Ask HN: How Does Cashback Work? | Hacker News Reader

Ask HN: How Does Cashback Work?

9 pointsnnurmanov6 comments

I am in the ideation phase, and I'd like to know how cashback works? Is the cashback amount deposited to a card after the purchase or card is charged an amount minus the cashback amount?

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Most American credit cards use the point system. One point is one cent. You accumulate points. Then you can use these points for things like booking flights, hotels, or buying gift cards or Apple products, etc.

Let's say the cash back is 1% and you spend $1,000 last month. This month, you will receive 100 points. You can redeem this for $10. Most cards have programs where points are worth more if you use it for different things. For example, my credit card gives a 50% bonus when buying flights using the points. So the $10 is worth $15 if used for it.

This is actually smart idea, money does not flow, hence there is no associated transaction cost, instead points are accumulated. Thanks!

For every card I've had, it builds up in a separate pool, and every so often you either have it deposited to a bank account or applied as credit toward the bill.

Does it require spinning off a transaction? I wonder if there any transaction costs associated? There is another thing, if money deposited to an account, should this be considered an additional income?

Credit card companies have been successful at having this considered a discount, so it's not income. At least, the IRS hasn't significantly challenged this treatment yet.

I've had a card that automatically processed it as a statement credit one statement behind, and my current cashback card automatically deposits to a linked brokerage account once the accumulated points reaches a threshold. All transactions have a cost, but for these, it's negligible and hidden from the account holder.

The cashback money is funded in two ways:

1. Increased fees that the banks and networks charge merchants. This increases prices for goods and services for everyone, regardless of how each individual customer pays.

2. Interest payments and fees paid by people who don't pay off their cards every month. This includes a whole range of people, but is often those who can least afford it.

The whole system is unsustainable, and I don't use cashback cards.

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