history there. I assume they require some exorbitant income level as well?
Anyway, seems like just getting Diamond status gives you quite a bonus. I'm in this weird situation where I plan to go to US for the next 3-6 months, and I am actually considering living in Hiltons the whole time :)
The only time that banks really care about your income or your income to debt ratio, is buying a house.
> We find a redistribution from low- to high-FICO consumers regardless of income. While super- prime high-income consumers benefit the most from reward credit cards ($20.1 in net rewards relative to classic cards), high-income consumers with sub-prime FICO scores on average pay the most (-$12.8). Meanwhile, super-prime low-income consumers ben- efit less ($9.7), but sub-prime low-income consumers also pay less (-$2.6). Thus, high- income consumers with high FICO scores benefit from reward credit cards largely at the expense of high-income consumers with low FICO scores.
> As our findings are inconsistent with the “reverse Robin Hood” hypothesis
tl;dr: it's a stupid tax. People with high incomes who are still financially unsavvy end up indirectly subsidizing lower income, savvier CC users.
Accepting credit cards is a net benefit for merchants, even accounting for fees due to increases in volume. This is just greed. They want access to the network without actually paying for the privilege.
It’s not entirely one-sided, customers do pay for the rewards: My 3 credit cards are costing me 1500$ per year in membership fees.
Credit card companies also offer a whole bunch of services to users like chargebacks and disputed that make it easier to enforce things like warranties.
Plus there are social benefits like reduced crime and saved time and energy visiting banks etc.
> Plus there are social benefits like reduced crime and saved time and energy visiting banks etc.
All of these benefits are also applicable to debit cards.
I mostly use debit cards because I have no real interest in getting credit and dealing with debt etc.
I never know the status of debit cards. I assumed they were free riding on the credit card infrastructure (hence the zero fees etc). Is that not correct?