Credit Card Rewards Became a $9.2B Wealth Transfer

The intuition being: people who carry balances and pay interest don't actually spend very much; they are not wealthy.

Now I just use my apple card everywhere, pay it off every month and get whatever rewards I get.

It feels like a weird situation, those that stand to gain the most from credit cards are also the ones that should feel a difference of under $100 in rewards the least.

The one exception I see is bonus sign up rewards since those can be fairly significant, or making sure you use an airline card at the airline since those bonuses can be fairly significant (with sometimes other benefits). But outside of those exceptions, just choose a card with good rewards and stick with that and pay it off every month.

You can just opt out of using credit cards.

It is risky and it is very easy to lose great amounts of money on a bad decision when credit is involved. Arguably that makes it bad. But still not negative sum.

I love it. As someone who never carries a balance I get paid by banks for doing pretty much nothing at all.

And I don't worry about US retailers, I don't live there.

I should add that rewards are not the best benefits. Sign up bonuses are much more lucrative, running to hundreds of dollars per card, and can often be repeated. Same applies to bank accounts.

Borrowers can also keep from overextending their credit and go on debit cards instead…

Obviously these things can have an impact on people but before the 80s credit cards were not widely available to people with high credit risk and the world still functioned.

I don’t have any data, but my intuition is that overall high-fee, high-reward cards increase propensity for consumer spending by at least a few % beyond the fees/rewards.

The merchants think so, too, or they wouldn’t accept the processors that let their banks hand out these cards.

One of the most corrupting yet hidden forces in America today are the payment networks MC/Visa etc. due to their bribing and corruption of the government in order to prevent things like making payment processor fees separate/independent of the cost, i.e., similar to how taxes are added after the fact, not included in the price; and also preventing merchants from having two different prices, cash vs card.

I’m a bit surprised that HBR does not seem to even really have an accurate mental model if the matter, unless they’re making an editorial choice to speak in vernacular turns to relate it to the audience.

The problem is not really the cards, it even credit cards, it’s actually the payment processing networks that are the corrupting force.

If America has a legitimate government, there would have been a federal alternative payment processor that charges nothing as an accompaniment and based on the authority to mint the currency, which is what a payment processor today is, a digital currency mint.

To put it into perspective, when you purchase something by credit card, a merchant may have to l pay a little under 3% on a $100 purchase. When you purchase something cheaper let’s say $5, a merchant may pay 6.5%. And no, they don’t just say “awe shucks, I guess I’ll lose that money”, They increase the prices by some averaged amount.

Some may say that they can’t do that because competition, well, because there is no real competition and because the payment processor de facto monopoly/cartel has basically every single company in lockdown and you have no real alternatives, especially in places like Europe where they’ve foolishly and enthusiastically started forcing everyone into digital payment, all the merchants simply roll what is effectively a kind of organized crime/mob extortion into the prices of the goods and services the common person pays and never knows is paying.

  Healthcare

  Internet access

  College

At least we have cheap gas? farts

Debit card fees are capped in the US, yet I’ve never received a discount from a merchant for paying with debit instead of credit.

As such, I just pay with credit and have never understood this argument.

Second thing: interchange fees are not the only fees that your typical store has to pay, the total fees are much higher. I think the EU essentially capped Visa/Mastercard profit in the EU, more than they capped small business fees for card payment.

This feels like a potential arbitrage opportunity... I live in Sweden, but if I can use a US credit card I can get high rewards?

They are a way for airlines to create value out of thin air with their own fiat currency. For the average consumer the miles create less of a pure economic efficient benefit and more of a psychic benefit - funny money bucket that accumulates to defray some trip expenses. Economically they'd be best off with an outright 2% back card.

For the minority of customers who are flexible on dates/locations and willing to plan in advance - most airline/hotel programs have sweet spots at the more premium level.

I use them to fly overseas business class refundable fares at discount. It's not free, but the taxes paid + foregone $ I could have gotten with a cash-back card ends up being 2-3x economy non-refundable fare instead of the 5-7x listed cash price if I bought the business class ticket outright.

It's generally a time-vs-money thing though in that to maximize airline/hotel programs you need to pay attention to various limited time offers for signup bonuses, spending bonuses, conversion bonuses, redemption bonuses, etc. Without those it's a very uphill battle.

https://news.ycombinator.com/item?id=39928604

that's some odd classism there.

credit card companies love your data. they can package it, sell it, analyze it.

this is real data of actual behavior, not whatever people say or click -- money where the mouth is.

even if they never make a cent off of you from an interest perspective they 1) still get fees from the merchants, and 2) get all of that juicy juicy transaction info -- and that info alone might be worth the costs.

Really helped us float the moving company and also some DIY renovations on our house that we didn't have all the cash on hand to pay for outright. And we didn't pay a thin dime for the privilege.

Another reason is that credit card companies sell your purchase data to aggregators and advertisers, and cash affords more privacy.

At one time, credit card companies forced vendors to charge the same, whether cash or credit, but that seems to have fallen by the wayside.

The problem is, is that cash is becoming less and less acceptable.

In a nearby town, you can't pay for parking, with cash. I have seen credit-card-only vending machines. A lot of restaurants have iPads at the table, and you never see anyone but the bus[boy|girl|whatever], bringing you your food.

There is no situation in which interchange fees get slashed and prices go down across the board by 3% to make it worth it for card users.

I always ask for a discount but for some reason I almost never get it.

The rational move then is to pay in as many installments as I can get without any additional interest. Then time itself gives me the discount. My actual money stays invested and I only pay later. My credit card gives me 1.1% cashback on all purchases. Inflation too does some of the work.

I would be curious what percentage of people actually qualifies for a card with over 2% cashback especially without a monthly fee. My guess is that that percentage is very low.

High earner/spender, sure but that's not most people

Even as someone who is a credit card optimizer, I also ignore numerous 1-3% choices a day.

Many people also spend more than they can cover on it.

How exactly to become wealthy then?..

--

> What happened to noblesse oblige?

Some things made noblesse oblige way harder to manifest.

Meritocracy. "I deserve what I have", versus "I got lucky have what I have" made harder to share back.

Globalization. When you use one community to produce and another to consume, and third to register a company, and owner lives in fourth it's hard to associate yourself with the community. Where exactly to give back? You won't even see those people.

Secularizarion. Though USA is still significantly religious place comparing to europe.

Easiness to move. Today you're here, tomorrow you're there in new zealand bunker.

Culture. Somehow the rich are in the people who are heavily interconnected, spend time together at the khe khe pedoisland.

Natural selection. The ones who care less about others mathematically have more advantage than those who care enough to spend resources on non-resource-aggregation activities.

--

So. There is no intristic motivation to do so (with majority), there is no external motivation, and there is no repercussions of not giving back.

https://news.ycombinator.com/item?id=39928604

Nobody's arguing that credit card companies are proving zero value, only that they're charging more than what can be "justified" (whatever that means). That's why in europe the interchange rates are capped at some amount to reflect that.

I think the most simple piece of legislation to solve a lot of problems is to allow merchants to pass along the interchange rate to their customers. If they could do this legally and operationally, this would solve most issues here. If a credit card wants to be expensive, fine the consumer should pay for it. Because of contractual and operational limitations, credit card companies have gotten themselves into the current arms race.

If stripe implemented this, it would make me appreciate them as a force for good instead of being a part of the problem.

That's not what the article says:

>High-income consumers with high FICO scores benefit the most from reward credit cards compared to mid- and low-income consumers with high FICO scores. At the lower end of the FICO distribution, however, this pattern is reversed. On average, net rewards are far more negative for high-income consumers with low FICO scores than for middle- and low-income consumers with low FICO scores.

>Or, to put that another way: if there is redistribution happening, it necessarily includes redistribution from unsophisticated high income customers to sophisticated low income customers.

While it's true that wealth customers with low FICO scores are getting hosed, it's not clear whether that is enough to cancel out the effect that richer people (presumably) have higher FICO scores on average

https://news.ycombinator.com/item?id=39928604

The article has one thing mistaken, because it says that Durbin lowered costs for transactions, but credit owners got to keep their perks... That's not technically true (I worked at a supermarket when debit rails first went into effect, and I worked in payments when Durbin went into effect).

There are no benefits to credit users who use the debit rails, and the merchants would really rather you use the debit rails, because it is much cheaper for them. Durbin was mostly a win for the merchants, not a win for the customers.

However, if you take that to believe that the merchants lowered prices overall because they were paying less for transactions, than you might try to read into it that credit users kept their perks, while cash and debit users paid.

The true story, however, is that it's an equilibrium... When the costs go down, the saved money goes somewhere in between the two (supply and demand), and as long as there is competition, the savings are shared.

However, the real problem is that credit companies are allowed to invest interchange fees in perks at all. Credit card companies decided to take their low-risk pool, and offer them incentives, splitting the money they saved between themselves and their users, and using it as a way to pull more low-risk users. The more that happens, the more expensive it becomes for credit companies that serve mid-to-high-risk users... and since we can't stop offering credit to those users as well, those companies push for and get increases to interchange fees to cover the additional cost... which creates more room for benefits for the low-risk users, and the cycle begins anew. It's a vicious cycle that can't be fixed by changing amounts on the existing fee schedule... The only possible fixes would be in either disallowing these kinds of perks, or splitting the rail charges, and specifically charging less interchange for low-risk users (which dries out the benefit pool)

I suspect that because I didn't understand what you wrote.

You used a lot of passive voice and complex jargon. That is economists favorite writing style: they write to confuse, not to explain.

This applies to cash as well. It takes a lot of time to count change for everyone. Plus all the ways there are to steal cash.

Your fun fact is wrong. Credit cards were always profitable. They were not in the beginning because scale is what makes them profitable. Anyone who uses their cards for a couple meals a month (which is what it was first started for) is going to cost money because of all the overhead to have you as a customer. In those days that was a stamp to send the bill, someone to open the payment and cash the check - now that everybody works electronically the overhead is lower, plus people are using it for more and so there is enough left over to pay for it.

Source: https://bfsi.economictimes.indiatimes.com/articles/credit-ca...

Besides, NPCI has introduced merchant transaction fee for UPI now causing decline in UPI transactions.

> equivalent of a 26% higher sales tax than premium credit card users shopping at the same store.

I do not think the sale price is increased by 26% - which doesn’t square with a 1% to 3% fee - I think they pay approximately 26% more in “sales tax” so you’re paying 26% more than the 7% tax.

"It's expensive to be poor" is a more or less universal experience under capitalism and it's amazing how many novel ways we've come up with to make it more expensive for poor people.

"Means testing" is one of the fun ones. The wealthy will often justify this as "People like me shouldn't get this help" which sounds even generous, and then you realise, oh, because we're testing if you're worthy to receive help now to get help you need to expend some time and effort to pass the test. When this "I shouldn't get benefits" is offered to you as a reason to means test, ask them why they're taking a benefit they don't think they should have and why they can't pay society back in other ways rather than inflict more misery on the poor...

US FedNow instant payments went live three years ago, and can move $10M per transaction for a few pennies per transaction.

FedNow Is Live - https://news.ycombinator.com/item?id=36801491 - July 2023 (1022 comments)

(A gap in legislation was not mandating offering FedNow capabilities to your customers as a condition of your banking license as a bank; I expect this to be patched eventually)