Rewards

Credit card rewards are paid for by America’s poor.

Credit card perks reward rich Americans to the detriment of the poor.  The $200 in cash back you got using your fancy new rewards card often comes at the expense of someone who can’t afford it.

The US financial system is racked with inequities. Sometimes, they’re obvious: who can and can’t get approved for a loan, who has a bank account and who doesn’t. But other times, they can fly under the radar.    Many people who use rewards cards have some idea that those rewards are coming from somewhere. But they likely imagine it’s the bank, not their fellow consumers and businesses, picking up the tab.

Every time a credit card is swiped, the bank charges a fee.  Those fees add up — enough to help pay for rewards like points-funded hotel rooms and cash back.  To compensate, businesses raise prices, and so cash users (who tend to be poorer) are often subsidizing the perks going to credit card users (who tend to be richer). And the higher the rewards, the bigger the cost to the unsuspecting people paying for it.

The catch on credit card rewards and points is that for the richest consumers, there might not be one. Instead, the catch is for everyone else.  When you pay with a rewards card, the guy paying in cash behind you is picking up the tab.

Credit card issuers (American Express, Chase, and Citi) make money with interchange fees, meaning the amount they charge every time you swipe plus a small fixed fee.  Generally, about 2 to 3.75 % of the total transaction amount.  These swipe fees ARE huge moneymakers.  Swipe fees currently average about 2.9%, and the more elaborate the rewards card, the higher the fees.  Merchants hate paying interchange fees, but if you don’t accept credit cards, you’re turning off a huge part of your audience.

Part of the money that banks get from interchange fees goes back to their customers in the form of rewards. In 2020, American Express spent about $10 billion on rewards.

The vast majority of credit card spending takes place on rewards credit cards, and over the years, rewards have become more elaborate as companies try to compete — more cash back, more perks, more miles and hotel rooms  With more credit cards and more rewards come more swipe fees. And merchants don’t want to pay those fees out of their own pockets — so they pass some of them on in prices that everybody pays, not just the credit card holders.

People paying with cash or debit cards wind up footing the bill to pay for the rewards of people who pay with credit cards — people who tend to be more well-off.

High-income consumers pay an average of $13 less per month through retail prices, and low-income people pay 60 cents more, because of swipe fees on merchants. Rich consumers spend more overall on fees, but it’s because they spend more in general.  When it comes to a percentage of transaction values, it’s poorer people who lose out.

The US economy is stacked in favor of the wealthy and corporations in all sorts of ways, including the stock market and taxes.  And the same goes for rewards cards.  Credit card rewards aren’t generally taxed like regular income, so to a certain extent, they’re even a bigger benefit than they appear on paper. Say a family spends $80,000 a year on a credit card and gets 1.5 percent cash back, translating to $1,200. By his estimate, that’s equivalent to about $2,000 in pre-tax earnings.

Interchange fees that go up with rewards cards can disproportionately impact small businesses compared to large corporations, many of which are often able to negotiate lower fees or strike deals with big credit card companies. According to the Wall Street Journal, Walmart, Costco, and Amazon have all been able to leverage their size and reach to bring down their fees. Not all businesses pay the same swipe fee, and many larger companies negotiate.

Businesses do have some options to try to lessen the blow of swipe fees — and therefore the price hikes they pass on to consumers — but they don’t always use them. Merchants can put a surcharge on purchases made with a credit card, though outside of gas stations, the practice is quite rare. They’re afraid of alienating customers, and training cashiers to make the calculations can be difficult. Alternatively, they can offer discounts to people who pay in cash.

For many people without credit cards, the problem isn’t that they don’t want one, it’s that they can’t get one because their credit score is too low or they don’t have enough of a credit history to get approved. It’s harder for the unbanked to build up savings, get traditional loans, or pay basic bills. And so they wind up losing money — they turn to expensive payday lenders that charge exorbitant interest rates and risk getting pulled into debt traps or resort to financial products that charge them more specifically because they have less. Rich people reap most of the benefits of the stock market’s rise, a rise that’s fueled by the productivity of workers.

So in conclusion, you can continue rewarding your customers with cash back cards and continue to push this expense and continue to punish your cash paying customers.  An equitable solution would be to offer a cash discount and to pass the merchant fees of to your rewards gathering credit card users.