The Acquired podcast did an episode on the history of Visa that covers a lot of how the credit card industry works.
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.
To add to your point; there's an IMF paper[1] backing this claim of "massive money transfer from the poor...to the rich".
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."
I don't read that paper as backing that claim. At best the paper finds that the mechanism is more complicated than "money transfer from the poor... to the rich". To quote the conclusion directly:
"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."
Technically this paper doesn’t say “poor to rich” it says “subprime borrowers to super-prime borrowers”. Income-to-FICO score is only moderately correlated. Well, it says rich to poor in the abstract and conclusions, but not the actual writing.
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”.
This is interesting. The study you cite and quote is about a transfer of money from "naive" credit card consumers to "sophisticated" credit card consumers, which correlates to "poor to rich", "less educated to more educated", etc. I'm even more interested in the transfer that occurs from both cash and non-reward-card consumers to specifically reward-card users.
Can't this be rewritten in plain English as "unsophisticated (dumb) people don't know how to use credit cards in their own interest?". Isn't that just the free in free market?
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?
What’s dumb is the statement or implication, which is made constantly, that the typical person is dumb. I don’t mean to pick on you personally, who I have no grievance with, but rather to heap scorn on an idea both illogical and presented in bad faith frequently, a practice I always aspire to.
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.
If you’re not saying that you’re an atypically smart person, then how would you know what such a person would think about this?
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?
I have addressed your question: the realities of life in a financially precarious situation have utilitarian payoff structures and attendant mechanism design that consist of a basket of utilities that are often signed if not complex scalars even at course approximation.
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?
So it sounds like you're saying that modern life is too complex to effectively navigate? There are many examples of rather simple people from humble beginnings navigating it successfully.
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.
My brother was also cursed by epilepsy, which was likely in large part due to the lead poisoning all of us received living in a house that should be condemned as young children.
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.
As I said, I'm sorry about your brother, truly. That doesn't take away from the fact that all our curses and all our blessings are fundamentally ours to bear. I'm not doling out any consequences, just advocating for individualism and voluntary association. These are the principles that underpin our prosperity. I've lived through plenty of misfortune and suffering. All of that is mine though. I would rather die screaming in agony than pry greedily into the pocket of an unwilling stranger. I'm somewhat disappointed we cannot disagree about this in a friendly manner.
The average person is average. 50M Americans (16%) have IQs below 85.
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.
You put me in an awkward position because I’m describing an observed trend of people I’ve known personally, and while I’ll call out flagrant malfeasance by name, I try to not just call people soft or incompetent by name without an adjacent example of serious wrongdoing.
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.
That's a one sided view of it. Credit cards increase customer spending behavior which benefits merchants. For low end customers, the appeal is access to credit, either long-term or just in between paychecks. For high end customers, the appeal is the rewards and perks they get, and the convenience and safety of payments.
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.
A huge aspect people ignore is how expensive it is to handle cash. From storage, administration, transportation, loss, etc. it's usually a little more expensive to take cash vs. card.
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.
I worked at several small businesses and we always preferred cash, we even accepted multiple currencies. The handling was no problem but I admit that it must be more difficult for larger businesses.
Card payments made the price of the service more expensive for all customers because we weren't allowed to have a card payment fee.
Small businesses put in sweat equity to handle cash payments, like the owner going to the bank to make a deposit. If they had to pay an hourly employee to do that, it might even out with credit card processing fees. Also small businesses can fudge numbers with cash payments in a way that’s a lot harder to do when some other company keeps a record of all of your cc transactions.
Yup, cash handling costs are significant when done as a service, they can be cheaper if you don't account for the time and risk (of both theft and forgery). Banks in the UK typically charge about 0.6-0.8% to pay cash in for large companies, and even more for small ones, and very few locations will take cash.
However nothing beats that sweet sweet tax evasion that cash allows.
Back when I was publishing a magazine in the 90s, I preferred credit card payments over checks in the mail because while there was the 3% vig for the merchant account on the credit cards, taking piles of checks to the bank was a pain and there was always the risk of a check bouncing (yes, there was also the chance of a charge being reversed, but in the whole time I did this, that only happened once—selling subscriptions for a print product is a good hedge against fraudulent use of cards and the one time I got stung it was someone who bought a big pile of back issues and had them shipped to Hungary). Add in that credit card orders could be handled by phone or internet while checks had to come in the mail and it was a clear win. And that’s ignoring the multiple studies that show that credit card purchasers at brick and mortar retail tend to spend more money than cash purchasers.
From the other side, my wife owns a small business where 90% of her sales are on credit cards. She has no desire to encourage cash as we honestly report all income regardless of source (and cash is a hassle and increases theft risk). The ~3% credit card fee is also more than made up for by the higher spend of credit card buyers.
From talking to other business owners, though, the lure of "tax free" cash is definitely a factor.
When I sold on eBay and they allowed cash/bank draft payments, I accepted local currency, but also major currencies like US$ (in cash or bank draft because I had a US$ account too) and other major currencies in cash (like EUR and GBP) because they were cheaper to convert with when travelling (or I could use directly). Without a spread.
Plenty of places in the world accept currencies besides the local ones because they are more stable or just worth more in general. Depending on the business, they might handle currency the same way too.
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.
In a properly working market, every consumer would pay their exact interchange fee and it would be printed on the receipt as a pass-through cost.
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.
Massachusetts and Connecticut are the two states that have laws banning credit card surcharges. Massachusetts also has a law requiring acceptance of cash.
>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
Between the Massachusetts Right to Repair Act and requirement to accept cash (Part III, Title IV, Chapter 255D, Section 10A), that state is looking more and more like the right kind of place for me to land once I'm done doing the FAANG thing. Convince me otherwise.
I think the law should be that you state the maximum price for a given transaction and then discount down.
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 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.
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.
A lot of businesses have a few percent cash discount to offset credit card costs, so they make the same amount either way. An antique store that would go out of business unless you pay in cash is either because they aren't paying consigners honestly, or they aren't paying taxes.
I hope you don't mind if I take the word of a woman who's been running her business for 35 years and is a staple in the community over some rando on the internet who doesn't know her business, hasn't seen her financial records, has zero information about how much the fees actually cost her, and may not even be in the same hemisphere?
Meanwhile eBay forces payments by debit/credit card/Paypal, because they have arrangements with a (formerly owned) processor, even though I, as a seller, would be happy to accept cash/drafts/cheques/COD/whatever to keep that ~3%.
I think the other thing that happens is that governments outsource electronic payment collection to a third party which imposes a surcharge for its collection and remits the full nominal amount to the government.
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?
The other side is also that this is great for card users because we're the price sensitive side of the transaction. I feel like this dynamic is rarely talked about when it comes to two sided transactions. Businesses can't "just pass it to the consumer" is a lot of cases and just have to eat it because businesses don't have that kind of pricing power.
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.
A large segment (in the US) that does _not_ subsidize credit card fees are gas stations, where, for the most part, the price for paying in cash is lower than with credit, or there is a per transaction surcharge for using a credit or debit card.
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.
Still true even for bigger brands like Shell or BP. They usually have two numbers on their price display, one is often about 5 cents higher than the other per gallon (guess which is credit/cash). It's interesting that the number for credit is usually way larger than the number for cash, implying most people use credit cards.
>This creates in effect a massive money transfer from the poor
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.
There was a study by the Federal Reserve that came to the conclusion last year that rewards cards is basically a money transfer of ~$15 billion from poor to rich per year. Discussion on Hacker News about it: https://news.ycombinator.com/item?id=34492502
> 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.
The Fed is very careful to differentiate between income and wealth. You can be wealthy with little income and you can have a lot of income but not be wealthy.
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.
Are any of these people required to open a credit card? If you're poor and low FICO, then you shouldn't have a credit card in the first place, just a debit card. And if you're poor and high FICO, then a credit card will provide you benefits.
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.
> If you're poor and low FICO, then you shouldn't have a credit card in the first place
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.
People without a credit card are still subsidising those with reward cards, as the high interchange fees are spread out across all of a store's transactions.
I don't see any proposal put forth. I see a study that is observing human behavior.
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.
These programs operate by placing the burden on the vendor who inflates prices and thus even people who pay in cash pay for the programs indirectly. So even if you don't want a card, or can't get one you still pay for it.
Also from the abstract: "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"
Gotta be honest that I'm not reading 60 pages at this moment.
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.
I think the Grandfather was making a different point. That because rewards cards = higher interchange fee for the merchant, this results in the merchant increasing fees on everyone (the payment networks prohibit charging a higher fee to only those paying with a credit card).
>>>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 poor/low-FICO scorers are either A) not getting accepted into credit card programs, B) paying higher interest rates, or C)not able to make their payments in full each month.
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.
It plays out this way because anything anyone buys with a credit card, reward card or not, ends up costing 2-3% more than it would otherwise have, because of interchange fees. If you have a rewards card, the CC issuer turns around and gives you, say, half of that back (1% cashback on everything) and keeps the rest. It's kind of like a tax break that you only qualify for if your credit score is above a certain threshold, but you have to pay into regardless of income/credit score.
> ends up costing 2-3% more than it would otherwise
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.
if the credit card merchant was able to extract 2-3% for using their network, what makes you think that a free debit card with low/zero cost wouldn't also be owned by the same credit card merchants and force the same fees to maintain their monopoly?
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.
Because right now debit card purchases don’t have a transaction fee while credit cards do. I just had two recent purchases where the vendor charged a 3% surcharge for credit cards but would do the transaction by debit card free.
It is an example that greed is everywhere. Not only among card issuers but also among merchants. The moment merchant find a socially accepted way to extract extra they will do it. Similar to tip screens on square terminals in all takeout places. Costs nothing to ask, generates some additional revenue.
There is a reason every concert and sports venue near me has gone cashless. It's not because they enjoy giving away 2-3% of their revenues but rather those places aren't active every evening and tend to turn over employees quickly. Handling cash is expensive and risky in that environment.
In a concert and sports venue concessions environment you're also prioritizing throughput much more than most businesses. Being cashless helps with throughput a lot - the employees don't have to wait for people to count their money, then recount it, and spend time making change.
Poor people can always get credit cards. They get constant offers for them. The catch is that they are terrible cards with fees and insane rates. The credit industry is perfectly happy to let everyone get into massive debit. They'll give them to anyone (https://www.mymoneydesign.com/nine-year-old-daughter-credit-...)
because poor people, typically:
- do not quality for high-rewards cards (which have higher credit score thresholds)
- if not savvy, carry a balance because they can't afford to pay off the amount in full, are subject to higher interest rates because those are the cards they qualify for, and thereby pay much more than than well off consumers (increasing the transfer of wealth)
- if savvy, realize that having a credit card costs them more than not, and stick to cash
- are more likely to be receiving payment for services in cash themselves and will just spend that rather than depositing and using a CC (if they even have a bank account)
> 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.
There has been nothing stopping US merchants from offering cash and/or debit card payers a discount since Oct 2011.
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.
Does accepting cash really save a business that much money? I've heard arguments in the past that it ends up being a negligible difference once you account for all costs of processing cash (someone has to take it to the bank, it can get stolen in a robbery, employees can skim, you have to count it, you need a safe, you need cash deliveries, etc).
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.
>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).
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."
yes there is. that's an enormous added pricing and communication complexity for businesses. which we know has a high cost because of all the businesses who have decided it would be higher than just stomaching the credit card fees.
Would a 1 percent cash or debit discount be an enormous burden? Some merchants already programmed their terminals to prod debit customers into entering their PIN rather than charging it as credit, so would offering a discount really be that much harder?
One answer is: It's just annoying. I normally use a credit card. Yes, I can use my debit card and enter a PIN. If it's a discount specifically for cash, I may not have any on me and don't want the change anyway. In any case, it's adding mental overhead to just paying.
(It's usually more like 3% delta which I almost get in cashback anyway but still annoying.)
I don't disagree with your point; I do want to point out, though, that whether it's "the merchants have to raise their prices" or "the merchants benefit too and are complicit", the end result is still that it's still the poor who lose.
> 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.
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.
Claiming that merchant fees result in higher prices is different from claiming that reducing merchant fees would directly, immediately, or measurably lower prices. Isn't a plausible explanation that companies are hesitant to lower prices for any reason?
Let's consider the opposite scenario, if Visa raises their fees do merchants keep prices where they are? I suspect not.
> Two thirds of the merchants surveyed reported no change or didn't know the change in their debit costs post-regulation. One fourth actually reported an increase in debit costs
This is an interesting flywheel. Once I realized that by not using a CC I was subsidizing everyone else, I decided to opt into using a high reward credit card myself.
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.
> 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.
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.
I see interchange is capped at 0.20%. How do credit card companies not lose money by giving a 60 day interest free loan to customers? That is what interchange fee covers. BNPL providers charge 4% for 90 days interest free loans to the merchant.
In jurisdictions that cap interchange banks cut the fat. No rewards programs, and ending perks like price protection and extended warranties. On the revenue side they are more likely to charge an annual fee. Some customers carry balances at 29.99%.
Yes because they are required to charge non reward customers the same amount and competitive markets forced prices down.
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.
It’s much more nuanced than that. True a 2% cash back card costs the company 2%.
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.
I’m not saying it’s a lie. 4 Amex Membership Rewards points are worth around 6% if I transfer them to Delta instead of spending cash on the same ticket.
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
> This isn’t about “only the rich get value”. It’s about the well informed.
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. …
Amex charge cards encourage you to pay off your balance every month.
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 am referring to booking flights on Delta through KLM. Since the airport I’m referring to is a small regional airport in south GA with only two commercial inbound flights a day both on Delta, of course they are overpriced for a 50 minute flight.
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.
It’s not the same. The booking systems you are referring to are based on paying cash and have all of the airlines inventory available.
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.
> The booking systems you are referring to are based on paying cash and have all of the airlines inventory available.
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
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.
Merchants pay 3%.
Cardholders borrow from banks, not card payment networks.
Rich people can donate to poor people regardless of the credit card situation.
The cost of running the credit card company plus rewards is a lot more than that 3%. Money is fungible. So your rewards comes 85% from interest payments in the case of Capital One or 71% in the case of Chase.
> 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.
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.