Edit: When I was referring to "transaction costs," I was referring to merchant fees
From my understanding this cashback systems come from two sources:
(1) Money taken on processing fees on Merchants themselves.
(2) Money taken from the interests of debt from the people screwed by this entire system.
The first one is just an hidden tax and garbage profits made possible only due to the monopolistic behaviour of credit card companies.
The second one is just plain simply immoral.
> The first one is just an hidden tax and garbage profits made possible only due to the monopolistic behaviour of credit card companies.
I'm not sure any supposed monopoly is necessary here to explain anything. In fact, there's no monopoly and different competing issuers have different levels of fees and 'rewards'. Eg American Express explicitly has high fees and high rewards, and competes against Visa and Mastercard (and against domestic systems in eg Germany or Japan).
A monopoly (or oligopoly or cartel) argument could perhaps explain why the smallest fees you can find are still 'high' by some arbitrary standard, but it couldn't explain why American Express is a viable competitor.
See https://upgradedpoints.com/credit-cards/us-credit-card-marke... for market shares of the different payment networks in the US.
It’s a bit like a casino: somebody can get lucky and get out more money than they’re paying, but most don’t. And the house (Visa/MC/Amex) always wins.
If you don’t have money, banks will charge you $15 / month for a basic checking account, plus $50 overdraft fees if you make the slightest mistake in balancing the account (or if a company makes a fraudulent charge on your account — also dismayingly easy in the US system).
If you have any reasonable income they start waiving the fees, and beyond that they’ll shower you with offers for credit card rewards and other benefits effectively paid from the massive windfall the banks and other companies collect from the poor.
The market isn’t solving this, so there should be more regulation and very tight caps on these various fees. A bank account shouldn’t cost more than $2 / month. An overdraft shouldn’t be possible unless you opt in to a loan facility.
In Europe, exorbitant fees paid by the poorest would end up getting paid by the welfare system. It would be more obvious that it’s a wealth transfer from the state to the banks and other corporations. So the government has a direct interest in enacting regulation that prevents this.
In America, the welfare system avoids transferring actual money to people as far as possible (because the system doesn’t trust poor people to handle money). Instead these transfers are made indirectly using systems like “food stamps” that you can use only to buy groceries. When the government is giving food stamps to someone, and simultaneously the same person is paying $100 in overdraft fees to a bank, it’s much less obvious who’s really paying the bank’s profit here, but it’s still the taxpayers.
Wells Fargo, one of the largest national banks, charges $15 / month for a checking account (last I checked) unless you keep a balance of over $1500.
And overdraft fees are hard to avoid because the American banking system is fundamentally flawed. Companies can make charges from your account if they know the number. (This is mentioned in the debt collection article too.) If you don’t have money, your account can suddenly go negative because some company somewhere decided to pull some money from you, and then the bank charges you $50 for the overdraft.
The system is so broken, it’s hard to believe from a European point of view. The USA only got European-style bank transfers this year! Until now, almost all money transfers were being bolted onto a system meant for handling paper checks.
Consider how much cheaper things might be across the board with lower fees
But you are right, that the system is not very transparent, and merchants probably seldom give people the full discount of the costs saved when they use non-credit card payments.
You can indirectly see some of this happening though: lots of places with lower margins (ie cheaper prices) won't accept American Express, but might accepts Visa and Mastercard. That's exactly because of the difference in fees.
If you go shop at merchant A that accepts American Express, you pay a higher price no matter how you pay. But if you have a non-American Express means of payment, you can shop at merchant B, which has lower prices overall (no matter how you pay). The economic effect is similar to directly passing on the fees transparently.