Anatomy of a credit card rewards program
bitsaboutmoney.com
bitsaboutmoney.com
The article goes on to ask the question "Why isn’t every card a rewards card?", meaning why doesn't every card pay cash back, but I think the more interesting question is why every card isn't branded in a way that makes the issuer more money. Why do they bother to issue cards where they get paid less? Why not brand every card as a "Signature Preferred" and then pocket the money instead of giving it to the less discerning customers?
And the most interesting question only gets a handwave: "The basic intuition underlying rewards cards as a product is that highly desirable customers have options in how they spend their money." But how far does this go in explaining why merchants "choose" to participate in this program. The obvious answer would seem to be that they get no benefit from the system as it exists but have no real choice, but maybe there is a better answer?
I liked the topic, but wished the author could have given more insight on what's happening behind the scenes to produce the outcome we see.
(This is also the answer as to why in the absence of regulation, exchange fees aren’t higher than they already are.)
Low risk is clear -- the lower the risk the more money is left, after handling problems, for the rebates and profits.
And salaries and pensions, etc.
There's many rewards cards that require an annual fee (which encourages a high spend to recoup the fee with rewards). But there are plenty of 1.5%-2% cards with no annual fee. You just need a good credit score.
The second and third tier Delta cards come with a $250 and $650 Annual fee.
The second tier card (Delta Platinum) has an annual fee of $350. But it comes with a $150 Delta Stays credit for hotels and one round trip an economy companion pass - basically buy one get one free - for any place in the US, Mexico, Central America or the Caribbean.
The higher end Delta Reserve comes with similar benefits. But a first class companion pass. If you never use either card except for the credit, the benefits more than offset the annual fee. The Reserve also comes with airport lounge access
I have three Delta cards just for those benefits.
I could explain the Amex Platinum, Gold, Green, every cobranded hotel card, the high end Capital One cards the same way.
The credit card companies as the article says are betting that the typical customer will use credit cards in a suboptimal manner. They are banking on most credit card users not to be like the typical r/creditcards users who carry 6-8 credit cards including “sock drawer” cards that are just held for the outsized benefits to annual fees and aren’t their primary cards.
My wife and I travel a lot and yes I have nine cards and $2700 worth of annual fees. Most of those cards are “sock drawer” cards that are just used because the “coupons” make travel cheaper.
(I am not affiliated with this site in any way)
They know exactly how many do this. The people who churn are just free advertising for them.
Just from the cash savings of my card setup, I would say it’s worth $3500 that offsets the $2700 in annual fees.
Then take into account the points I earn from everyday spend is worth another $3000-$5000 depending on how I choose to redeem them (see r/awardtravel).
Then take into account sign up bonuses and churning, I’m planning on doing over the next year worth around $5000.
It’s the only way that I can balance our travel hobbies with my goals of maxing out my 401k including catch up contributions (I turn 50 this year), max out my HSA and not use it and “retire my wife” so she can enjoy her hobbies.
This hobby isn’t just for people with above average incomes. If you are steeped in the culture, you can lean more toward churning and legal manufactured spending
https://frequentmiler.com/manufactured-spending-complete-gui...
In the UK you can still cancel and re-apply after 24 months. It used to be 6 months but those good days are long gone...
But there is still Chase, CapitalOne and Citi. The Chase Ink Business cards you can churn as much as you want and most of the other cards have either a 24 or 48 month rule
All of these things were items I was already using or would have purchased anyway and the discounts stack on top of any available merchant coupons too since they are credits coming straight from AmEx.
Some merchants like Amazon, Target, Home Depot etc do want the ability to refuse the "rewards cards" with higher fees but can't because of the current contracts they have for credit-card acceptance. If a merchant signs a contract to accept VISA cards, they must accept all VISA cards and therefore can't selectively choose to reject some VISA cards because of higher swipe fees.
https://thepointsguy.com/news/retailers-want-to-reject-rewar...
https://www.google.com/search?q=merchants+want+to+refuse+rew...
also milage reward points can hit as high as 2.3 cents per dollar so assuming i want to fly to japan with ANA i could in theory get 8.6c in value of MR points per 2.6c i charge myself. However i would not expect to get away with this and i'm sure square would figure this out.
When you use them it is still a charge to one of those credit cards.
It might actually cost Walmart more in my case, because the card I have on file has larger rewards for online purchases than it does for in-store purchases, and the Walmart app processes purchases as online even when made in-store. If I pay with the physical card it is processed as in-store.
They’re just stubborn and want people to use their option (and card, if possible).
As it is you can load any credit card into the Walmart app and pay by pointing the “check price” barcode camera at the screen.
[Citation Needed].
On the other hand, stores like that probably already do facial recognition on customers, so it really is just intransigence to not allow contactless payments.
For example, our local bus company can quite happily offer capped daily and weekly fares when folk use the same device to pay.
For most people, there's the time to get their wallet or equivalent out of pockets or purses, fiddle to get the card, put it the correct way and swipe (but not too fast or too slow!). Vs a phone/watch tap which is usually much more convenient.
Maybe if I wore my Apple Watch more, I'd get used to using it but the card just seems more straightforward in general. Maybe I'll insert and maybe I'll tap. I'm pretty indifferent.
Aren't both of these just symptoms of unfamiliarity with the tech?
I resisted phone payments for a while, until one day I forgot my wallet and quickly added a few cards to my phone. Now I'm severely tempted to use it more often—my phone has a wallet button on the lock screen that jumps me straight there ready to pay with my default card. I've definitely experienced some friction the two times I've used it, but it seems pretty clear that that friction is temporary while I'm still becoming familiar with it.
I've also had issues at Walmart where I know some lanes to flat out avoid because the chip readers will always reject my card for unable to read the chip. With my phone, this isn't an issue. Even if I get a new card, wait 8-12 months and its the same problem again.
But I am aware that the cards exist and I am not opposed to it. With contactless I am fine with it being on my phone or card. But I gotta have a card that has contactless to be able to use it.
Also at my current job, I am the WorldPay guy. I work at a point of sale company and my area of ownership is integration into World Pay for payment processing at brick and mortar stores. None of our clients have tap to pay devices. They are all running 15 year old Ingenicos and plan to run them till they stop working. So as of right now, that is at least 2,500 stores in the US that I know of that don't support any kind of contactless payments.
It sure does, and then 45 seconds while the machine ... thinks about life, and then 15 seconds for it to say "chip read error, reinsert card" and then another 45 seconds for it to reconsider the nature of reality, and then listening to a fire alarm sound that they chose for the success alarm. Excellent UX, no notes
However, this is HN and not at all typical of the U.S. or world overall. Even though we frequently lose sight of that.
Then you'd visit a lot of them and they'd claim to not accept Amex!
I ask because when I was in Germany (and, granted, this was a few decades ago) you got some percent off the price if you paid cash. Merchants there seemed pretty credit-card averse.
A bit hostile towards merchants, but very nice for consumers imo.
It's nice for consumers who prefer to pay by card. It's hostile towards consumers who prefer to pay in cash.
Credit card fees for small orgs are like 1-2% so for a small biz that could pinch. Cash also lets you, uh, "fudge" your numbers for tax purposes.
(I still use a card because life is short)
(If you pay cash, the business owner can just pocket the money without ever recording the transaction. For digital payments, this is much harder to do undetected.)
Big companies do a similar thing by offering you a store card. Costco likely makes more money from you when you pay with your Costco card than if you pay cash, because they get the interchange fee very very low and have to pay to handle cash. Rumor was AMEX was eating the interchange fee AND paying them … because they more than made it up by the customers who made the card Top Card.
Given what this article says, it sounds as though not only are cash buyers cross-subsidising card buyers, but non-rewards card buyers are cross subsidising rewards card buyers.
So much for free markets.
It’s usually motivated more by mom and pops skimming taxes than 3% credit card fees. If you do any kind of volume, there isn’t a ton of savings as cash management ain’t free.
The electronic equivalent is people who take personal Venmo at retail.
I would need a system that can display to the customer what fee they would be charged with their selected payment method, and be given an option to switch to a less expensive payment method.
For example Braintree is 2.59% + $0.49/transaction, plus 1% if non-USD and 1% if the card was issued outside the US.
They used to split transactions into two tiers, based on how much the actual interchange and other fees were, and you monthly bill as a merchant would show charges for each tier. Within each tier the charge to the merchant was a fixed percentage and a fixed transaction fee. There was no good way for the merchant to know ahead of time which tier a given charge would fall under, although they could guess that a high rewards card was more likely to fall into the higher fee tier.
Donation platforms ought to do some analytics on this. If I’m giving money, I want it to be simple without requiring me to second guess.
If a donation platform takes Apple Pay, the friction is even less. I don’t want to fill out your stupid long form, create a password, share my address or whatever.
But, I’m one person — this might be an interesting Masters thesis topic to study the behavioral economics of donation platforms.
Found an example - https://donorbox.org/nonprofit-blog/donors-to-cover-processi...
Why not go even further? Itemize the marginal cost of maintaining your property's parking lot for those customers who visit your business by car? Charge customers a "store heating fee" in the winter? Customer support fee if they talk to anyone? Just as ridiculous. Processing credit cards is just one of many costs of doing business that you need to account for when you price your products.
Besides, I honestly would be sort of annoyed that you insist on making your dissatisfaction with your credit card processor my problem as a customer. I have my own problems to worry about, don’t make my saving 1-4% on groceries vs. 2-3% cash back on my credit card another thing I have to deal with. I’ve stopped shopping at certain grocery stores over less.
This isn't that uncommon, quite a few places in Europe do this actually.
Usually there's a barrier at the parking lot entrance. You get a ticket when entering, which you then have to put in a machine when leaving. The machine calculates your fee based on how long your car was parked. Modern systems are far more automated and use license plate readers instead.
If it happens to be a store-owned parking that charges per hour, it's to prevent abuse from drivers going to other stores nearby if it's in downtown. Charging for parking outside your store in a less dense district is equal to putting up a sign that you don't want customers.
Aka... charge for parking? I mean? This is pretty common? I've always found it annoying that stores will validate parking for motorists but if I choose to take public transit or bikeshare, I don't get any corresponding debate.
What's the fee for cash the requires quite a bit of change? What's the fee for cash that is composed of very small values (e.g. quarters and dimes for a tv)?
It's interesting that all of these complications are ignored entirely when pricing payment methods. Handling cash isn't free and carries risk.
What's the fee for credit card chargebacks from stolen cards, or chargeback fraud from customers who receive a product and then dispute the charge anyway?
> What's the fee for cash the requires quite a bit of change?
There are machines that count coins and issue exact change. If you do a lot of cash business, you buy one. For example, the self-checkout machines at Walmart do this.
The largest denomination still issued for US cash is $100, so no cash transaction will require more change than this, and some merchants don't accept large bills for small transactions.
> What's the fee for cash that is composed of very small values (e.g. quarters and dimes for a tv)?
How often do you think that actually happens?
Also, how are costs like this to be avoided unless you stop accepting cash whatsoever, and thereby lose business? Just eating the credit card fees instead of passing them on isn't going to stop someone with a jug full of nickels from wanting to spend them.
> Handling cash isn't free and carries risk.
Nothing is free. How about the time value of money for the time it takes for the credit card companies to pay you, as opposed to cash which you can immediately spend or deposit and begin collecting interest on?
The issue is that credit card companies have the usual set of costs and then on top of that charge significant transaction fees and shift the cost of various types of fraud to the merchant even though they're the ones who designed the system that makes it easy to carry out.
It’s an unsophisticated approach to business. That’s why it’s common in mom and pop places — mom didn’t go to business school and pop is tripping over dollars to save a nickle — they see the “expense” but they can’t see the revenue that aren’t getting.
There is a reason most small restaurants fail — they don’t know how to be more profitable. So they start to add on these little fees when they begin to struggle and don’t realize that they’re making the problem worse. In other words, most people that start restaurants don’t know what they’re doing in the back office even if they’re great in the kitchen. Restaurants fail for many reasons, but not controlling costs is the biggest — however, they’re naïvely choosing to control the wrong costs.
One of my good friends owns a chain of 30 Tex-Mex restaurants in Texas. After several burglaries of the safe at several locations, they went cashless at some locations. The cashless locations, without exception, saw sales increase by over 12%. He quickly made all of his stores cashless and sales increased among all stores. My anecdote isn’t data — but there is plenty of data out there.
The credit card surcharge scheme is endemic among small business owners who actually haven’t done the math. Or, more accurately, they’re doing the wrong math.
Credit card users spend more than cash users. So you make up for the “savings” with lower sales volume. And credit card users that have to pay higher prices will go elsewhere. Or, if they pull out cash, they’ll spend less of it.
It has the obvious benefit of discouraging people from increasing your costs with rewards cards. Keep in mind that businesses often have net margins in the vicinity of 5% of revenue. Paying 3% of revenue or more to the credit card company is heinous.
And what work is there to do? The calculation is done by a computer. If your attitude is "just price in the cost" well then there you go, you can pay the true cost of the card you have without even looking at the alternatives. Whereas if you want to get the lowest price then you have to figure out which card has the lowest price. Removing your option to do this is not going to save you money, it's just going to cause you to pay the higher price at all times, which you still have the choice to do.
> they see the “expense” but they can’t see the revenue that aren’t getting.
Increasing sales by e.g. 15% while decreasing net profit by up to 60% is often not a fantastic business decision.
> Credit card users spend more than cash users.
Which is why you accept them but provide a discount for the people who don't use them and thereby don't expose you to their fees.
> And credit card users that have to pay higher prices will go elsewhere.
But they're not higher prices. Restaurant A charges however much to everyone. Restaurant B charges exactly the same amount to people who use credit cards and a few percent less to people who pay cash. The people who insist on using credit cards can go to either place and pay the same amount, anyone willing to pay cash can get a discount at Restaurant B.
The first gives you a lower advertised price but then irks customers when they find out about the extra charge. The second gives you a higher advertised price, which could be worse depending on the nature of the business.
But the proposed alternative where you charge the same to everybody and incorporate it into the advertised price requires you to use the higher advertised price, which has no advantage over the second option regardless of whether or not the second option is better than the first.
In other words your point is pretty much moot because nobody is choosing a restaurant based on, veal parmigiana costs $25 at Villa Roma and $24.50 at Sicily Palace. But they very much might remember that Sicily Palace charges a credit card fee and boycott it in favor of somewhere else.
I've seen signs that say stuff like "Prices listed are for cash, 3% surcharge for credit cards."
How many different fee tiers are you as a retailer really trying to charge?
How do i know you are being transparent with the surcharge? What if you add 2% for a card payment when your actual overhead is only 1%. I suspect this is the reason why EU made these type of schemes illegal many years back. It just creates bad incentives for stores to add random fees everywhere.
How do you even calculate the processing fee of cash on a single transaction? A lot of comment here seem to assume cash is free, when in fact you need a safe, take time to go to the bank, security transfers, counting it, and so on.
Fwiw I don't really care what the technical reason is, it's a rhetorical question to add to the ways the credit system holds back the poor.
AFAIK it's a carve out specifically for houses. Car loan interest isn't deductible despite being "secured".
Same reason Medicare (old people) pays healthcare providers more than Medicaid (young and poor people).
It would be good to understand this better. Doesn't everyone use a credit card? Not just the poor? Who are the poor in this case? Are tax deduction rules anything to do with the credit system?
My comment is to show another way this is perpetrated. People saddled with CC debt could dig themselves out faster if they could write off interest.
Well, some places add on a fee, but yes, agreed, some places apply a blanket charge. I don't see how this relates to the tax deduction.
> Even a cash paying poor person who cannot get a CC is paying for this
This is about a tax deduction. Are you saying someone who can't get a credit card is going to be meaningfully affected by a tax deduction?
> People saddled with CC debt could dig themselves out faster if they could write off interest.
This is true, but also the giant number of people who just chose to get into credit card debt would be paying less tax. If you want to make credit cards into effectively interest-free loans then that might cause issues.
Earlier you asked me to explain how credit cards harm the poor. I showed you, and now you complain that it doesn't pertain to a tax deduction. It's not about a singular thing. The singular thing was one token example of a larger theme that for some reason you refuse to acknowledge.
maybe you rent, but renters DGAF about the local community the way that homeowners do.
home (property) taxes also fund a lot local services, schools, etc. you want prices higher and stable, and not dominated too heavily by mega-corps that will weasel out of paying said taxes.
Renters absolutely care about the local community.
I wish the tax code had more a more positive slant per your point, but lobbying seems to be a bigger driver.
https://www.telegram.com/story/news/local/worcester/2007/03/...
I guess Reagan's friends at that point wanted more money for Wall Street to gamble.
The deduction on mortgage interest now mostly only affects the well-off because the standard deduction for married filing jointly is so high.
Many people didn't math the interest deduction correctly - only the amount over the standard deduction should be counted, as you'd get the standard deduction anyway. Can vary depending on SALT and charity donations.
For a long time I would read money saving tips articles and a tip that frequently came up in these and in pro real estate pieces was that paying a single extra mortgage payment per year would let you pay your mortgage off 12-15 years early.
When you did the math you realized it was bogus. As near as I can tell, this actually was true for one brief period in the 1980s when mortgage rates were at their zenith. Articles were written about this amazing tip well into the 1990s before the BS was transcribed to the internet and then repeated well into the super low interest rate era where it wasn't even close to being true.
Of course it wasn't even really true in the 1980s either. Once interest rates went down you'd have been wise to refinance at the newer lower rates instead of prepaying the mortgage as it would improve your cash flow and lock in the savings. So in reality, it would have only made sense if interest rates had stayed at that same high rate for the whole length of the mortgage!
Ironic in hindsight; every monetary and fiscal policy as of late seems to be designed to punish savers and reward debtors.
Once rich people figured out how to get poor people to be angry about things like higher marginal tax rates for rich people and “death taxes”, we raised taxes on the suckers to benefit the richer people.
Only about 10% itemize.
https://www.taxpolicycenter.org/briefing-book/what-are-itemi....
I think it's reasonable to say that the folks with the largest mortgages are the ones most likely to itemize mortgage interest, even if they are capped.
HELOC interest is rarely deductible either. First, you now must be able to itemize deductions, which the recent tax changes have made very unlikely. Less than 12% of tax returns are able to itemize:
https://www.irs.gov/pub/irs-soi/soi-a-inpre-id2303.pdf
In addition, even if you are in that ~11% who can itemize, HELOC interest is only deductible if you use it to work on the same house being used to get the LOC. Any other use is not deductible.
Counterpoint: i will pay you $500 if any of the big retailers (>2k stores) lowers prices now and cites "lower credit card fees means we can charge less".
If competitors can lower prices, whole market eventually ends up having to do that.
http://www.bloomberg.com/features/2015-how-amex-lost-costco/
If I have a card that gives back 2% to me, back causes 5% fees to the vendor, both of us would be better off if I used a card with 1% fee, and the vendor gives me 2% discount. Unfortunately, not allowed.
The real reason that most merchants don’t charge surcharges is that they don’t want to lose the sale, calculating the actual interchange is wildly complex and in general they prefer cards to cash.
It’s a noticeable fee for them.
As far as I know they're also allowed to charge surcharges for non-capped cards (e.g. business/commercial cards, three-party schemes like Amex etc.)
What people forget about these fees is a credit card is cheaper to take for the merchant. The credit card is never counterfeit money. The clerk never takes money from the credit cards, nor does the manager counting it (I wasn't in retail long but I saw both). You never have a robber come in to take your credit card money. Even when all goes well, you don't pay the clerk and manager by the hour to count all the cash twice. You do have some risk of taking a stolen credit card, but overall it is cheaper for the merchant to take credit cards and that savings should be what pays for the card costs (I have no idea how to count the different costs to see if that is true)
That's 2/3s of capitalism. Hold enough MA and V -- directly or through just having enough net worth in an index -- and you'll start to see this as a feature, not a bug.
Zero, zero companies will discount the sales price when the rewards cards are gone.
There is a strong argument that discontinuing rewards cards actually helps the extremely wealthy by taking from the middle class and giving it to the Uber rich shareholders and big business owners.
The simple reason why issuers don’t make every card a signature rewards card is that merchants would revolt.
The interchange fee schedule[1] is fascinating. Dozens of categories of merchants with different rates. There is no technical reason for this. Fraud costs are borne by merchants and to some extent processors, but not the issuer banks that receive the interchange fee.
The fee schedule reflects a kind of battle for customers. It’s worth repeating that most of interchange for these higher end cards is passed back to the customer in the form of rewards. Essentially, merchants are willing to pay higher fees to support the cards that higher spending customers prefer.
But there is a limit. We can observe that not all merchants accept AmEx, which has some of the highest interchange rates. If every visa/MC card were a signature card, more merchants would push back.
[1] https://usa.visa.com/content/dam/VCOM/download/merchants/vis...
Point in case, there's an interchange fee cap of 0.3% for credit and 0.2% for debit cards in the EU. And there are entire countries moving to cashless, so obviously everyone is happy with it.
Instead you need an app installed on your phone (alipay or wechat), where you transfer cash into the app in advance. All with Chinese as the only language. (From what i heard, there now is a tourist-version of alipay in English. Last time i tried it was mostly Chinese)
See also, subway stations in Japan, which IIRC operate under a similar model.
Free transit is a terrible idea because e.g. it means tourists don't contribute and anyone who passes a tax cut will have defunded it without the actual users being able to help.
This is literally how they get around - asking those who can pay the fare to subsidize them doesn't seem like that much to ask.
https://www.merriam-webster.com/wordplay/usage-of-case-in-po...
A lot of times these regulations are pitched as helping consumers, but it’s really merchants pushing for them. You could make a similar observation about the EU regulatory fight with Apple et al right now. It’s actually Spotify fighting for it, and they have different interests than consumers.
Personally, I would disagree. I prefer no rewards and a simple landscape where I don't have to compare credit cards.
I lived in both EU and US, and didn't like the work needed to compare (and keep comparing) all the credit card offerings. In the EU, you just the credit card from your bank and don't feel like you're missing out.
(It's Finland btw, and you need a Finnish, not "anywhere-in-SEPA", bank account in order to practically function in society here with the strong online authentication service)
And for anyone getting less cash back the math is even worse, which from the same premise will be the majority of people or else the merchant's costs (and so the amount they pass on) would be even higher.
You're not picking realistic numbers. The fees range from around 1.5% to ~3%, and the 2.5%-3%+ fees are limited to ~10% of customers. An average fee of 3% doesn't make sense. Very basic napkin math would be 0.9((1.5+2.5)/2)+0.1((2.5+3)/2) = ~2.1% average. So only in the 100% passthrough case does the high end cardholder actually lose. That's not likely.
And if you look at the chart, if 740 is 10%, there are probably far fewer than 10% of transactions averaging 2.75%, so this is likely still way overestimating.
That's just the interchange fee, not what merchants are actually paying. Stripe charges a flat 2.9% + $0.30 and this is considered competitive:
For a $20 transaction, that's 4.4%, and that's for everybody, not just the people with rewards cards.
Stripe is hella expensive! But they are easy to get started with.
Competitive rates depend on the type of business, i.e. their volume and their fraud risk. The most transparent form of pricing is called “interchange plus” where it’s a flat markup on the interchange schedule. High volume merchants should be able to find a markup in the fractions of a percent.
It is my understanding that the big Stripe customers negotiate lower rates with them as they scale.
And this is why small businesses are more likely to offer cash discounts than larger ones.
If small businesses give discounts for cash it's because they're committing tax fraud, I presume.
https://www.nerdwallet.com/article/banking/business-checking...
And that's assuming you're depositing all of your revenue. If your business allows you to pay some of your suppliers in cash, you could have >50% of your revenue in cash and never pay a bank for cash handling because you're immediately spending it on business expenses rather than depositing it.
> If small businesses give discounts for cash it's because they're committing tax fraud, I presume.
I have seen governments charge a convenience fee for credit card processing. Is the government committing tax fraud?
This is not universal, and banks in different countries charge different cash collections fees. The cash collection fees are also structured, e.g. whether the daily collection is required, or every other day, or once a week.
It does not end there.
Many banks still require the business to sort collected coins into separate money bags according to the coin denomination, e.g $1 coins go into one bag, $0.50 coins go into their own bag. Coin bags have a weight limit, 2 or 3 kg, which means that the business has to weigh the money bag up before handing it over, or it will not be accepted.
Now that we are done with material things, we also have to consider all things immaterial that the cash handling entails.
Before the money bag is handed over, the collected cash has to be counted and reconciled against the cash register records on premises, otherwise it will create annoying and time consuming to fix discrepancies in the accounting system. If a staff has accidentally mislaid a note or a few coins, amounts won't reconcile and incur a cash collection delay as the armoured truck can't wait for the reconciliation to complete. Which may consequently increase the risk of leaving cash in the shop overnight with all expected consequences of a potential burglary and losing the cash.
That is just some of the peculiarities of how cash is handled, and I am not sure whether cash handling turns out to be cheaper for an average business with a substantial number of cash payments a day.
Electronic payments, on the other hand do not have any of those shortcomings, vastly reduce the margin for human errors, automate the reconciliation and accounting and reduce the risk (i.e. no money is kept in the shop overnight).
This would not seem to be relevant unless you're in one of those countries.
> Many banks still require the business to sort collected coins into separate money bags according to the coin denomination, e.g $1 coins go into one bag, $0.50 coins go into their own bag. Coin bags have a weight limit, 2 or 3 kg, which means that the business has to weigh the money bag up before handing it over, or it will not be accepted.
There are machines that sort and count coins. Coins have uniform weights, so the number of coins in a 3kg bag will always be the same and the machine's count tells you when you're at the weight limit.
Also, what kind of business are you in that you're accumulating small denomination coins? Typical behavior is the customer shows up with three $20 bills to buy something for $52.37 and then you need to disperse a $5, two $1s and some loose change. You don't bring coins to the bank, you bring them a stack of $20s and $50s and then withdraw more small denominations to make change with.
> Before the money bag is handed over, the collected cash has to be counted and reconciled against the cash register records on premises, otherwise it will create annoying and time consuming to fix discrepancies in the accounting system.
So you dump the cash into the counting machine at the end of shift. It's really not that complicated.
> If a staff has accidentally mislaid a note or a few coins, amounts won't reconcile and incur a cash collection delay as the armoured truck can't wait for the reconciliation to complete.
Why would you wait until the truck arrives to do the count? You count the money and put it in a safe. Also, why would you pay for armored car service? If you have $300,000 in annual revenue then your daily take is less than $1000.
> Which may consequently increase the risk of leaving cash in the shop overnight with all expected consequences of a potential burglary and losing the cash.
Shops typically have more value in inventory than they have in cash. Breaking into a safe to steal $1000 in cash isn't even worth the trouble when they can break the glass on the display case and walk away with $10,000 in electronics or tools or small appliances.
> Electronic payments, on the other hand do not have any of those shortcomings, vastly reduce the margin for human errors, automate the reconciliation and accounting and reduce the risk (i.e. no money is kept in the shop overnight).
And they'll be great as soon as we have a system to use them that has low transaction costs and preserves the buyer's privacy by not creating an electronic record of everything they buy tied to their government ID. Until then they can GTFO.
Cash handling is a fairly obscure process that is ridden with absurdities and edge cases that most people are oblivious of. The claim that accepting cash is cheaper for the business than taking card payments becomes false once the cash turnover exceeds a certain threshold.
> This would not seem to be relevant unless you're in one of those countries.
«Not happens in my backyard» is not helpful. Cash is handled in nearly all countries around the world, and the cash collection and handling process is more or less similar everywhere. The basics of the cash collection and accounting principles have not changed since the times of Sumerians.
> There are machines that sort and count coins. Coins have uniform weights, so the number of coins in a 3kg bag will always be the same and the machine's count tells you when you're at the weight limit.
Such machines exist in bank branches only, and the bank branches usually close before the business shuts the doors for the night. Most importantly, they do not scale. If it is a family run grocery store or an arts and craft shop, you do your banking yourself during business hours or send your eldest offpsring who is old enough to whack collected coins into a machine and bank the money.
It does not work with larger and big retailers, government agencies and alike with a substantial regular cash intake. Cash has to be collected, usually daily, and it comes with «processing» constraints, e.g. manual counting, receipting and bagging the cash.
A money bag has a weight limit that can't be exceeded, but it can be underfilled because there has been simply a smaller number of coins collected in a specific denomination. A money bag has to have a transaction receipt affixed to it stipulating the amount deposited into the bag – the bank requires it, and it also goes into an accounting system for reconcilliation. If amounts counted by the bank and by the business end up differing, there will be a reconcilliation problem in the transaction feed from the bank into the accounting system even if it is 1 cent off. This is why cash gets counted twice. If you make a mistake counting coins, you have to start over again.
> Also, what kind of business are you in that you're accumulating small denomination coins?
Any medium to large grocery chain that accepts cash for payments where by COB coins are overfilling cash registers. Schools on donation and charity days, e.g. the «gold coin donation» days, where each child brings a $1 or $2 gold coin with them. Service stations and small grocery stores in suburbs and in the country.
> Typical behavior is the customer shows up with three $20 bills to buy something for $52.37 and then you need to disperse a $5, two $1s and some loose change.
Yes, the 37 cents is the problem here. Please allow me to introduce you to the Australian (and previously in New Zealand, too) 50¢ coin that has a dodecagonal shape, has a mass of 15.55 g and a diameter of 31.5 mm, followed by the 20¢ coin with a diameter of 28.65 mm and a weight of 11.3 g. Five such 50¢ coins will burst most wallets and will warrant a purse to carry more.
Back to your example. The change for the $52.37 amount paid by $60 will entail:
1. A $5 note (almost weighless).
2. A $2 coin (6.60 g) or 2x $1 coins (2x 9.00 g == 18.0 g).
3. A 50¢ coin (15.55 g)
4. A 10¢ coin (5.65 g)
5. A 5¢ coin (2.83 g) – due to rounding rules because of 1¢ and 2¢ out of circulation.
And then you have a customer (in fact, many customers) who is fed up with lugging the metal scrap with them who will pay $7.58 in its entirety in coins (just to offload the burden), and that is how the business ends up with having to fill up money bags for coins at COB. This is ubiquitous, however, the bulk of the change still comes from a constant stream of small purchases in cash.
> Why would you wait until the truck arrives to do the count? You count the money and put it in a safe. Also, why would you pay for armored car service?
Because people still break in and moreso in low-socio areas where people with substance abuse problems will absolutely break in and take any money even if it is $5 in the safe – their conscience does not operate on the ROI level, and they take whatever they can get a hold of. And you would pay for the armoured service because most banks do not offer non-armoured services.
> Shops typically have more value in inventory than they have in cash. Breaking into a safe to steal $1000 […]
Stolen inventory has to be sold first, it can be traced (moreso so for high value inventory items), so there is no instant gain. Stealing even $10 is a net gain, the stolen note is untraceable and it is an instant net gain. Most breakins are small value ones, and the high value breakins are an entirely differen cattle of fish.
> And they'll be great as soon as we have a system to use them that has low transaction costs and preserves the buyer's privacy […]
The reason why we do not have them is because Visa and Mastercard colluded quite a while ago in their quest to eliminate cheap and low transaction fee national payments networks around the world (hello, Cirrus/Maestro, EFTPOS, Switch and similar) that were detrimental to their business. Technically, the national payment networks still do exist but are almost not seen anymore.
Initially, Visa and MC only had one product: credit cards. First, it was an exclusive product for affluent customers with a high net worth that later became a mainstream product for the masses, and the internet was a major driver for the credit cards to become mainstream.
Then Visa and MC figured that they could also tap into the cash payments and came up with the debit card product, approached national payment networks (granted, via connections in governments) to convince them first to co-brand the national payment networks with Visa/MC debit cards (a dual purpose card and the first fix is free) to later proceed to eliminate the national payment cards altogether, which has now successfully happened almost everywhere. Granted, Visa/MC debit card processesing and interchange fees are much higher than the corresponding national networks' ones and for a reason. Governments in many countries have had to intervene and cap the transaction and interchange fees in recent years.
So Visa/MC did not stop there, of course, and are now tapping into the transaction information to gain further from results of their collusion with each other, and they absolutely loathe any privacy related changes that will thwart their PII and behavioural information collection attempts.
The current trend seems to be national payment networks making a slow comeback by way of instant bank payments, payments to mobile numbers and similar ways, so Visa/MC are at odds and do not seem to have a strategy. At least not for now.
The next wave of instant/mobile payments is going to be exciting.
What you pay Stripe is for the combination of interchange fees + Stripe's own service fees. The Stripe service component of the fee would be charged regardless. Whatever markup a merchant makes for Stripe's fees are not recoverable and irrelevant to the comparison.
Identify a payment processor that a small business making e.g. $60,000/year in $20 credit card transactions can use that would charge lower fees, if you can.
We can take this from the other end though. A merchant who accepts ACH via Stripe pays 0.8%, one who accepts $20 on a credit card through Stripe pays 4.4%, so the merchant pays 3.6% more with a credit card than ACH, and 4.4% more than accepting physical cash. It doesn't matter how much of each is Stripe's profit unless there is some competitor a small business could use to process credit cards for less. Is there?
> You're also making broad oversimplified assumptions about the what merchants do in response to transaction fees.
In a competitive market, increasing every competitor's costs would cause them to pass on most/all of the costs, because the competition is keeping margins thin and their alternative is to go out of business. This is not an oversimplification, it's what actually happens in real commodity markets.
> Multiple implausible things need to be true for high end card users to be losing out on this scheme.
All that's required to happen is that the merchants are passing on more of the credit card processing fees than the amount of the rewards. Since the fees are higher than the rewards, this is not that implausible.
2. Commodity markets literally are an oversimplification.
3. You are conflating unassociated fees! See 1.
The combined fees are the cost of accepting credit card payments. The entire collection of them is avoided by accepting cash.
> Commodity markets literally are an oversimplification.
Only in the sense that everything is an oversimplification.
If OPEC cuts oil production, the price of gas goes up all over, because it's a commodity and the gas stations can't just eat the price increase. If the DRAM companies were colluding to constrain production and they get caught and have to stop, the price of DRAM goes down all over, because it's a commodity and buyers will take the lowest price. But if the price of DRAM goes down, that doesn't mean the price of iPhones go down, because iPhones are not a commodity -- only Apple makes them -- and then they don't necessarily have to lower their prices just because their costs went down.
Real competitive markets can actually behave like idealized commodity markets, or as close as makes no difference under reasonable sets of assumptions.
> You are conflating unassociated fees
If they're unassociated then how does a small business pay only the interchange fee and not the rest of them? If the answer is that you can't, they're not unassociated.
Sure sometimes, but transaction processing markets are not that simple. They are 2 sided markets, i.e. both the merchant and the merchant's customer are customers of the credit card company, who charges the merchant and the merchant customer varying fees based on how valuable the customer is to them. Then you have a merchant services layer on top of that. Then you have the variety of markets and goods that use all these services, all of whom may have different terms and fee structures with the credit card company and/or merchant services company. Merchants will pass on or absorb fees based on many factors, and possibly even varied within its goods and services. It's really complicated, and commodity markets are a gross oversimplification of how it works. Trying to model it would be a nightmare.
> If they're unassociated then how does a small business pay only the interchange fee and not the rest of them?
If interchange fees were 0 then you would still pay the other fees, which do not go to the credit card company. The fees are related, but not associated.
But now your argument is "it's complicated and there's no way to know" which isn't a strong claim that the status quo is to the advantage of the customer.
Meanwhile the portion of the fee that doesn't go directly to the cardholder is a deadweight economic loss, which, in general, is only to the advantage of the parasite extracting it and to the disadvantage of everyone else.
Notice also that the most likely alternative to "it actually harms even the 2% cash back customer" is "it's barely better than breakeven to even the 2% cash back customer and harms everybody else." Which is hardly a reason to keep it.
> If interchange fees were 0 then you would still pay the other fees, which do not go to the credit card company.
Ah, but that's the issue. You wouldn't. Because the rewards programs are a monopolistic practice.
Suppose I want to start a competing payments network and my sales pitch is I charge low fees. I'm only charging 0.05%, and provide free code that does the basic thing Stripe does, and keep the costs down by using anti-fraud tech the existing networks don't care to invest in because they're shifting the cost of fraud to the merchants and payment processors. The merchants are immediately on board if I can get cardholders. But the cardholders won't use it because no rewards programs.
Take away the rewards programs and now the network with the lowest processing costs will be the most widely accepted, and then customers want those cards because they're more widely accepted and otherwise indistinguishable.
Yeah, Stripe is a bad example. Because Stripe is a payment service provider. They take all the various fees involved with managing payments and package it up, then put a pretty bow on top with some useful services, APIs, nice marketing. But this package deal is significantly marked up. Stripe absorbs the variable interchange fees and different rewards card markups because they are charging you 3% flat (more or less) and have a healthy margin in for themselves in the middle. Stripe makes a little less when you charge a Platinum AMEX, but they make a relative ton when you charge a secured mastercard. They know that less than 10% of the transactions are these higher cost cards, so they just absorb the lower profit on those transactions.
This is a wholly different game than lower level payment processors. For example at a company I worked for about a decade ago, we stuck a deal with WorldPay which is the largest payment provider in the world. We were paying interchange fees, a small fraud fee of a few cents, and then a worldpay fee of 20-40 basis points depending on the card. We were directly charged more on a premium rewards card, but the margin on WorldPay was a few basis points above cost. But they provided nothing really in terms of services. We had to find our own payment software, terminals, and everything else. They were just the raw service.
So imagine worldpay on one side, which is just brokering with the banks and requiring us to do everything else. On the other extreme, you have Stripe which is "turnkey" and you can sign up with zero sales volume on a pretty website. One is interchange + 30 basis points, the other extreme is a flat 3%+20¢.
Stripe is a great business. But not a good example here. They essentially abstract away all the complexity in this article by charging you more money (their raw negotiated cost with banks is probably 0.8-1.2% on 90% of their transactions), they are marking up 1-2% for themselves as a service provider. That is not to vilify Stripe. They serve a valuable role and the abstraction layers (SaaS subscriptions, free trials, etc) are well worth it for a lot of companies. But keep in mind, this is a service company on top of the credit card system. So its not a great example in this discussion.
That's the problem right there. Bank accounts should be free by force of law. A bank charging depositors for literally anything is just absurd. They should be paying you, not the other way around.
You have all the costs like KYC requirements, actual overhead of tracking and managing the balances and payments. And many of the payments options are free or low cost...
If it was such money maker, surely there would be lot of competition offering zero fee bank accounts.
The banks make money of the debit & credit card payments, savings accounts, having you as a customer for mortgages and other loans.
List of 30 free checking accounts in Belgium: https://www.spaargids.be/sparen/gratis-zichtrekeningen.html (NL/FR)
I do. In fact it is free in my country. Anyone can go to literally any bank and get a free account with support for basic operations, including a checking account. I set up my GitHub Sponsors thing with a free bank account. I'm not paying the bank to get paid by GitHub.
Just turn it into a basic human right and don't look back. They should be glad we're depositing our money in there. It's just completely absurd to be charged even a fraction of a cent for the privilege of having some bankers profiting off of your money. It'd make sense to pay them if they were safekeeping it for you in their vaults. They aren't. They're lending it all out to third parties, gambling in stock markets. You name it, they're doing it. These bankers actually crash the economy now and then with their irresponsibility and they face approximately zero consequences for it.
So why should anyone pay them a cent for this "privilege"? That's just clown world levels of insane. They should be competing to see who can pay depositors the most, not charging them. Managing balances? It's the computer's job. Overhead? Literally not our problem. Just make them eat all those costs. Maybe that'll even make them start lobbying for less government bureaucracy so as to reduce their "overhead". AML/KYC is just the financial arm of global mass surveillance anyway and should not even be legal to begin with.
In Czechia banks literally are competing like that, offering free bank accounts, sometimes even with bonuses on top if you pass enough money through it. So it seems like your model of banks' financials does not work.
What I'd expect instead, based on my having taken exactly one class in economics as an undergraduate, is subtler effects that play out over time. Maybe the general growth in prices over time slows down a titch until a new equilibrium point is met. Maybe wages rise a little bit because retailers can afford to pay their employees more. Maybe life gets easier for smaller businesses that have less negotiation power than the multinational behemoths. Maybe some bank executive somewhere decides not to buy that third luxury car at the same time as ten thousand restaurant owners decide that, just today, they will treat themselves to an espresso drink from the coffee shop instead of making drip coffee at home. That kind of thing.
I think maybe that last example is most interesting to me, because it calls attention to how merchant/consumer is a false dichotomy and things are always a bit more subtle than how the news likes to make us think they are.
Like I get what you are saying, but reality, in this case, trumps theory.
As a PhD student in Econ, I am glad to see that you learned something about how to actually apply this work. Thanks for making my day after some rough grading.
Yes! People forget that the many merchants in this country are also participants in this consumer economy as well. I think one's exposure to mom&pops/small businesses informs this view greatly. One can be forgiven of seeing merchants as faceless corporations if the entire shopping experience has happened at faceless multinationals (...of whom's profits contribute to many consumer's 401ks!)
And also Merchants are in many ways the "edge compute" of the long, very complex tangle of suppliers, wholesalers, service providers, and (of course) the bank. All which entail transactions that, in isolation, looks very similar to merchant-consumer.
To veer a little off-topic, this is why my biggest economic policy dream would be banning or severely restricting ads and marketing.
The fees you describe are a few percent points. The average B2C company spends 10-15% of their budget on what is, for the most part, a zero-sum game with their competitors. Even ignoring all the aesthetics and societal benefits, imagine the boon to overall productivity.
obviously gradually, and over many years, to make the transition manageable. e.g. increase taxation on marketing expenses by a few % a year so it is less and less financially viable.
The bitter pill to swallow is that consumer preferences played a role in evolving this system. Card networks are managing a two sided market, and that means offering value to both the merchant and the consumer. Reward programs are examples of consumer value. If Visa decided to kill its “signature” interchange tier, those customers would move to MasterCard.
Many rewards programs are also predatory in the way they want to sell your data so you are targeted by advertisers for products you wouldn't buy otherwise.
Granted, some slice of it is kept by the issuers, but it turns out issuers mostly make money on interest not interchange.[1]
[1] https://www.valuepenguin.com/how-do-credit-card-companies-ma...
Meanwhile in Europe the issuers are capable of running a profitable business on only 0.3% fees (and much lower for debit). So even though you may think rewards programs are nice, they are in the end costing you more, not giving you free money.
It’s just another cost of business. Sometimes you bump up the price to account for it, sometimes you take the hit in profit in exchange for more volume hand more profit).
Very rarely do businesses do “cost plus” pricing. They usually charge what they can.
Which is why prices are sticky.
For the businesses that price based on cost alone they usually reject credit cards all together. Long ago I shopped at a computer parts store that had the best prices and they were all focused on volume - no further discounts, no credit cards, no free delivery.
Honestly no. Price is relative. The sticker price might change, but the effective price depends on the customer. Largely generalized: Low-credit customers essentially subsidize the cost for high-credit customers. Let me explain:
So let's call the current price: p.
- The cash customer pays: p
- The rewards card user pays p - 1% (because they get cashback)
- The mid-level rewards customer pays p - 2%
- The premium reward users pay p - 5%
Now let's say that reward cards are banned. No more rewards cards. Let's call the new price (after rewards cards and their associated fees are removed) as 'n'. What would happen?
Scenario A: No Change
Now I believe if you got rid of rewards cards, then n = p. Merchants wouldn't lower prices, they would just keep them the same and pocket the difference. So now everyone loses, except for cash customers who are unchanged. But everyone pays p, which is at best the same as before, and at worse 5%+ more expensive by getting rid of rewards cards.
Scenario B: Utopia, the Merchants Care
Let's make the argument you are making, which is that maybe the merchants would be nice and give us a cut of the rewards card savings. This would save them maybe 1%. I suspect slightly less on average, but let's call it 1% to be generous.
So in scenario B: n = p - 1%
Yes cash customers win! They pay 1% less than before. But the majority of customers still lose. Cash customers are the only winners. Normal rewards card users are paying the same amount they were before. The bell curve of card users are probably paying 1% more, while the high-end premium card users are paying 4%+ more than before. The majority of consumer still lose, only cash customers come out ahead.
This scenario of course assumes that merchants are generous and pass on the savings. If this did happen, you would likely notice savings for a year or two at most, due to economics and market forces.
Eventually, like I said above. The price just becomes normalized and the price is the price once again. House or car prices go up slightly at first because of more money in customer pockets, employers are less pressured to give out high raises, so maybe income raises are 0.5% on average lower that year, and 0.3% lower the next year and 0.2% lower the year following (which actually makes it look like raises are increasing YoY other than the first year). This continues and 3 years later that 1% gain is normalized into the economy and becomes the new baseline and we are back where we started.
So no, everyone does not lose with rewards cards. There are winners and losers. You could argue that lower income customers (the ones most likely to pay with cash or low-end credit cards) pay the price for the higher-income customers (the ones most likely to have 800+ credit scores with premium cards).
So, largely generalized you could argue that low-credit customers subsidize the price of goods for high-credit customers. I think that's a more accurate argument. And to be clear, I'm not stating that it's fair, just that it's accurate.
If the average over all transactions was 1%, then the cash customers must have greatly outnumbered the 2-5% reward customers. In that case, the majority of consumers aren't losing. The majority benefits or sees no change.
If a majority of customers were in the 2-5% range, then the new prices must be more than 1% cheaper, maybe even 2% cheaper. So now all the cash customers and the 1% customers benefit. And the 2% customers might see no difference.
I believe that you believe. Rewards programs are ultimately bad for consumers and merchants, but great for rent-seeking banks. As a consumer I'd prefer an EU style cap and not have to spend my time working to scrape back some of that money.
https://www.wsj.com/articles/goldman-is-looking-for-a-way-ou... https://archive.is/bkoBG
So yes, the rewards are "automatic". But what's not "automatic" is you getting the maximum possible reward percentage on your spending. For that, you often need to optimize your spending along the guardrails put up by some random card issuer. Which takes effort and time. I don't know about you, but I've got better uses for my time, so I'd prefer just not having 2-3% of the price of all products I buy to go towards obscure rewards through which I need to claw back some of those 2-3% by gaming the system. If I want to play games, I buy a computer game and play that.
That's just my personal preference. It seems like a much fairer system. I just don't like that middlemen take an unfair share, even if that middleman is me.
Absolutely not. Fuck rewards programs. I don't want to waste a single second thinking about how to optimize my card usage and spending habits to get "rewards".
https://old.reddit.com/r/CreditCards/wiki/list_of_flat_cashb...
But credit card fees exist, and will exist regardless of what you choose. Just like filing for your tax return - you can either take the money or let the bank+merchant have it. But maybe you're just too busy to be bothered by reclaiming that money, too?
The amex "I pay $500/y for a 3% card with rotating quarterly 4% and 5% categories" shit though? Yeah, I agree, ain't nobody got time for that.
If you conceptualize it as "Annual fee minus reward credits" it's far more reasonable than that. For example, Amex Platinum is $695/year, but the Walmart+ and Digital Entertainment credits are $395 combined. Compared to the next highest card in Amex's line - Gold @ $250 - this makes more sense that you might originally think.
2% is about the most you’re going to get “no strings”.
1. Apple Card which is 2% back on all Apple Pay
2. Costco Visa that does 3% on restaurants and travel
3. Amazon prime visa, 5% back on Amazon and Whole Foods. (This is just saved to my Amazon account so I don’t have to think about it.)
It’s pretty easy to remember to use the Costco card at restaurants.
For me I just sign up for a new credit card twice a year and then shift my normal spending to the new card, canceling the old one.
I usually get a week’s hotel stay for free or $1000 cash back for nothing more than taking 30 minutes twice a year to find the best card.
I might be totally off base, but this seems like it can't end well.
If you go to r/churning back a few years, people were getting 24 new cards a year. Open the card, buy $4,000 worth of gift certificates, claim the reward, close the card, repeat. It was insane the amount of effort people put into it.
Banks creates these rewards to incentivize people to open the cards. Chase did eventually put a limit of 5 cards in 24 months (a limit I have hit), but they just reject you for the card off the bat.
In terms of the credit score hit, it's minor. I've never had my score change by more than 5-10 points. I wouldn't do it if I was applying for a mortgage in the near term, but otherwise, it doesn't really change my score as 5-10 points doesn't change the band you're in.
I'm well aware of 5/24 -- I might suggest that if people are shuffling things around that much, they deal with Chase *first*, before looking at other issuers, just to be sure those applications don't get denied.
Prices has already been raised, I don't think they'll ever drop back, so that doesn't seems like a reasonable data point to dispute the price raising claim.
Credit card in EU is only for rental cars.
The lack of a high interchange in the EU has not made any positive impact on prices.
I live in Paris, France, one of the most expensive cities in the EU, and was recently on a roadtrip through the American Southwest and I disagree.
Subscriptions? Want to compare how much internet or phone bills cost in the US vs France (I pay 20€ (really 10 because it's the same provider) for unlimited phone calls, messages, internet and 30GB Internet in most of the world; and 50€ for 5Gbps down/1 up fiber which also includes a Netflix subscription and something like a hundred TV channels)? Even Netflix is more expensive in the US.
Goods? What goods? Food in restaurants is more expensive in bumfuck nowhere restaurants with Maga hat wearing clientele than mid end restaurants in Paris FFS! Clothing is way too variable to be a useful comparison (there's cheap shit and expensive luxury items in both countries).
Electronics... maybe? I compared Apple Mac Mini and Studio prices and it was pretty much the same.
Do you have anything concrete in mind or are you just imagining things?
There is one thing that is definitely less expensive in the US - fuel. But that's by policy in the EU, not due to credit card interchange fees.
Merchant fraud and merchant credit risk is borne by acquirers (although, if they went under the issuing baking is ultimately on the hook). But fraud by the cardholder and cardholder credit risk is borne by the issuer.
Yes there is the downside for businesses when the processors reverse charges but if this was big enough of a downside then people would stop accepting the card.
Yes sometimes people get their number stolen and are out the money for a while during an investigation, but again if this downside were big enough people wouldn’t use that card anymore.
Yes there are new types of fraud enabled by the technology.
The big benefit is you don’t have to have liquid cash sitting around where people can grab it and disappear.
Some merchants don’t accept some cards… they’ve decided that the cost outweighs the benefit. My grocery store fought against accepting Apple Pay and they do now. Walmart doesn’t.
One of the main benefits of credit cards over most other forms of payment is that that isn't the case. A fraudulent transaction on a credit card ties up some of your credit limit during resolution. A fraudulent debit card transaction or personal check takes money out of your account. Of course, if you wait long enough, you may have already paid the bill containing the credit card transaction and then you're in the same boat.
It would be impractical for merchants to accept some branded cards and not others. Imagine "we accept "Chase Premium One" card, but not "Chase American Airlines" card." Very confusing for consumers. If it's a whole category, like Amex, it's easier to refuse it (besides, low income consumers are unlikely to have an Amex card).
Also, even though Costco only accepts a single brand of card (used to be Amex, now Visa), despite their size and market power they accept any Visa card a customer presents.
That seems absolutely ridiculous. The FTC doesn't think this is a problem?
I didn't see any other comments actually answer the question, so I'll try my hand at this. (Caveat: I've never worked in the finance industry professionally, but I consider myself one of the Redditors mentioned in the article.)
From my layperson understanding, banks undertake not to issue more than a certain percentage of cards as "Signature Preferred" cards, and there is a minimum credit limit required to open such card accounts.
The Chase Sapphire Reserve mentioned in the article is a Visa Infinite card, and Chase requires a $10,000 credit limit to open it. Chase doesn't give $10,000 credit limits to just about anyone, and considering how flexible the US is with identity and income requirements, Chase needs to be more stringent with their underwriting and verification processes to avoid issuing such cards to people who are more likely to default.
From further research, it looks like the Visa Core Rules do offer guidelines [1], for anyone interested:
The bank would incur additional costs to satisfy the requirements to issue higher tier cards. For Visa Infinite, banks are required to offer benefits like "Priority assistance and convenience", "Exclusive privileges and rewards", and "Safety and security", and in some countries, concierge services. Visa Signature cards must have 24/7 customer support.
The PDF is a gold mine for anyone interested in learning more about the various tiers.
[1] https://usa.visa.com/content/dam/VCOM/download/about-visa/vi...
Presumably, for example, Starbucks is willing to pay higher interchange on the Chase sapphire series than on the Chase freedom series because they believe that the people carrying Chase sapphire cards spend more money. Starbucks would not be willing to pay that for less profitable customers.
The high fee for rewards cards can be justified to merchants because those are their best customers, i.e. rich people, people to travel a lot, etc.
It’s actually kind of messed up because rich people are getting a larger discount on goods than poor people who can’t get a rewards card.
It's a pretty decent outlet for having something complicated to work on. Another would be EVE Online with the added bonus that it's also an actual game. My guess is most of those people are just trying to min-max what the companies allow them, rather than trying to find an exploit in the system that prints money per spreadsheet CPU cycle.
I am suspicious that anyone can get a job in finance with only churning (or EVE) spreadsheet skills. I have rarely found "well if you can do that hobbyist but seemingly proximal activity, you can walk into a decent-paying job" to be true in tech and I suspect it's true for finance too.
Maybe the finance bros just need a leetcode-for-spreadsheets website to run their technical interviews to open the floodgates though.
This was otherwise an interesting article.
It’s even mentioned in the article that the airlines love flight miles because they can play with the redemptions to sell unused capacity for what the customer sees as real money. It also encourages loyalty.
To give you an example, a business class ticket from Seattle to Taipei with EVA (a very nice airline) is about $8000 round trip or $6000 one way. You can book it for 75,000 Aeroplan points one way. That is 1-2 credit card signups.
But Aeroplan also lets you have a stopover in the middle of a trip and lets you string together up to 6 flights and only pay based on the distance.
So you could do Seattle, do a layover in Taipei, have a stopover in Manila, stay a day in Singapore, and then land in Darwin Australia for 92,500. Which is closer to 2 credit cards, but still easily achievable in a month or two. But the value of that trip when I did something similar was closer to $12,000. Prices out at around $9000 for my test dates for the flights I did.
Now, you need to take many trips a year to do that as a single individual (which I am), but the referral streams for credit card signups are also very powerful, so get a Player 2 as it is called, and you can easily get 20-30% more on your signup bonuses and each person can also do the bonus.
And that is just business class. Once you start getting into First Class redemptions (hard to do, but the serious people manage it), the value can easily be the equivalent of a 12K for a simple round trip, yet alone stacking First Class products as many programs let you do.
Some of the pricing is also probably last minute. Points costs fall last minute, but cash prices rise. That boosts your cost per point, or CPP as we call it.
If you're specifically interested in Japan flights, I recommend checking out this podcast: https://thedailychurnpodcast.com/ep-58-how-to-book-ana-japan...
As far as general advice, many people acquire Chase UR points predominantly for Hyatt and acquire Amex MR predominantly for flights. If you're in 2 player mode then you earn points a lot faster because you can refer each other.
If you have a source of business expenses, it’s easy. With regular consumer spend it’s more challenging but doable.
We empathized time at destination. If you’re going for value, you target airline and other upgrades. Our focus being time, we usually targeted hotel redemptions. There used to be a path to “launder” AMEX points and convert to a multiple of Hilton points through airline programs.
I'm guessing (but could be wrong) that you would not actually have paid $60K for business class seats for your family had you not had points that would cover. (I have gotten really good deals using points for something I'd have paid for anyway--but it's been rare.)
If you have some specific flight that you pay for regularly, e.g. to visit family, then replacing that flight's average cost with points gives a concrete number on point value.
If you are using points to fly first class on a trip you would not be taking at all but for the point redemption, then the value gets a lot more muddled.
If you want higher ROI on spreadsheet hobby start using it for your own financial/retirement planning. Playing with numbers in that field can change outcomes by hundreds of thousands dollars.
So we already have jobs that pay well for optimizing things.
These days I understand it is probably harder to hit those numbers. When I was doing it in earnest (2014-2016, roughly), it was already regarded as "late" in the sense that issuers had started to take notice and crack down. I'd read people reminisce about the "golden days" (pre-GFC, I guess) when you could get a card with something like a 5%-for-6-months signup perk and just absolutely go to town, we're talking literal millions in manufactured spend.
I take 3-4 transcontinental business class trips a year and heavily exploit the sweet spots of airline programs. The cash equivalent price (booked well in advance, so not just last-minute flights) of my travel is probably $30,000 a year. I just Australia on points, with lots of little stopovers in a few other countries.
Whether you value it as much as $30K is debated, as some people say you should value it at what you would otherwise have been willing to pay for the experience. You also have to factor in that award availability is limited, so it is nowhere near the same as picking dates and going. Your points and availability heavily shape where you go and when, which is fine for a curious about everything person like me, but messier for those with specific needs.
I have a colleague who does the same thing, but is lucky to get $4000 a year from a similar pile of points as he wants to use them all for his family to Hawaii for Christmas and he is just flying economy. The variably in value is tremendous.
Plenty of cards can also be churned for straight up cash. There are people pulling 5-8K in cash off of them a year.
The other advantage is that is all after tax. You don't pay tax on any of this.
> attention you need to pay to sniff out good deals
That is why you join a community like /r/churning. There are also lots of Facebook groups as well. Crowdsource the work!
> not hurt your credit score
Depends on whether you need it. Also, I found that my credit score became pretty stable after I got some 15 cards. New applications change it by 10-20 points now.
> remember how to balance charges across cards.
I personally got the hang of this rather quickly, as you just have 3-4 at any given time (the rest are "sock drawered" until it is time to cancel) and pull out the appropriate one. Some put post-it notes on what each card is good for.
As for the billing, companies send digital reminders now.
When I first applied for my CSR card many years ago, I was rejected by the web app. But a perusal of /r/churning led me to some powerful phone numbers where human customer service reps can override such rejections.
If so, doesn't that cause the issue where your points are all scattered across various different credit companies?
As another commenter noted, this article doesn’t pull out clearly how this whole credit card reward scheme actually works. The Acquired episode does, by the end.
It works like this: the ‘luxury’ credit card providers, partnering with Visa, take money away from merchants in order to extract profit for themselves while keeping the credit card consumers happy. The merchants are pissed about this, and regularly make lawsuits to regulate interchange. The money extracted by the credit card companies and Visa causes merchants to raise prices for everyone regardless of whether they have a rewards card or use a credit card at all.
This creates in effect a massive money transfer from the poor, who do not use rewards cards, to the rich consumers who do. The Acquired podcast provides specific numbers on just how much worse off poor consumers are given this system, and how much the richest consumers benefit.
I come from Australia where interchange fee regulation tamps down on the kind of credit card mania and fetishism seen in the USA.
Suppose the reward is 2% so someone is paying 98% of the listed price. Now if everyone was a rewards customer the price just moves to 102.04$ from 100$, in effect nothing changes. However not everyone uses a rewards card, and the prices stay the same.
Net result with an even split would be that 98% discount applies to 101$ and Bob an unrelated customer is stuck paying the extra 1% to give the reward customer their 1% savings.
However, it’s not split 50/50 so rewards cards sometimes have more victims funding their rewards and other times few victims and it’s effectively just a marketing gimmick.
But a 4% card that gives you credit card points doesn’t cost the card issuer 4%.
If you transfer 4 Amex points for 4 Delta Skymiles. Amex isn’t paying Delta 1 cents per Skymile.
On the other hand, you can then replace a $1 you would spend on Delta with 0.86 Skymiles (ie 1 Skymile is worth 1.4 cents). It’s also not costing Delta 1.4 cents to fly you.
If you use your credit card points to buy on a credit card run travel portal, the credit card company is getting a kickback from airlines and hotels.
It’s turtles all of the way down.
Sure, plenty of cars just lie about how valuable the rewards are. That’s a completely different game.
If I transfer those same points to Flying Blue/KLM (a Netherlands airline), since they are a partner with Delta, I can buy a domestic round trip flight in the US on Delta through them where the cash price to fly into my parents small regional airport is $508.
The price in points is 17K. That makes those same 4 points worth 12% back per dollar.
This isn’t about “only the rich get value”. It’s about the well informed.
4 points per dollar is what you get back on the Amex Gold for groceries.
You could never buy points as cheaply as Amex. For all intents and purposes, credit card users are collectively buying miles in bulk
It’s about people who can pay off the card every month not the rich. These cars charge high interest rates which can very quickly offset any benefit unless you have the resources to never use them as debt. Ie the capacity to have a ~months worth of spending in unused credit.
> You could never buy points as cheaply as Amex. For all intents and purposes, credit card users are collectively buying miles in bulk.
Many customers get discounts on ticket prices that don’t apply when using air miles. It’s another form of price discrimination designed to maximize profits not specifically a discount for bulk purchase.
“Awards are subject to capacity controls. Awards may require higher prices depending on routing rules and restrictions. Exceptions to these rules may require additional mileage or taxes and fees. Travel to all destinations within region may not be available at lowest price. …
Award seats may be limited and not available on all Delta Connection flights.” etc https://www.delta.com/us/en/skymiles/how-to-use-miles/travel...
But award bookings through partners have their own hoops. But I don’t have to “fly J to Bali” - a popular meme in r/awardtravel. I look for economy flights.
The flight I was talking about to see my parents is to an airport with only three commercial flights a day inbound and two outbound. All to and from Atlanta. So of course it is over priced
I don’t know about the airline you mentioned, but as an example of what I am referring to Delta offers Active Military members a discount on flights that simply isn’t going to show up for you. https://www.delta.com/us/en/special-circumstances/military-t...
That’s price discrimination which has nothing to do with bulk purchases. It’s simply another leaver they can optimize so most seats are used while they also maximize what they charge for those seats.
Saying it the ticket is worth X, when that’s literally the highest price they charge anyone is misleading.
I don’t have a choice if I want to fly to see my parents since that’s the only airline that services their airport.
But a more popular route I take is from Orlando (MCO) my current home to my former home Atlanta - a Delta hub. Those flights range from $100 to $175 one way. Again by booking Delta flights through Virgin (a UK airline) is 7500 points making the Amex points worth 2 cents each. If you want to fly direct to or from Atlanta, you’re going to fly Delta more than likely.
Just like you can book a Virgin airlines route via Delta.
Getting tickets for a flight on any airline uses a booking system.
https://en.wikipedia.org/wiki/Global_distribution_system (optional) vs
https://en.wikipedia.org/wiki/Airline_reservations_system (required)
Delta offers two types of inventory - regular inventory and “award” inventory. Award inventory is only available to alliance partners, is very limited and you can only pay with points.
You can’t even buy the flight at that price with Delta Skymiles.
For instance, I can’t pay cash even if I wanted to and get a discounted price for the flight in question via KLM. I have to use points. Those prices aren’t available via online booking systems.
Every ticket goes through a booking system. Not every ticked goes through an online booking system.
> I can’t pay cash …
Again I agree, you don’t have the option. That doesn’t mean nobody can get discounts. KLM also offers a military discount etc.
Or just look at their fees, a classic case of price discrimination:
Cancel a ticket through the online refund request form USD 30
Change or cancel your ticket via phone reservations free
Change a ticket via an airport ticket office USD 25
The airline industry charges people setting next to each other wildly different rates.
PS: Jumping through airline miles points is worth X$ to you, they aren’t worth X$ to everyone.
There has been nothing stopping US merchants from offering cash and/or debit card payers a discount since Oct 2011.
https://www.ftc.gov/business-guidance/resources/new-rules-el...
Most merchants are betting that people paying with credit cards are willing to buy sufficiently more or buy at sufficiently higher prices such that credit card transaction costs are more than offset.
That is the only reason why a cash/debit card discount would not be advertised.
Edit to respond to below:
I don’t buy that. Merchants of all types already engage in myriad types of discounts and promotions to price discriminate customers all the time.
A simple sign saying “x% discount for paying cash/debit” is of negligible complexity.
(It's usually more like 3% delta which I almost get in cashback anyway but still annoying.)
I have no numbers, so it could be totally off-base, but it feels not-impossible that it costs a percentage or two to process all your cash anyway, so the difference between cash & credit cards isn't actually that big. It's just that the interchange fees show up as one big chunk whereas the cash processing is lots of little bites, or even accounting for things that didn't happen (like skimming).
I guess this only applies if you're legitimately reporting all your cash take, if the business itself is skimming for tax reasons then the savings on cash would be substantial.
Not just skimming, but lost business for cash-only establishments is huge. The amount probably varies by type of business, but I sometimes go to a bar that's cash-only and I've seen so many people walk in, try to order, and walk out and never come back once they find out it's cash-only. Even groups of 15-20 people. That's a significant cost (in lost revenue) even if it doesn't directly show up as a line item.
Even I admit to choosing a different place from time to time I think "I could go to the cash only bar, but then I'd have to go to the ATM first or I could just go to the other place that doesn't require an extra trip to the ATM. I should probably just go to the ATM so I could have some cash on me anyways, but traffic is heavy or it's cold/rainy/dark/late."
I bought an ATM and don't charge a fee to use it. It's right next to the bar.
We still get some walkouts, but not very often. We have a strong reputation.
I'm always a little confused on exactly HOW this plays out. I could see someone with terrible credit being denied, but most cash back cards I use are hardly gated / limited to "rich folks only".
I feel like the reasons / the way it plays out are more complex than the results. And really if someone is poor, struggling to pay their card, that's a larger issue than the type of card they use.
I'm just not sure reward cards = "This creates in effect a massive money transfer from the poor" as simply as stated.
This is a very simplified view. Cash handling is not free. Fraud levels with cash are different. Overall attractiveness of a small but cash-only business is different.
Cash handling isn't free, but a digital transfer that doesn't have rewards is obviously cheaper than a credit card.
There's even a proposal to drop these fees even lower: https://www.reuters.com/markets/us/us-fed-set-revise-debit-c...
Europe has similar laws capping the fees on both credit cards and debit cards. We could do the same and it would work better for everyone except the credit card companies.
[1] https://usa.visa.com/content/dam/VCOM/download/merchants/vis...
But that reads like they're talking about the net effect measuring across FICO scores, but it's not clear that they're talking about the overall cause / if this is a case where some of the poor could in fact choose to use these cards.
Being poor is complex, just not having time (two jobs, etc) often means they don't have time for a lot of things, including shopping for credit cards. I wonder if things like THAT are playing a part.
I don't disagree with the math on the end result, I do think the reason is larger than just say rewards cards, and has to be approached careful.
>>>The money extracted by the credit card companies and Visa causes merchants to raise prices for everyone regardless of whether they have a rewards card or use a credit card at all.
>>>This creates in effect a massive money transfer from the poor, who do not use rewards cards, to the rich consumers who do.
If say the poor used these cards at a higher volume, wouldn't they then to be passing on the changes to other poor?
Compared to another individual that can put all their purchases on a rewards card and pay off their balance every month.
The pricing point isn’t that complicated either. Nearly every business accepts credit card and can’t avoid the higher credit card fees that pay out to reward programs.
In the abstract:
> sophisticated individuals profit from reward credit cards at the expense of na¨ıve consumers.
Then in the study:
> Next, we study whether the redistribution across FICO scores is driven by differences in cardholders’ income, suggesting a transfer from poor to rich consumers. Indeed, We adopt the following terminology: “Reward cards” are credit cards that earn either cash back, miles, or points; “classic cards” are credit cards that are do not earn any form of rewards. credit card rewards are often framed as a “reverse Robin Hood” mechanism in which the poor subsidize the rich. Our results, however, show that this explanation is at best incomplete. [...] 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.
While the study points out that high income, high FICO consumers benefit at the expense of high income low FICO consumers, which strictly controls for income as opposed to wealth, ultimately the study concludes what OP said it does, that reward programs transfer wealth from the poor to the rich, and I quote:
>Credit card rewards transfer income from less to more educated, from poorer to richer, and from high- to low minority areas, thereby widening existing spatial disparities.
"We find a redistribution from low- to high-FICO consumers regardless of income."
Poor people have low FICO scores. There are also high-income people with poor FICO scores. Both are involved.
"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."
The high-income people have much more money, thus have more to contribute to the pool of money going to high-income high-FICO people.
But poor people, who already don't have much money, are also contributing to this pool of money going to high-income high FICO people. And more to the point, it impacts poor people much more, because... they're poor.
So it's not completely the opposite, it's just inaccurate. The poor are subsidizing the rich, and the rich are subsidizing the rich. The difference is, there is a much larger effect on the poor, because... they're poor. They have less access to credit and that lack of access affects them more. A small amount of money lost has a larger impact.
In addition to all this, people of color also have lower FICO scores, so not only is it a burden on the poor, it's a burden on people of color (and the young in general). https://finmasters.com/average-credit-score/ https://www.cnbc.com/2021/01/28/black-and-hispanic-americans...
It seems like the proposal is to take away rewards for everyone because there's a group of people that can't help themselves. Why not just be more strict about who gets a credit card.
The behavior being observed is merchants increasing their prices for all consumers to accommodate a subset of consumers who use reward cards, where reward cards end up being a form of income for their holders.
The distribution of consumers who gain the most income from reward cards are those who are more wealthy. The distribution of consumers who lose the most money as a consequence of having to pay higher prices due to said reward cards are the less wealthy. The end result is a transfer of wealth from those less wealthy to those more wealthy.
That is an observation, not a proposal or a judgement. You are welcome to make a judgement or put forth a proposal from that observation but the study itself did not do so.
The poor need credit cards. Having a credit card is one major way to improve your FICO.
Credit is a critical part of everything from obtaining housing, to lower rates on auto and home loans and insurance, to the ability to pay for necessary life emergencies when you don't have savings (and the poor don't have savings). Having bad credit can even make it difficult to get a bank account, which you'd need for a debit card. People who don't have credit cards often resort to check-cashing stores to cover their expenses, which are predatory and charge exorbitant fees, keeping the poor poor.
> there's a group of people that can't help themselves
I don't know how to say this in a way that will make sense to you, but this idea that "they can't help themselves" or are just "irresponsible", and that's what led to their situation, is wrong. And the idea that they shouldn't get some form of assistance is wrong. It's kind of complicated, and I would need to be typing here for an hour to begin to explain it... There are tens of millions of people in the US alone that struggle every day because of a credit history that they are often not in control of, and predatory businesses that make it impossible to climb out of debt, and basic human livelihood restrictions that are tied to FICO. I really can't stress enough how important it is for the poor to be able to get access to credit and increase their score. Hopefully someone here can suggest a book or article that you can read that will explain it in depth.
It looks like a number of decent rewards cards require a credit score over 670.
(update: 4.5% of US households are unbanked; these are mostly from the lower quantile) https://www.fdic.gov/analysis/household-survey/index.html
There's also everything required for the credit card company to operate, down to building leases, datacenters, hardware, employee pay. All of that is vastly funded by late payment fees and interest, which are almost exclusively funded by the poor.
At one time I wanted to start an "ice bucket challenge" to start a snowball of rich people donating 100% of their credit card rewards to the poor in some capacity. I'd happily join if I could get the snowball going, but unfortunately, if the snowball doesn't happen with a bunch of multi-millionaires I'll just end up indirectly giving my money (not poor, not rich) to the actually rich and I don't want that either.
https://www.valuepenguin.com/how-do-credit-card-companies-ma...
> Rich people can donate to poor people regardless of the credit card situation.
While this is true my idea was more of a wide scale protest or behavioral art to make people aware of how bad the credit card system is for the poor. I know it isn't going to solve poverty but it might raise awareness about something not everyone knows about.
This is why you are most likely to see credit card surcharges for tax payments, court costs, and other non-discretionary charges. Anything that either is optional to pay, or isn't but they really want you to pay now (ex. a debt collector) has every incentive to subsidize the card acceptance fee as it will increase their sales.
This will vary depending on where you are.
Most retailers here in New Zealand pass the fee on to customers. Even paywave gets the percentage fee.
This is how Doordash works on the restaurant side, they can't charge you the customer 20-30% of gross on orders, everyone would stop ordering. So mostly they just have to eat it or lose those sales. Some places choose to lose, some choose to raise prices on DD if they can but mostly they eat it.
Which can lead to seemingly ludicrous results somethings. I paid a "convenience" fee for parking the other night because presumably collecting a bunch of quarters from a meter was cheaper for the municipality than getting a bit less money transferred from the parking app people?
This is why your grocery store partners with an ATM network to let you take out extra cash at the POS. As long as you're paying the fee, they'll do whatever they can to trade you cash for a digital deposit into their bank account.
Card payments made the price of the service more expensive for all customers because we weren't allowed to have a card payment fee.
You accepted multiple currencies without taking a spread on Forex? How did you convert it for free? Not even actual forex businesses can do that...
Actual forex businesses convert currency at negative cost. That's what it means to be a forex business.
Used the EUR in Cuba when a buyer mailed me cash.
However nothing beats that sweet sweet tax evasion that cash allows.
From talking to other business owners, though, the lure of "tax free" cash is definitely a factor.
BTW. Good luck catching that. In SF, that is how many businesses work. You want to use a card? Ok, one extra dollar. Nothing enrages visa more, but, the merchant should have this right.
So you can have a cash discount but it's okay to say no credit card fees. These are the "junk fees" that came up in political discourse in the last year or two. Credit card vendors shouldn't be allowed to restrict cash discounts. I know this isn't libertarian, but I want it to be a pre-negotiated thing simply for the sake of keeping cash alive, like how minimum wage is a pre-negotiated wage to avoid the overhead of getting the whole nation into a labor union.
That's why I like free shipping on Amazon. I know it's not literally free, I just want to see what you're _actually_ gonna charge me, it cuts off an avenue of bullshit.
This would actively drive interchange fees lower when consumers have to choose to pay 3% on an Amex swipe vs 1.6% no frills MasterCard swipe, or .05% for a debit swipe.
The reasons there is no downward pressure today is because there is because there is no transparency, and no incentive for consumers to choose a lower cost card.
Convenience Fee.
https://portal.ct.gov/DCP/Legal/Credit-Card-Surcharge
>Connecticut law prohibits a business from charging a customer a surcharge for using one payment type (usually credit card) over another payment type (usually cash). However, the law does allow a business to offer a discount if a customer chooses to use one type of payment (e.g., cash) over another type of payment (e.g., credit card). Receiving the discount is not the same as adding a surcharge. As long as the discount policy is clearly written and presented to the customer and the final receipt shows a discount, it complies with Connecticut law
The routine was to show up at the store with your paycheck, cash it, pay for your groceries, and keep the change.
Our store used to have the safe up front next to the bags of charcoal.
I'm pretty sure lots of people are putting these on credit and... might not ever pay it back.
She literally couldnt get cash from these people.
(US medical btw)
This is not universal.
Where I currently live, and where I lived five years ago, supermarkets charge a fee (50¢ here, 25¢ where I used to live) to take out cash at the POS, because the card transaction cost more than handling cash.
There was a lot of "Are you sure?" prompts on the screen because the supermarkets (both big chains) didn't want the burden of the plastic transaction.
I've seen it stated a lot in technology forums that "cash is more expensive for merchants than cards," but I've never seen that spelled out from any source other than the card companies.
Every low-margin business I patronize, from the garden centers, to the convenience stores, to the antique stores all either offer a discount for cash, or charge a fee to use plastic.
Just last week, a woman who's run an antiques store for 35 years told me that card fees were going to put her out of business, and she practically begged me to go down the street to my bank to get cash for my purchase.
Car-centric as it is, gas prices are arguably the commodity that US consumers are most price sensitive to (and which is also most commonly evoked in politics). So this shows that consumers would prefer to discriminate between card and no-card purchases if given the option, except that the vast majority of retail outlets do not give them that option.
This creates in effect a massive money transfer from the poor, who do not use rewards cards, to the rich consumers who do.
Not quite. Credit card companies obligate merchants to charge the same prices regardless of whether you pay with a card, but merchants frequently don't honor that obligation. And there are also merchants who only take cash.
The poorest customers are likely to patronize these merchants. They're also likely to be given discounts that aren't card-related; the whole idea of price discrimination is that, because impoverished customers have low willingness to pay, you charge them less.
In a voluntary system, money transfers are always going to end up being much smaller than they looked like they would be when you thought about their effects, because people adjust their behavior to avoid them.
No longer true in most of the US, actually.
https://www.lawpay.com/about/blog/credit-card-surcharge-rule...
I'm quoting the summary below
"We study credit card rewards as an ideal laboratory to quantify redistribution between consumers in retail financial markets. Comparing cards with and without rewards, we find that, regardless of income, sophisticated individuals profit from reward credit cards at the expense of naive consumers. To probe the underlying mechanisms, we exploit bank-initiated account limit increases at the card level and show that reward cards induce more spending, leaving naive consumers with higher unpaid balances. Naive consumers also follow a sub-optimal balance-matching heuristic when repaying their credit cards, incurring higher costs. Banks incentivize the use of reward cards by offering lower interest rates than on comparable cards without rewards. We estimate an aggregate annual redistribution of $15 billion from less to more educated, poorer to richer, and high to low minority areas, widening existing disparities."
[1]
https://www.imf.org/en/Publications/WP/Issues/2023/03/10/Who...
The paper says high-income borrowers who run balances “lose” the most in this transfer - because they spend more in absolute terms, and banks are better able to capture that through balance increase.
To quote: “our findings are inconsistent with the reverse Robinhood hypothesis”.
"Notably, our results are not driven by income, as they hold within the sub-samples of low-, middle- and high-income individuals. In particular, high-FICO high-income consumers benefit the most from reward credit cards, but they do so at the expense of low-FICO high-income consumers. While credit card rewards are often framed as a “reverse Robin Hood” mechanism in which the poor subsidize the rich, our results show that this explanation is at best incomplete."
Why is a principled objection to a paternalistic state intervening to protect dumb people from making bad decisions seen as unethical? What entitles dumb people to such protection?
The typical person is the result of ruthless selection pressures over millions or billions of years depending on how one sets their watch, a chain of the fittest, savviest, toughest, and hardest to kill members of the most dangerous life form we know about.
Most people, more than half, are unsophisticated by the definitions implied, which would make people of above average intelligence “dumb”. Dubious, to put it mildly.
A much more plausible theory, and one not laden with all the trim and tackle of a bigoted agenda, is that the typical person receives a poor education, leaving them ill-equipped to outmaneuver operations research PhDs whose entire job is to use the very efficient frontier of mechanism design, dark patterns writ large, to outfox individuals who (in the typical case) didn’t have wealthy parents or some other greased path into an advanced degree.
And the real kicker to me, as someone who has spent serious time with seriously high-profile people in technology, is that for whatever combination of reasons (one watches out for post hoc ergo propter hoc type fallacies, cause and effect are nuanced in human affairs), I’ve found that the higher someone’s station in life is, the less formidable they seem. I don’t know if power corrodes the necessity to stay sharp, or if privileged positions emphasize some other set of traits at the expense of basic competencies, but if half the big shots I’ve met started from scratch in my neighborhood, they’d have been an easy mark for the unscrupulous and/or hungry.
Being ill-served by an education system that is broken by design, and being outfoxed by fraudsters with sophisticated mathematics who all but write their own laws doesn’t make someone stupid.
The typical person is typical, and from the perspective of an atypically smart person that's dumb(er). I'm not saying I am such a person, only that they inevitably exist.
> is that the typical person receives a poor education
Uneducated, unsophisticated, and dumb are interchangeable for the purposes of this argument. People should navigate the world on their own merits, not have the state intervene on their behalf. That's the point of a free market and society.
Whether or not you're of "above average intelligence", if you use your credit card like a bank account, you deserve every bit of "wealth transfer" to people who know better that entails.
Understanding the difference between borrowing and earning doesn't require any sophisticated mathematics. Neither does understanding compounding interest payments. The only skill required is basic arithmetic. I don't see why folks feel the need to defend plainly bad decisions made by others, or advocate that they be protected from the full extent of their obvious consequences.
Understanding modern finance at any level of sophistication sufficient to even speculate about the incentives and constraints and therefore the implied utility payoff structure for anyone requires a great deal more than simple arithmetic: even your example of calculating compound interest in the most charitable interpretation of how you could have meant that, which is a stationary risk-free return discounting a zero-coupon bond with neither default nor prepayment risk (because now we’re into IO and PO strips and that’s a TED talk all by itself) is a differential equation.
Its big brother, the Black-Scholes-Merton equation, is wildly more complicated under any faux-realistic “risk neutral expectation”: that’s Ito calculus. And it’s all but useless (arguably worse than useless in times of significant pressure in repo markets among other stresses): it’s basically a security blanket that Mandelbrot had demolished conclusively in the 1970s, it was all but conclusively discredited in “interesting times” in markets the moment it was posed. And we can do VAR, and all that, I’ll make time for this.
I'm sure opinions of people in any category vary widely. I'm simply pointing out that the curse of knowledge/competence exists. If you're an unusually capable anything, the average person will be incapable by comparison.
None of the deep understanding of finance you're postulating is required to make decisions adequate to avoid being taken advantage of by a credit card. Pay your bill every month in full and you'll be a net beneficiary.
Trying to optimize your investment strategy is a full time profession. Simple, functional, strategies are readily available for unsophisticated (but not dumb) consumers (eg. buy and hold index funds). Stepping off the beaten path is always done at one's own risk, and over the proverbial corpses of your predecessors who thought they knew better. So much is true in all areas of life.
You've not addressed my main question: Why defend obviously unconsidered, unsound, and plainly bad, decisions made by others?
A trivial, tinker-toy reductio absurdium is that if someone believes they are likely to die soon (not an uncommon thing for the left behind in the 2020s, my brother drowned himself in a bathtub a few years ago under a level of crushing poverty that I would have subsidized dramatically more had I understood his situation, even being substantially tapped out myself) they have little if any incentive to worry about how a fucking credit card is going to look 20 years down the road.
I speak from a lot of lived experience here: when I got a job in my late teens sufficient to arbitrary calories, I gained 30 pounds. I was 150 at 6’4” prior.
I speak from experience on education: I have what rounds to none, and somehow discuss the nuances of complex derivatives pricing, which is tangential at best to my core expertise.
I’ve addressed your argument: you can’t easily dollarize all of the externalities, and even if you could, compound interest remains a differential equation.
I’ll kindly thank you to address the substantial points regarding mechanism design, semistable Nash equilibria, the role of open market operations in wage manipulation, the recurring socialization of losses and privatization of profits via a long discredited notion that anything in finance is long or even medium-run Gaussian distributed that I’ve raised before saying the word “dumb” again?
I’d really appreciate it.
Your straightforward example consists of someone who consciously makes a short-term decision on the basis they won't be around to deal with the consequences. In your specific example, why should we externalize their risk? Isn't it theirs to take, and aren't the consequences theirs to own? If their assumption turns out to be wrong, don't they already have more than enough to be happy about?
You're basically suggesting we subsidize the short-term thinking of people who for whatever reason are not planning for their own future? What is the moral reason that entities them so such a subsidy?
I'm also speaking from lived experience. I was born into a single parent household of very poor recent immigrants. I'm also not a financial expert, but my thesis is you don't need to be to avoid falling into obvious debt traps.
> the left behind in the 2020
I am sorry about your brother. Do you think he was not personally, individually responsible for his decisions and actions? I've not met any employer who isn't clamouring for someone that will: 1) be sober 2) show up on time 3) work hard. Anyone who can do these three things can excel. There are countless instances of careers that span from entry level to executive. This is substantiated by research that shows "grit" as the key determining factor for economic success.
> I’ll kindly thank you to address the substantial points
Your thesis is that not all individuals have the same capacity to manage risk due to systemic inequalities or immediate crises. I agree with that. I simply disagree that this is a morally unacceptable status quo. I see society as a liberal ecosystem, where organisms are continually succeeding and failing. The authority required to mount a collective response to these inequalities is too susceptible to corruption, and represents injustice in its departure from liberalism. Not to mention that well-meaning interventions by federated authority have an abysmal track record.
I wish people like you faced anything like the consequences you so gleefully dole out for others.
I’m going to forget your username. Make sure I don’t have cause to remember it.
I don’t think it takes hard hitting investigative journalism to find catastrophic fuckup after catastrophic fuckup among the elite in the last month alone.
That’s a Google search away, if your objection is made in good faith, Google it.
In general, whatever their station in life, smarter people are going to locally optimize their situation better than someone who is dumb. As a society, we tend to overemphasize social class — we assume rich people are smart and poor people are dumb.
You make good points. Many high status people are good at manipulating the levers of power and influence, just as a machinist is good with wielding his tools. Money is just a tool. Fancy clothes or whatever is just a tool. Both people may possess a poor understanding of how their tools actually work.
Truly successful people know themselves and their limits. Rich people get to hire smarter people to do stuff for them. Poor people have to find a niche to maximize their value and minimize their faults.
Many jobs require a college degree as a blunt filter for employee quality. Now that more and more people have that so it's been devalued. You now need specific majors or to come out of an elite college to get the same advantage that used to be conferred by being a college grad. Colleges talk about affordability but many colleges spend big on recruiting star professors and new facilities to compete in the rankings and alumni donations arms race.
Car traffic makes not driving dangerous so people are incentivize to drive. SUVs make driving a sedan more dangerous during crashes so people choose to buy bigger cars.
Marketers race to the bottom on ever more annoying, numerous, and louder ads. People block or mentally tune out ads which feeds back into advertisers pushing the envelope to get noticed.
If ransomware victims did not pay it would become unprofitable. But each business is rightfully concerned about mitigating its immediate business interruption.
Case studies indicate otherwise.
Dodd-Frank Act postulated what you stated, that higher fees result in higher prices for consumers ... and if you lowered the fees for the merchants, merchants would lower their prices (to pass along that savings back to the consumers).
But studies have shown otherwise, and merchants did not lower fees.
https://www.cutimes.com/2015/09/03/durbin-failing-to-lower-m...
[1] https://laweconcenter.org/resources/the-effects-of-price-con...
[1]: https://www.influencewatch.org/non-profit/international-poli...
Let's consider the opposite scenario, if Visa raises their fees do merchants keep prices where they are? I suspect not.
Interchange fees primarily fund consumer rewards programs and benefits. To become an appealing choice for consumers, any new payment method has to offer competitive benefits. Those benefits are funded by the fees.
Visa/MC/AmEx have essentially created a system whereby higher-spending customers are able to wrench more value from merchants in the form of higher fees. This is reflected in the fee schedules that slice and dice merchants by category and customers by card tier.
If you want to build a new payment system it is important to understand that it’s not just a negotiation between merchants and issuers. It’s a two-sided market where customers also leverage their spending power, directly or indirectly.
The second biggest is the missing need: Most people don't have any advantage of using crypto. They go to work, get a salary, buy/sell things and thats it.
If you don't need to buy something illegal or really believe that there is still a soviety left to take some crypto in worst case scenario, fiat is great.
There's a bunch of backend and b2b use cases to be explored but those also take time.
All this assumes the volatility issue is solved.
In a quasicapitalist utopia, crypto would be a very convenient way to enable the government to set a stock value for a universal cryptocredit and make that credit its default method of value transfer.
They could do something like pin the value to 1 credit = 1 hour of unskilled menial labor, and strictly control the supply.
With appropriate software monitoring and a lack of other methods of direct wealth transfer, it would make it impossible to not properly pay your taxes and vastly more difficult to exchange wealth without government oversight, and make money crimes vastly more difficult, from hiring criminals to do crimes to purchasing drugs and weapons for illicit purposes.
It's the perfect system for a dictatorship as well.
For example, central banks are exploring smart contracts for international payments. https://www.bis.org/press/p240403.htm
I don't travel internationally very frequently, but whenever I do my credit card handles currency exchange for me automatically. Perhaps I'm not getting the best exchange rate, but the difference is minimal enough that looking into alternatives isn't worth the hassle.
> Less sardonically, there is a lesson here: systems which intermediate between cultures are useful. Intermediating between cultures is a thing the world urgently needs and is extremely prepared to pay for.
https://www.bitsaboutmoney.com/archive/financial-systems-tak...
I don't think decentralized currency will actually solve the issues travelers have with this, at least without reproducing much of the infrastructure already in place for traditional currencies.
Why would you spend crypto when you could get more for it if you wait a week?
You wouldn't.
And people don't.
that never stopped capitalist from spending their money even if they make profit from their investment. If your logic was true, no one who has access to investment opportunities (eg. the stock market) would ever spend any money.
I think you're taking a stronger interpretation than what I wrote.
I'm not saying no one ever spent any crypto.
I'm saying that because it was deflationary, people tended to spend less than otherwise. This was so bad with bitcoin that it failed to be usable as a currency.
If my logic were true, then when interest rates were higher and people could make more money doing nothing, then people with access to investment opportunities would tend to spend less money.
Which is exactly what we are currently seeing.
You don't need to know how visa works as long as you know how to register for a cc and know how to put that card into a device when paying.
Meanwhile, for over a decade now, Litecoin has had a settlement time of 2.5 minutes. And, for tiny (sub $100) transactions, it’s totally reasonable to just look up the wallet’s holdings in an instant.
For online transactions, you can always let the customer go immediately. Just wait 3 minutes before you ship :P
And, yet people say crypto can’t work because the fees are too high (they’re lower) and the settlement times are too slow (they’re faster).
Dealing with merchant fraud is a legit call-out though. I don’t know what a good crypto solution to that is. I can imagine replacing that department with a smart contract. But, I’ve haven’t looked around to see what’s been tried.
I thought it was because transactions take minutes instead of seconds.
In practice, seconds after a transaction has been signed and broadcast, it is already very unlikely to double-spend. Miner incentives are such that the first-seen transaction is the most likely to be used. A delay of a couple seconds is sufficient to account for network-propagation lag.
You wouldn't do this for high-value transactions, but there's some threshold where real-world risk is lower than the convenience of a fast transaction, and that threshold is reasonably high.
If this were true you would expect crypto to have taken off in countries with low interchange rates. Europe, for example, has far less of a rewards and points culture for payment, and (compared to the US) much lower interchange.
Crypto never took off as a replacement for credit cards for many reasons - the biggest coins out there are simply too volatile to be usable as a currency, they lack the consumer protections you get paying with a credit card, and they’re simply too complex for an average person to understand.
However, even if it were legal, I don’t think this would counter my claim. I’m merely saying that you’d need to match existing rewards schemes in markets where they are established. Introducing them into a new market is an entirely different matter. The system we have today evolved through many decades of negotiation and deal making among merchants, issuers and card networks.
You’re right about consumer protections —- it would be very expensive for a crypto-based system to provide those without an intermediary that can adjudicate and reverse transactions (chargebacks).
Blockchain is a distributed and complicated one.
While looking up a representative link for that, I also saw that it appears Venmo is in that game, too: https://www.cryptovantage.com/best-crypto-credit-cards/venmo...
I always thought the big problem with crypto was that the fees were atrocious for any small transaction.
And the fees only get higher as the network gets busier. You can choose to have a send some money with a small fee, but the miners will never confirm your transaction, as each block is limited.
It's why, though, there are a bunch of payments companies that have popped up in places throughout Asia that aren't competing with rewards systems off the back of interchange.
And I already addressed Apple, and I certainly don't trust Google. Like, sure, I'd use Apple Pay, except the entire concept of their ecosystem has no place for someone like me. Apple chooses not to support Android, not the other way around. Not least of which, I'm not at all impressed at Apple's ability to run financial products, or manage online security.
Imagine my surprise upon finding out that the only way to use 2FA with an Apple ID is a phone number. Stunning.
> Trusted devices are the basis of Apple 2FA, not a phone number.
I own a SINGLE Apple device, a Macbook. The only option for 2FA is a phone number. And again, Apple Pay is not available to me because Apple can't be bothered to add Android support.
I came here saying crypto's completely device agnostic, app agnostic, open protocol experience of "scan a barcode, hit pay, wait 2 minutes" was ideal.
You have suggested an alternative that is proprietary, unavailable to most users of the world, and requires me trusting a company that again, can't offer me real two-factor auth protection for my Apple ID.
I'm sorry, it's not a serious recommendation.
EDIT1: To produce this screenshot, I had to login twice, once after another, in different dialog boxes, both of which let me edit my input after submitting the contents. And then the entire process stopped. Then I hit "Turn On" again and ... it's just spinning. I'm sorry, I can't take any of this serious.
https://files.catbox.moe/p6kwv5.png
EDIT2: Oh and after taking that screenshot, writing this prose, and returning, now it wants my password, again. And now it's just an empty dialog:
https://files.catbox.moe/e4qi0a.png
EDIT3: And again, now it's loaded and asked me my security questions. And finally:
https://files.catbox.moe/eolfeu.png
No, no, no, a million times absolutely not.
The only way to cost in cc fees is to always assume the highest tier plus one time fees. This is then built into the retail cost of everything
If you pay with a lower fee card, you subsidize the higher fee customers
If you pay cash, debit, or check and don’t say anything - you subsidize the higher fee credit card payers
If you ask me, I’ll give you 2% discount for cash or check. I’ve built in 3%+
Visa debit is the biggest scam going, they’ve found a way to charge 2.5% to take debit cards. In Canada forever it’s been 0.10 a transaction for debit for higher volume clients
Pretty much - you need to get a high reward cc and use it for all your purchases and pay it off every month. If not, and you don’t ask for a discount, you subsidize the people who do.
Example - last month I was “funded” $130,681.33 this includes debit cards which I pay a low flat rate for (but this is changing)
On $130,681.33 I paid $2,433.51 in service charges or 1.86% . Plus the liability of the possibility of a charge back, also I do not accept Amex.
- I think the simple answer to nkurz's point on why don't all cards charge the maximum in interchange is - it's just market forces. It's not worth enough money to long-term piss off the bigger merchants (i.e. Amazon). When you have a 30% APR card non-rewards card, the 3% interchange is small beans. Also the acquiring bank would probably want a bigger piece of the pie if it were more widespread
- Credit Card economics is radically different across different countries (for all sorts of reasons). So for example, a third of card users in the US explicitly seek the rewards and another third have it for the various protections/security vs. debit cards. In the UK only 12% seek rewards, with the two biggest use cases being to spread costs of big transactions or to improve their credit score. (so for that reason it's sort of hard to have a global view of this problem)
I have noticed some strange behavior with some cards at certain supermarkets. That may be them trying to fight back against the US interchange fees, but there are workarounds.
> ... the capping of interchange fees should result in lower fees charged by banks to retailers for processing card payments.
If users of US cards still get 5% rewards when using their cards in the EU, I'm curious about who pays for the 4.7% shortfall.
[0] https://ec.europa.eu/commission/presscorner/detail/en/MEMO_1...
Funnily I've gotten notified a couple of times by Amex, as per ECB regulations, that the course they've used is significantly worse than the official one.
Even in the US, this is not true. The Blue Cash Preferred and Everyday Preferred cards have foreign transaction fees, as does the Business Green card.
Practically all non-US-issued Amex cards have foreign transaction fees as well. The US card market seems to be very competitive on that front.
Amex Plat did not charge foreign fee, but exchange rate is 1% less favorable according xe.com
Chase Sapphire Reserve also no fees, exchange rate is 0.3% different from xe.com
Don't get me wrong, there are tons of options for cheap or downright free foreign exchange transactions (such as Revolut, N26, Fortuneo, BoursoBank just in France). It's Amex in particular that are borderline scamming their French customers on foreign transactions.
The number of people who can effectively use/abuse this consistently is probably pretty low.
Yes using the card as designed and promoted I don't know how I live with myself.
Even just using the word "use," US cards are designed for and promoted to people who live in the US, and are likely to do most (if not all) of their shopping in the US. Absolutely, there's nothing morally wrong with getting a US card and using it a bunch in the EU, but the point is that the number of people doing that is low enough for the banks/card companies to just subsidize the fees.
Credit cards, from nearly their inception, have been widely promoted to be used when travelling. The cards could charge for foreign transactions but they choose not to, obviously to promote use overseas.
They could simply specify that the rewards only apply to US purchases, yet they don't.
They could notice that I've been committing this "abuse" for TEN YEARS and cut me off, yet they don't. They keep on upgrading me instead.
Sure, many of them might be "promoted" for travel (never mind you not providing any citations or statistics for this statement). The vast majority of people probably can't afford the money or vacation time to travel internationally more than once, maybe twice per year (at least in the United States, where most destinations require going overseas).
Nobody is attacking you, no need to take this so personally. The point was that the reason they still give you the rewards that the EU's lower processing fees can't fund is possibly because they're making enough extra from the customers not doing what you're doing to fund it. That's all.
FX is expensive in general regardless of the way you do it.
It's not worth enough money to long-term piss off the bigger merchants (i.e. Amazon)
After I bought my current home, I put a bunch of expenses on the card. I didn't realize I had gone over the limit until I got a letter in the mail telling me that they automatically increased the limit. They keep increasing it every year or two, so at this point I could put a mid range car on the card.
All that said, I would prefer if rewards cards in general were banned and everything was just 2% cheaper. The whole concept feels a little dirty to me, like I'm taking a bribe to use a specific form of payment. But, at the same time, it doesn't make sense not to in the current market.
It's not a life changing amount but it's free money.
It carries an annual fee of $95, but the 6% back on groceries (on your first $6000/yr) and 3% on gas add up pretty quickly.
For Amazon and WFM, I use the Amazon (Chase) card. Since WFM has replaced or outlived most of the grocery stores near me, this is my other carry card, and it doubles as a backup card if the Fidelity 2% has a problem.
I almost added a Target 5% store card recently, because being a cheap bastid overrides being a minimalist bastid. But I abandoned the card application form, when something about it seemed a little too invasive. So I'll keep doing the Fidelity 2% card when I shop at Target, and that makes Target prices a little less competitive.
Yeah, that's the other reason I like it: I rarely have to think about it. Both paying off the monthly balance and cashing out the rewards are fully automated.
All I have to remember to do is save a copy of the annual summaries at least once every 3 years, because they don't let you go back farther than that.
I try to keep most of my finances "on rails" like that where bills, savings, etc. just happen automatically.
Would you prefer that reality literally, or just if it was effectively like that? Literally doing that seems way worse than payment methods competing for your business with rewards.
I want payment methods to compete by offering better service for lower fees, not by bribing consumers with rewards (and explicitly charging the businesses higher fees to pay for those bribes).
For instance, this is somehow only two sentences.
It is a fee, ultimately paid by the card-accepting business, which gets sliced up between various parties in the credit card ecosystem to incentivize them to put their logos in the wallets and on the phones of well-heeled customers and increase the amount they spend and the frequency with which they spend it. (In industry, we sometimes distinguish interchange—which mostly goes to the issuing bank—and scheme fees—which mostly go to the credit card brand itself—but as interchange is much larger, let’s just call them both interchange for simplicity.)They’re not essays you can skim. But I enjoy a word journey.
It's very long so I'll just quote a small bit specifically about the Investor Relations:
> If you cannot route letters to the legal department, go as high up as required. Pro-tip: virtually every major US company has a department called Investor Relations which is trivially discoverable, very well-funded, publicly routable, and very bored during 80% of the year. You can excuse any letter to Investor Relations with: "I am a shareholder in BigBank. I was therefore profoundly displeased when I learned…"
> What’s a well-paid bored professional in Investor Relations going to do with your account information? Nothing? Nothing is a great way to get fired. No, they’re going to open up their internal phone tree or ticketing system and say “I have a letter from an investor which alleges an identity theft issue. Which group handles that? Your department? Great; handle it and call me when you’re done. Do you want it by fax, email, or FedEx?”
For this to work though you've got to present like your position in the stock is in the millions of dollars, even if it's actually like $100. The author of the article has been in the financial industry for a very long time, and has also spent a long time as a Japanese salaryman, so he can definitely pull that off.
Luxury retail isn’t often worth it, but when it is it comes with lifetime services.
In a world where these high-exchange-fee / high-reward cards were outlawed, merchants would pay less in aggregate in fees. But almost surely they’d lose out net from a drop in overall consumer spending.
That affiliate programs inspire gamification for consumers to optimize their spending patterns to “win prizes” seems like a neat bit of competitive market pressure: It’s obviously a win for all involved or they wouldn’t be so popular.
Are you talking about the cash back? Isn't that just a shell game? If the consumer is getting 2% cashback, but the merchant is charging consumers 2% more to pay for it as well, how is it "feeding back to the consumer"?
One of the issues is that the cash back rate is not evenly distributed across the buying population.
The disadvantage to the customer is increased spending because of how easy it is, which probably far outweighs the 2%.
I would hope the tarnish on your immortal soul and realization that you're profiting directly off other's misery would be a bigger downside.
Why is it obvious that it's "a win for all involved", as opposed to some big powerful financial companies taking advantage of a bunch of less organized merchants while providing benefit to some subset of cardholders? Obviously the merchants benefit overall from accepting credit cards, but I don't think it's anywhere near obvious that they benefit from funding the rewards programs. If there was any way for them to opt out, I feel a lot of them would. And it's hard to see how the non-rewards cards customers are benefitting from the current system---would any of them choose the current system if given a choice?
I definitely agree that someone is winning from the current system, but I don't think it's obvious that it's everyone.
If that were not the case I would be happy and let the market pick the preferred way. My 2c.
Definitely not a win for consumers, who in aggregate lose out. The margins to make the system work are built into the prices you pay at the checkout.
Other markets like Europe and Australia capped interchange and made it cheaper for retailers and consumers.
This forced banks to redesign their products/rewards/pricing to give consumers a real choice of whether to play or not.
Some consumers decide to fund more of the rewards cost themselves (via cards with annual fees). Some keep high rewards by using new bank-issued Amex (but pay surcharges at the checkout). Some keep much of the gains for themselves (via no rewards/low cost cards, with lower costs for the retailer).
So now, consumers who don't want to pay the overhead of interchange-funded rewards for everyone else don't have to.
(Disclosure: I ran portfolio management/cross sell/profitability/customer retention for an Australian credit card issuer during the period that interchange there was capped and progressively forced down. Later, I was the Netherlands representative on one of the card schemes' European advisory committee.)
While not wrong don't forget that cash also has costs that are built into the system - there are a number of theft ways to lose money with cash that don't apply to cards. Even when everyone is honest there is the time cost to count all that cash. Somewhere between the two is mistakes in counting.
Prices are a function of supply and demand. Higher interchange fees hit supply (costs more to produce and sell the same quantity of goods) but they also spur demand, or no merchant would accept the cards with these fees. And indeed some large merchants have (for example) excluded American Express or Discover from their available payment methods for just this reason.
It's not a win for consumers having to spend their time learning the "game" in order to not be left behind and essentially lose money.
I use basically a single credit card with a simple, universal cash-back scheme. I do some extremely simple and low-touch investing on the side. I choose not to waste my time attempting to do a billion other things that everyone else is doing to extract more value from the system, but I'm well aware that I'm probably coming out behind a lot of people as a result. That's not a "win," it's a race to the bottom that I've partially conceded.
Also, suppose Stripe did offer a low / zero transaction cost card. What's the incentive for me (a customer) to get it? It isn't any better than the other no-monthly-fee CCs, and is strictly inferior to a rewards card.
For merchants, yes, they are incentivized to accept Stripe's new card. But they can't stop accepting the other ones until Stripe has a significant share of the transactions. And may not be able to do so even then.
And meanwhile Stripe is eating the cost of running this new zero fee card system, which effectively takes away money that they could invest in their own business.
Sounds like a lose, lose, lose all around.
The real solution is to have a law that caps the CC transaction fee. Or allow merchants to add a surcharge for rewards CCs.
I think it would be healthy to be able to have options with near zero cost but I guess this would only happen with strong regulations, which seems almost impossible in this space (in the US)
The bank? Keeping money in your account allows the bank to take out credit. Providing digital payments sounds like a reasonable service for a bank to provide. As well as fraud prevention. This is how it works in Europe, most people have debit cards. The insanity is having to take out a loan you don’t need to prove that you’re responsible.
It has to be minted and circulated, we see it as "free" but in practice the gov foots the bill. And, for cards it would be issuers footing the bill.
Then moving cash isn't free either. Merchants handling a lot of cash also pay to get their cash moved, processed, exchanged etc. It's an aspect where card could be lower, but zero is also an impossoble goal.
https://www.consilium.europa.eu/en/press/press-releases/2015...
[1] https://www.congress.gov/bill/118th-congress/senate-bill/183...
[below text is from google search results]
To facilitate the penetration and usage of RuPay Credit Cards on UPI, there will be no charge for transactions up to ₹2,000, an NPCI circular said. For transactions upwards of ₹2000, the applicable MDR amount will be borne by merchants and no additional charges will be levied upon the customers.
Disadvantages of Rupay Cards Limited International Acceptance: One of the main disadvantages of RuPay cards is their limited acceptance outside of India. ... Restricted Usage: RuPay cards are primarily designed for domestic use within India.
Probably because there’s no money in it.
Because then it wouldn't be a debit card? I assume that the debit-network is reserved for debit cards?
The post was informative though.
Those publications usually had a contract with some provider of public domain or CC-licensed fairly generic graphics.
When I see these AI-generated cover images in posts I'm left with a bad taste in my mouth. They look "ok" when glanced but pay more than a second of attention and they're terrible and uncanny.
If you truly care about the image's place in relation to the post, you'd go through the process that you mention and most likely you will end with a chess board and piece set that make sense, as opposed to whatever the image in the OP actually represents.
I agree with the folks behind iA Writer on this:
> Average AI images drag down everything around them. An AI hero image is a comedian opening the show with a knock-knock joke. Good images enrich your article, bad images steal its soul.
Besides the obvious answer of "then don't use an image", they could also use a stock image.
What do you think people were doing before Dall-E came along lmao
In many cases in my experience the vendors who can successfully pull off this strategy have a high quality, high value product and operate in a no-frills store front and are often family owned, maybe a generation or two already. There is a Vietnamese banh mi sandwich vendor where I live who has been around for 30 years only accepts cash - they have the history and patronage to pull this off.
Usually the POS rate is around 2% so at the end of the day you'll split it evenly and get a 3% discount. A few years back it was even highter and I bought several home appliances and saved around $100 so it's worth for both parties.
Now imagine people that deal with ranges from 10K to 100K - It's definitely worth it shaving a few bucks here and there
Not sure how things are in the USA, but in Germany, that has nothing to do with "fighting back" and everything with dodging VAT.
Yeah, but not a 10% incentive, especially given that depositing cash isn't free either, for commercial accounts.
> There's also benefits to getting immediate cash that you can put in the bank for expenses at the end of the day vs waiting a day or two for credit card money.
> There's also benefits to getting immediate cash that you can put in the bank for expenses at the end of the day vs waiting a day or two for credit card money.
patio11 actually argues that it's the opposite which explains why stores offer you to take out cash along with your purchase when you pay by debit card) in another article at https://www.bitsaboutmoney.com/archive/the-infrastructure-be... - "And so, getting magical paper out of the till and into your wallet without it first visiting the bank saves the retailer money. It can also, potentially, earn the retailer a small amount of float. Cash in its tills is dead money and may not be deposited until e.g. the end of the week or later, but selling that paper to a customer for real money results in it arriving in their bank account faster than physically walking it to the bank."
It might be different for a small mom&pop store that actually deposits their cash every day, of course.
``` Since retailers usually charge the same price regardless of payment method, payment card rewards programs with different levels of rewards effectively cause some customers to subsidize the consumption of others. The research presented confirms that households with income less than $75,000 per year collectively transfer over $3.5 billion to those making more than $75,000 per year. Furthermore, the cost of interchange fees to retailers can be significant, especially in competitive sectors such as gasoline and groceries. This study demonstrates that interchange costs are typically about 17 to 19 percent of retailer profit. Variance in these costs may induce risk-averse retailers to set higher prices, thus generating additional economic inefficiencies and hurting retail consumers. Negative impacts on low income and minority households and small businesses have become “entrenched” and are likely to get worse as interchange fees continue to increase. This economic inefficiency will not change unless there is a “sufficiently large shock” in the form of policy or technology to change the dynamics of the monopolies holding sway over the credit card system. ```
https://hispanicleadershipfund.org/wp-content/uploads/2022/0...
Technically yes. But what would the impact be of outlawing the practice of volume discounts through a “policy change”?
It’s frustrating to read an article that acknowledges (indirectly) that payment networks don’t earn revenue from interchange nor have anything to do with reward programs, but then goes on to say that for simplicity they will refer to it as if it did.
If there is a better name for the table of rates (or the list of rates on a monthly CC transaction table for your business) I don’t know it. It’s absolute madness and near impossible to make sense of.
Often I feel like they exist only to confuse the merchant into just throwing up their hands and saying “I mean, I guess it’s right”. It also means that almost none of them can tell you how much they’re paying for credit card transactions. All they know is the sales person said “I can get you the best rates” which may or may not be true, those people will lie to you and tell you anything that you want to hear, I know this from personal experience. These people are snakes and dealing with them makes my skin crawl.
I’m aware that there’s a chance that I’m leaving money on the table, but this is one of the main reasons I use Stripe. I prefer predictability an inscrutable of data that may or may not show that I’m saving a little bit more. It’s also why I normally avoid credit cards that have rotating categories or this or like. I prefer a flat, easy to understand rate that I can compare to other cards instead of having to keep track of which card I’m using which month. Again, this means I’m leaving money on the table, but I do it for my own sanity.
At 3% they are clearly losing tons of money on every transaction. There is an annual fee but it is only $60. The money can be withdrawn from Robinhood as soon as it is deposited. How can they possibly afford this? What are people doing with their money in Robinhood that they are willing to pay people over 1% (I'm assuming) just to deposit money there in a roundabout way?
My guess is that since Robinhood Gold gives you a lower margin interest rate, enticing people to use more margin, they hope to reap all the money back and then some.
Since the rebate money goes directly into your Robinhood account, rather than a checking account, they encourage it to stay in Robinhood.
https://youtu.be/KodqIPMbyUg?t=54 (First CityWide Change Bank 2 - Saturday Night Live)
I was hoping he would go into detail on how programs like Citi double cash work. In that program you get the normal 1% back at purchase and then 1% at payment. I assume the latter is subsidized from interest payments, but what about card holders that never pay interest? Are they subsidized by those that do?
(Work at a fintech, I see the financials but those I cannot share)
So, you pick a balance of how much to return assuming that you get a mix of revolvers (borrowers) and transactors, and recognize that if you hit it right, some folks will skip the "best outcome" (for most) option of grace-period payback and faster rewards, due to choice or need (running low on cash, etc). And that's how you get the 1 and 1: folks love to spend, and Citi estimates that the 1 on payback sounds good but can be spread out as folks still pay the minimum to revolve, garnering interest and fees along the way.
It's illegal in the US to reward for debt directly (you can't incentivize folks to revolve instead of paying in full), and this card is at least a step in the right direction of doing the opposite. But if they really incentivized best behavior for consumers, we'd see all the % rewards focused on payback (and none for spend), with a reduced reward for payback on revolving debt, to incentivize reducing avoidable debt where it makes sense.
But that card would fail as a business for most banks and fin companies. While the early trans fees would be great, it would self-select responsible payback folks who never generate interest or nuisance fees. Such a card would need a massive annual fee or have to be tied to some other profit driving product, at least in most companies I've seen.
But maybe somebody will figure a clever way to make it work.
Where I live credit cards are still relatively uncommon, most cards in use are debit, and from the article it seems they have a simpler scheme behind them. The idea to have a 'book-buyers credit card' seems quite foreign, though I think some people have gas-station-related cards.
Stripe is relevant. If customer and merchant incentives are aligned, I would say Stripe probably just wants to have low or minimum interchange? Have I misunderstood?
If they're rewarding you with something, either you or someone else is paying for it. Someone else, in this case, means another cardholder. Maybe the merchant the rewards program is through is counting on you to spend on something you otherwise wouldn't. Sure as hell isn't the bank offering the card.
The credit-ification of everyday purchases in the United States since the 1980s has been a disaster for the average American's financial health.
My logic is that the people who design credit card reward systems are smarter than I am about the topic they spend 8 hours a day on. So, every rewards system they offer is designed to trick me into suboptimal purchase decisions. Even the perception of beating the system is built into the system.
patio11 seems to confirm some of this, but I’d love it if someone who is informed about the design of these programs would say it to me straight. (Experts in “hacking” rewards systems will be disregarded because according to my thesis you are victims of mind control.)
For context I’m one of those never-carry-a-balance credit card users.
I think it’s reasonable to think points systems are, in some sense, trying to trick you, but also silly to ignore them because of this. Coupons are also trying to trick you in a similar way but that similarly doesn’t mean they’re a bad deal.
This is something that really can't be said loud enough. The vast majority of credit card content on the Internet is just shilling for referral money. Like almost all of it. There's so much money in this space, and most people have no idea.
That's why Doctor of Credit is the only site I'll ever visit/use - https://www.doctorofcredit.com/were-removing-all-credit-card...
About a decade ago I found some blog about credit card rewards and signed up for their mailing list. The owner of the blog emailed me directly saying how he's going to "guide me through the process" and was pushing me to sign up for certain credit cards for sign up bonuses and wanted to know if I had any questions. He was acting like he was a friend just trying to guide me. I was a little taken aback but replied I was going to spend a large amount of money soon and I wanted to earn a sign up bonus for it and I found a sign up bonus that was comparable to what he was pushing on me from Navy Federal. I asked what he thought of it. He said it was no good and I needed to use the cards he was pushing for XYZ reason, blah,blah,blah. It was so fucking sketchy, I stopped responding, unsubbed from the mailing list, and sent all his emails in the trash. Never visited the blog again.
I didn't realize until later how much money he stood to earn from me using his sign up links and the only thing wrong with Navy Federal offer was it wouldn't earn him anything.
I ended up becoming really familiar with the major credits after that.
For food, most places will accept cash here. Hell, even a bookstore near me won't accept cash anymore.
I also saw that places like gas stations "pre pay" if I select debit, trying to hold $60-$100 from my bank account until the final transaction comes back.
While this hasn't happened to me, I've read that if your debit card is compromised or if a charge back is required, you would have to fight your bank to get your money back and it's a bit easier with credit cards.
The ones run by younger people are very credit-card-first, love not dealing with cash, etc. They usually have one of those Stripe iPad things. If you do pay with cash, they'll get a bit flustered because it breaks their flow.
The ones run by older people are either cash-only or try hard to disincentivize customers from using credit cards, sometimes with signs guilting customers about how much money card companies take from businesses.
It really feels like a generational thing depending on what people are used to. The older shop owners remember when cards were a lot more rare, and they've seen their swipe fee expenditure go up over the years. While the younger owners have only ever lived in a credit card oriented world and just bake the swipe fees into their prices from the beginning.
If the store was extending you credit (ie leave now with the goods and in the future pay us back) they’d be required to accept cash at that point.
That said, there are laws in some jurisdictions against card-only payment policies. I suspect they're not widely enforced for smaller places.
There is no federal statute mandating that a private business, a person, or an organization must accept currency or coins as payment for goods or services.
(There are some specific local laws; generally though it appears not to be the case that you have to accept cash.)
Article I, Section 10, Clause 1:
No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.
Variously interpreted, that part about states can't make their own currency may be tangentially important.
Using a credit card is always cheaper to the merchant, maybe the merchant doesnt realize it but cash is a bad deal like Uber is a bad deal - They money is up front so you never realize the costs. In the case of user, it is fuel, vehicle wear and tear, and shifting demand.
In the case of cash, it is the cost of counting and keeping the drawer, security, deposits, change, and internal training/theft. Most estimates show it to be ~10-20% of income of a business is wasted. Always less than the cost of credit.
Well...that is...if you didn't do what maybe 50% of small businesses do: Screw the taxpayer. Sure, these credit card companies take 3%. Many small businesses take cash so they can do cash accounting and keep "money in" away from the IRS. They dont report it, they pay workers with it under the table and you, the customer and tax payer, may pay less, but you are getting screwed.
The big one is that points can be used for 1.5x travel or something like that. So 100 points buys $1.50 of travel, which can add up pretty quickly. The signup bonus was worth something like $1200. And its 'better than normal' categories fit well with professionals in cities who eat out a lot, with a high point-accumulation from that use.
https://www.bloomberg.com/news/articles/2016-09-02/chase-sap...
(Non-paywall link: https://archive.ph/vba5Y)
The rewards seem fairly normal these days, what with rewards inflation happening. Some cards now are offering 250k rewards points as a sign up bonus.
Would we be better off by having capped swipe fees? Idk. Would merchants actually lower their prices instead of keeping the extra revenue that everybody is now used to pay? Idk either. I don’t trust in the goodness of the heart of merchants or credit cards issuers.
But, would I have an unexpected 3 or even 4 figures “unexpected” rewards at the end of the year that I can only use for vacations? I don’t think so. I could possibly set up something with my bank, but I don’t need to think or plan rewards… they just happen.
Also, I’m confused about the federal law flat rate fee on debit cards. I know merchants using Square and report that they’re charged the same fee for debit and credit cards, no discounted rate. For small businesses, I’d like to use my debit card, but not if the payment processor is going to pocket the difference between the discount debit fee and their fee to the merchant, and thus me.
I said I don't travel. She literally froze for five seconds it looked like her head was going to implode. After that my bank practically abandoned me.
There was a recent story here how all banks in Canada push services to the point of daily meetings and managers tell staff to aggressively push products. Even ignoring federal banking rules obligating bank employees to tell customers to pay off debt first before investing.
https://usa.visa.com/content/dam/VCOM/download/merchants/vis...
Some of the tiers for Visa cards:
Visa Infinite Spend Qualified Visa Infinite Spend Not Qualified Visa Signature Preferred Visa Signature Traditional Rewards All Other Products
This seems to run counter to that - there is revenue, perhaps less?
I honestly cannot decide.
Sucker buttons? How about (this is addressed to a certain group of people not everyone) spend your time trying to make money in some way rather than trying to max small amounts that you get from credit cards, reward programs what not. As if everyone is just some kind of retired person with time on their hands to think about miles, rewards etc as a way to keep busy.
For this to be effective, what parts-per-billion concentration do I need?
In my case, I pay for as much as I possibly can using a credit card and then pay it off at the end of the month so that I can get that % reward back and am not charged any fees.
Once is while the EU does something right.
I’m not enamored with crypto per se, but as far as I know only crypto in general (and Monero in particular) are working on solving that problem.
More practically, being surveilled creates a data store about my life that can last forever, theoretically. It's hard to conceive how that could be used if (when) that data gets mishandled. Might as well not leave a trail.
It is as evidenced by the way blockchains are used now. Cryptocurrencies are the most important applications, and few people actually own them, and by "owning" I mean being able to make a blockchain transaction. In most cases, they have an account with a third party who does the blockchain stuff. In other words, a bank. In fact, it may be an actual bank, which is probably for the best because actual banks are highly regulated and are less likely to just take your money and disappear.
Cryptocurrencies quickly became just another financial product that is being integrated in our current system. And for the other ways cryptocurrencies are used, these are mostly illegal (drug trade, ransoms, scams, tax evasion, etc...) and governments are working on that.
Other prominent applications of blockchains: NFT, DAO, etc... are even crazier than cryptocurrencies. All the madness of our current financial system without the regulations that make it somewhat usable to grownups.