>When merchants raise prices for all consumers in response to these costs, users of low-cost payment methods (e.g., cash and debit) cross-subsidize high-reward credit card users who shop at the same merchant"
Cash handling is not a low-cost payment method, Cash handling can cost businesses between 4% and 15% of each transaction, when factoring in labor, security, bank fees, and risks like theft and counterfeit bills.
One could argue that credit card users have been lowering prices for cash payers as business avoid cash handling pitfalls and get their funds safer and faster.
Credit cards also transfer wealth from people who pay interest to people who don’t.
It’s a silly system, where everyone has to invest their time (optimizing for rewards, avoiding interest) in an ultimately negative sum game. I hate it so much.
What does that graph tell you? Because I think patio11 wanted to send one message and people accidentally misunderstand the graph.
That's the interchange income corresponding to wealthy people. Interchange is paid by the card-accepting business, not by the buyer. The buyer pays interest and other fees and that graph looks very different.
From that original study the full picture table says in % of ADB that the "poorest" (below 620 FICO) pay ~45% interest and fees but bring only 2% additionally in interchange income. The wealthy (at 800+) pay ~10% interest and fees but bring another almost 10% interchange income, on 4 times higher spending, and 3 times higher rewards (so the wealthy get ~12 times higher rewards in $ value than the "poor").
Just the percentages paid by each group more than offset the difference in spending. There are also way more "poor" accounts than wealthy accounts. Intuitively you can tell that the banks are effectively subsidizing the fees and interest for the wealthy with the income from the poor, for the sake of the interchange income which is mostly generated by the wealthy but doesn't come from their pocket.
Those poorest of people (<620 FICO) pay more interest and fees (percentage and absolute terms) than any other group. There's a range in the middle on the wealth scale where the customers are actually a net loss for the banks (the 660-760 FICO range).
Businesses raise prices to account for interchange fees. So they are essentially is paid by the consumer. If we outlawed rewards credit cards (by capping interchange fees), everything would likely be slightly cheaper.
> Businesses raise prices to account for interchange fees
Agreed, which makes the picture even worse for those low income people. Even poor people are guaranteed to occasionally pay the "rich person tax" included in the prices of some of the products and services. At least until some AI pricing starts changing the price real-time based on the buyer's estimated wealth (sort of already real).
> So they are essentially is paid by the consumer.
Not from a bank's perspective. Only in the sense that prices are higher between the seller and buyer.
> If we outlawed rewards credit cards (by capping interchange fees), everything would likely be slightly cheaper.
I don't agree on the second point as a blanket statement. When Epic game store lowered its fee not a single game got cheaper for the buyers.
Outlaw rewards credit cards? Or make it compulsory that the true cost of a specific credit card is revealed to the merchant who has the right to absorb or pass on, in a line item, that cost to that specific consumer?
If I know I'm paying for my own rewards, I'd choose a card that keeps more money in my pocket. I'd go as low as the PITA factor of cash.
It's not clear to me what the net benefit is of a credit card over a debit card.
But for sure the confusion ensuing from allowing debit cards to be charged as credit cards should be illegal. The merchant account providers are probably the ones reaping the free money on the racket.
Credit is the POS default, for whatever reason. Not all POS are the same. e.g. US Post Office consistently knows if I am using a debit card, and it prompts for a PIN when I do. Every restaurant, bar, service does not ask for PIN, and the handful of merchants I've inquired with say their debit card fees changed by the merchant account providers are the same as credit. Scammy.
I think that's out of date. He links to a study showing interchange revenue net of rewards showing up to 3% by high FICO scores. (Just at a gut check that seems crazy to me, since interchange revenue doesn't really go much above 3%!). But that's from 2013. I remember when Fidelity launched its 2% flat cashback AmEx back in 2003. People didn't really know if it would be sustainable. Now 2% is a dime a dozen.
The most recent I've seen otherwise is this Federal Reserve study[0] from 2022. It finds that the marginal return on swipes is actually slightly negative because of how juicy rewards have gotten, and 80% of their profitability comes from interest (with most of the rest fees):
> we find that, on average, the credit function makes up approximately 80 percent of the credit card profitability, whereas the contribution of the transaction function is slightly negative, as rewards and other expenses on credit card transactions outpace banks' interchange revenues.5 In addition, fees—in particular late fees—comprise approximately 15 percent of credit card profitability.
I gave up long ago trying to optimize any rewards, it just ended up being stressful and not really worth it ultimately.
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.
I've generally tried to stay with cash back rewards in categories that don't change, that's been the best way to balance complexity with rewards for me while not nudging me to buy stuff I don't actually need. I don't like messing with points or rotating categories or included subscriptions. With one exception I avoid annual fees as well.
So like, I have a card that's 6% on groceries, another that's 3% on gas and restaurants, Apple Card does 2% on Apple Pay transactions, and I have a 1.5% card for everything else.
I don't bother with rewards either, be it cards or memberships or whatnot - too much hassle if you're also working full time. BUT: one thing I use the credit card for and that is for the pay and travel insurance attached to it. Could I get it otherwise? Maybe, no idea. But if you don't carry debt (and I never do) there's no downside.
In the US you have several legal safeguards that are not provided by debit cards. Fraud liability limitations, chargebacks, and so on.
You can still implement “if I can’t afford something, I don’t buy it” with a cc. I pay mine off every month so it’s financially the same s a debit card but use a premium card for its purchase benefits.
I used to have this same mentality (no credit cards) when I was younger, until my debit card was stolen and someone took $1000. The bank basically shrugged their shoulders and said there was nothing they could do.
I always get my money back when this happens with a credit card purchase. I've also had to dispute things occasionally, and I almost always get refunded.
If you shop at places where many customers user credit cards, and those places don't change an extra credit card processing fee to customers, then you are effectively paying for those credit card fees whether or not you use one.
Try to pay for SaaS online. Tons of them accept nothing but credit cards; and then some of them accept direct withdrawals from bank account but it takes days to verify. Services using Stripe seems to be the worst at this. (I’ve never carried a credit card balance my whole life.)
Debit cards charge as credit cards no problem. That said not having a credit card is tough on your credit history. You could just have one and pay the balance but then they still have all your data, it sucks
I’ve specifically had debit card with Visa mark declined online where credit card was expected. Don’t know how common that is because one stops doing that once it happens a couple times.
This is arguably partly because the EU caps card interchange (at 0.3%, generally). So these reward schemes don’t exist, because there’s no money for them, so why would anyone use a credit card over a debit card or bank transfer unless they need the credit? Most people in the US presumably don’t start using credit cards thinking “I’ll get in debt, that’ll be great”; it’s the reward schemes.
Yet many European countries have high household debt. Switzerland, Sweden, Netherlands, Denmark, some of the highest in the world. I guess it has to be mortgages, since it's true they are not that "big" on credit cards. Although Klarna is a Swedish company.
Speaking for NL, yes it's mortgages. And those come with monthly payments towards the principal in pretty much all cases. Also, those being mortgages the rates are like 5% or so, not over 20%. Soll
After 30 years, people generally speaking own their home and that's their biggest chunk of wealth. So basically, yes a high debt to income ratio, but it's building towards wealth and its not high interest debt either.
Ex-European here. It is very common to overdraft your bank account in Europe. The overdraft interest fees are very similar to the credit cards here in the US. It is basically the same service but with a different execution.
Pay your credit card balance off every week, and it's an overly complicated debit card but you technically build up a score for future loans. Also maybe you get cash back on that?
Rational if you want a mortgage in the US at least.
I'm in <other US city>. It's possible to earn enough to buy property here. I already have a mortgage (as an immigrant, building a credit score from credit cards which in turn qualifies you easily for a mortgage is pretty nice).
While I hate that it's like this, you're leaving money on the table.
Currently you're keeping money in the bank accruing the bank interest to occasionally pay for stuff.
With a credit card you would get various bonuses/cashback/gameified returns by owing them money, and it costs you nothing as long as you pay them back once a month interest free.
If you however slip up/miss a payment it will cost you a lot.
Both cases suck, but the latter saves you money if you play that game.
That's from a EU perspective. From a US perspective you also require it from a credit score perspective, which EU thankfully hasn't adopted... yet.
Cashback is definitely capped, I'm less sure on other forms of rewards, but by my napkin comparisons, I do get out more "value" from my credit cards than the fees and cashback caps. YMMV of course.
Sorry, but I don't care what other people think. It's my money and I'm careful with it.
The entire credit card industry is set up to squeeze out as much profit from people as possible. They offer discounts as an incentive, but it is a huge trap that many, many people fall into. I'm not interested in risk. I'm interested in simplicity.
It's participating in the credit card industry that is foolish.
For people who only spend what they have, what is the risk? I don't accrue credit card debt, never have, so I've enjoyed a 2-3% discount on my entire spending history. Over lifetime that will probably amount to a couple of vacations.
I completely get where you're coming from, but credit cards are a tool, and you can came out way ahead using them properly. For starters, they are key to having a good credit rating, which opens a lot of doors - maintain 3 open cards, pay off the full balance every month, and keep those accounts open for 10+ years. Big lift.
Second, never use a card with an annual fee.
Third, which I already said, but bears repeating: pay off the full balance every month.
Fourth, look out for one good rewards card and funnel expenses through it, so you can get the rewards.
My parents taught me all of this 40 years ago, and it was exceptional advice, and has served me (and my family) very well.
Credit cards are not about carrying debt. They are the worst tool for that.
I assume you've somehow gotten access to stable housing though via that bank account (possibly a home loan, or something else), or accessed a large line of credit before 'modern' credit scoring came into play (FICO scores and the Big Three).
I see many commercials for local banking up here that pulls out 30-40+ year members of the banks boasting about the prosperity the bank provided them, but at the same time, when they'd walked into the bank back in the day A Guy just said "yeah he's good for it" and wrote out the loans they needed.
You can't opt out of the modern credit scoring system and if you fuck it up even once with a bad line item you're out of the running for quite a few things and become virtually poor.
I’ll never understand this credit card debt thing... and why should businesses eat the credit card commission cost? Is it 5%? You pay for it, why should I?
I’ve literally never bought anything with a debit card. I’ve definitely spent over a million dollars on credit cards in the last 3 decades and maybe over 2 million if you include personal and business card transactions.
Vampire Squid. But this is only in one country. Go other places (e.g. New Zealand) and reality is different. There every single transaction has the credit card fee added explicitly.
The reason for a business to want to accept cards is that some fraction of your customers would choose not to buy whatever it is you sell if not for the convenience. Whether that's a guy who decides not to buy donuts because then he won't have even to buy more scratch-offs or the woman who doesn't get those bald tires replaced because if she did the family will be leaving on cheese sandwiches until payday.
For the consumer the reason is that this is revolving credit. If you pay next month you can have stuff today. That's a small relief, unless it turns into a carried balance and then it's an ongoing burden, but you don't think about that burden at first because you're naturally optimistic.
There is value in this even if you always pay your full statement balance every month.
If you have a stable source of income knowing your credit card payment is due on the 7th of every month means you don't have to monitor your checking account's balance for every purchase. You only have to think "make sure you can cover $X by the 7th".
Credit isn't negative sum, it is a positive sum game. "Negative sum" has a specific meaning here and just because wealth is being transferred isn't that significant; positive sum games also have wealth transfers.
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.
Why is it so hard lol? I have the Bank of America Rewards card for 25+ years. 2.62% cashback on everything, 3.5% on dining/travel. Maybe there are better ones out there but this is good. I have auto-pay setup so I don't have to worry. I have not spent a second of my time optimizing anything in last 15 years
Assuming you have sufficient income, paying your balance off in full every month and instantly redeeming the rewards each month doesn’t take a whole lot of time. I just use a card that gives 1.5% cash back.
Agreed. I have my rewards configured to automatically convert to cash to reduce my bill. The button was buried deep in the website, but once I found it, I've never had to go back to the rewards site again.
I don't have to invest any time at all. I just use the (US) card that gives me the greatest benefits, be it cash back or services. Usually I just look at the reward rate, which is a base 2% for me right now going up to 5% for some things.
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.
Imagine a world where the pipeline from extra fees back to hoop-hopping cashback didn't exist and your services were just cheaper by the same percentage points instead. It's designed to make money off people slipping up instead of serving customers.
Yes, but there are so many financial injustices and inefficiencies in the world.
And it may not work the way you expect. Retailers may favor credit card users if they tend to spend more. There are substantial costs associated with handling cash, so cash users may end up paying more.
Sure, but I'm not comparing credit cards to cash, but credit card incumbents to hypothetical lower rate ones that don't offer rewards in exchange for risk and busywork.
Incorrect. I am paid by the banks, I have no financial relationship with other customers.
But of course banks make huge amounts of money from poor customers via various fees and interest payments. It warms my heart that I get some of those ill gotten gains insead of the evil banks.
In order for the banks to retain the market power required to keep such high interchange fees in place the need to incentivise those who don't NEED to pay with a credit card to do so anyway, and the biggest way they do this is by splitting the loot with you. You share in the loot, and you share in the responsibility for how it was accumulated.
Alternatively CC companies could cut off people over certain credit risk and then be able to charge interest in line with the lower overall credit risk…
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.
The point is they make a lot of their money from people who don't, paying 20% APR -- the 'whales' in this consumer industry aren't the richest people, unlike retail, gaming, travel, etc.
Rewards are paid out for transactions, not interest paid, that's all. Otherwise poor people failing payments would get more rewards than the rich which don't. The dynamics would be completely different.
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.
> The merchants think so, too, or they wouldn’t accept the processors that let their banks hand out these cards.
Visa / Mastercard / American Express all have lines of premium credit cards (Visa Infinite, World Elite Mastercard, Amex Platinum), and they're very much too big to ban. You'd just be left with one processor in the US (Discover, now owned by Capital One).
This is wrong. Merchants can elect to only accept debit cards.
In recent years, all of my utilities have added 3%+ credit card surcharges, so I pay most of my household expenses with debit cards/ACH now.
Tmobile, Comcast, Verizon, ATT, Target, grocery store, electric utility and water utility (government), annual vehicle tax (government), auto body shop, daycare, and any home repair contractors all charge 3%+ (or give a discount, same thing), so I basically only use credit cards for other retail stores and travel and restaurants.
There is literally no time involved in avoiding interest. You pay your complete balance when it's due. As far as rewards go, I can't be bothered with them so I always just opt for cash back which I do maybe twice a year. Time involved: 5 minutes / 6 mo.
There's plenty of time: the time you waste by not spending money you don't have. You have to wait longer until you make more money in order to spend more without interest.
Don't spend money you don't have. Especially don't do it with 20% interest short-term loans. It's not that hard. If you're not financially responsible enough to handle a credit card, do not get one. I didn't have one until my late 20s.
That is a spurious argument. You have a choice in whether you pay interest, you do not have a choice about a purchase including the cost of paying payment processor fees since the price is the same if you use paper money.
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.
That is not a positive. I'm fine with splitting up a price if you want to show how much tax gets added, but having to continuously do the mental math of "no this item is 10.99 it's 10.99 + tax" is very frustrating. When I pick up a $11 item, I want to spend $11.
Internet access isn't particularly expensive in the US.
Healthcare, education, and housing are expensive in the US for the same primary reason: political interventions that simultaneously subsidize demand and restrict supply.
Bit for bit, internet access is cheaper in America than it is in Canada or Australia.
Canadians like myself have ~40% of our provincial taxes spent on healthcare, so in my case about ~8% of my gross income. Somewhere in the tune of $20k/yr. While I was living in Seattle and filing American, quite a bit less of my gross income went to healthcare. Just food for thought.
But that is not because it's less efficient. With the Canadian system being socialzed and 20k$ being just 8% of your income it is to be expected that you would pay moch more than the median person into the system.
"I make $250k CAD a year, my experiences must be representative of, and relevant to, the masses," is a wild thought to have.
Well, maybe I spoke too soon, because my private American healthcare turns out to also be about 8% of my gross income (of $60k)(before copays and my deductible)(and also it's crap). Twinsies!
But yes I agree that it would be awful to have my health needs taken care of and a mere ~160k USD left to spend on everything else.
That’s not the reason. The required build out has actually already been been paid for: https://www.huffpost.com/entry/the-book-of-broken-promis_b_5.... But the US is so politically broken that corporations could just pocket the money without actually providing the infrastructure.
That really explains only small parts. Even the horrible suburbs have little real reason to be that expensive. In the end it is really about lacking actual free market and enabling corporate capture as voted by the voters.
I’m in Stockholm, and our condo HOA (BRF) includes 1Gbps per unit in the fee for all units because billing individually would cost more in admin than the service itself. We have FTTP and then cat6 to each unit.
Card network rules in the US prohibit merchants from adding a surcharge for payment with a debit card. Most merchants are either unaware, or prefer not to care. If you are using a debit card at a business that assesses a card surcharge, point out that your card is a debit card when paying and refuse to pay the surcharge. If that does not help, there are online forms available from both Mastercard and Visa where you can submit a merchant complaint.
And often the credit card companies try to enforce this by writing wording into their contracts that try to stop merchants offering different prices for different payment methods.
This is true. In fact, if you come across a merchant that accepts credit with a minimum purchase amount or tacks an extra fee, you can take the receipt and call the terminal owner (visa/MasterCard) and report it. The receipt has a terminal ID, and it turns out the likes of Visa get really pissed if merchants do that.
I know this because I used to work on a US military base. There was a sole merchant on a particular installation that was doing this, but it was extreme. They'd force you to buy over 10 USD if you wanted to use a card, and it was the only place to grab a snack. One day there terminal was shut down, and for a period they only went to cash payments. Once they took credit again they removed the minimum purchase. Turns out somebody got pissed, and reported them.
Regarding the article, the ~390 USR sounds about right to me. I only use a credit card, pay it completely off at the end of the month. I've never once paid interest since in the 8 years I have used this card. Every few years I buy a plan ticket with the rewards.
And it wasn’t out of the goodness of their hearts that they changed - they finally lost enough big court cases over it, it was to avoid heavy handed legislation.
Places around me have been starting to itemize the credit card fee. Only car dealerships so far have waived the fee for debit over credit in my experience.
It's partly true: this only applies to consumer cards. That's why many EU banks still offer corporate credit cards with huge cashback etc. For example, revolut offers no cashback in France on their metal cards if you have a consumer account, but up to 1% cashback on the same card if you have a "freelance" account. https://www.revolut.com/fr-FR/metal/
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.
Even if the FX is notionally "free" they pick the rates. So they can set those rates to generate exactly the same profit for them as with fees.
You will probably not see rates that are even competitive with a dodgy FX cash place at an airport, let alone with the numbers you've seen on financial networks for what FX transactions by banks cost, but you feel happy because there was "no fee".
Huh. I wonder how long that's been true. I guess I haven't been to America since last century, but I could have sworn I had zero fee but unreasonable FX rates when I was in Poland which can't have been more than 25 years ago.
This is flat out incorrect. It's actually quite difficult to get a cash FX rate that's even close to as good as the standard credit card FX rate, which is also set by Visa/MC and not the banks.
Where the banks do get their pound of flesh, though, is the foreign transaction surcharge, which is often around 3%. No-fee cards exist but you need to look for them. And a whole new set of charges applies to doing a foreign cash advance on a credit card.
This is misleading. Banks put a fee on foreign transactions, many do this even if the transaction is in the card's native currency.
The card companies always add a margin to FX conversions, usually in the 0.5% range. This is fairly benign since the market rate can move between the transaction and the settlement, so sometimes you save money.
With sumup I get 0.5% cashback up to a whopping 10€/ month lol. There are other cards giving cashback, I think Amex blu has a 1% with no upper bound of monetary cashback
My understanding is that they are much less generous on average compared to U.S.
E.g. for now I have the most premium card offered by my bank (50€/mo), and it gets me extra product insurance, rental car insurance, travel insurance, free lounge access, and some other things like that, but no cashback or similar.
I think some premium cards do offer cashback nowadays, but they are in the minority. Some cards also offer airline reward points. My experience is limited to Finland, though.
In the UK (which broadly follows the same rules), I get 0.25% with a Visa and 1.25% with Amex. Sometimes there are introductory offers for a few months.
Patrick McKenzie (patio11 fame) had a great blog post in credit card rewards
There is a lot that goes into it, and it is interesting how customers like me who literally never have carried interest and have to made thousands of $ in rewards over the years still make the banks money....
Credit card points/miles are an interesting topic, and I have found them to be kind of useful cyclically myself over last 20 years.
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.
> It's generally a time-vs-money thing though in that to maximize airline/hotel programs
Credit card hotel booking portals are often much worse than what's available too.
For example, you might end up paying 30-100% more for a hotel booked through Chase Travel. At the very least you'll have way less selection. Even if price matching exists, you could still end up paying more.
I am traveling to Mexico next month and I do have a Chase Sapphire Preferred card (the one with the $95 annual fee). You get $100 in hotel credits per year if you book through Chase Travel.
In one of the spots I'll be at, there was (1) selection. It was $92 for 2 nights in a pretty low populated town that I'll be passing through. That hotel was rated 3.2 stars on Google.
If I use Google search or any hotel aggregator site, there were over 10 hotels available for half the price with much better ratings.
In this case it cost me about $50 extra to use the card's benefits.
Many people don't understand how rewards work when it's marketed towards your annual fee. The $100 credit doesn't offset the $95 annual fee. You pay $95 out of pocket for the fee. As soon as you book that hotel for $100 you've now paid $195 total out of pocket of which $100 gets credited back, so you're still out $95. If you instead didn't have the card and got the hotel at the cheaper rate, you'd only be out $45 or whatever you paid.
I mainly got the card because it had a really good sign up bonus, 0% international exchange fees and reasonable rental car coverage. Other cards can cover these benefits without an annual fee.
> 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.
What does this mean? I'm not clear what the sweet spot is - are you talking about buying points/miles/etc outright with cash rather than earning them as credit card rewards? Everything I've read is that these are almost always bad deals.
It means that the vast majority of redemptions are a bad deal, but every program has gaps in their earn/burn charts that lead to good values.
There is no one-size-fits-all answer.
If you do not have time to look into it, plan trips 6-12 months in advance, or have flexibility (will go anywhere thats a deal), then they aren't worth it.
> 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.
“Saving” airline miles is definitely suboptimal, like you said, getting 2% cash back and redeeming it immediately is the optimal strategy. Money is fungible and cash depreciates.
Plus, the “deals” you have access to with airline miles are not slanted in your favor.
As others have mentioned this is particularly prevalent in the US. I always liked that Australia's vision for a peer-to-peer payment system (note cards are mainly for merchants, hence the rewards) has inclusivity [1] as one of its core tenets "continue to transact ... without disproportionate burden or risk ... those experiencing financial hardship". They also just stopped surcharging [2] and have capped interchange fees since a long time.
I always wondered why people in America would ever pay by cash or credit card - unless they are laundering that cash.
Otherwise, you're giving up 1-3% discount.
Set auto-pay on your credit card to pay in full every month. I've never once paid for credit card interest. I think there's a term inside credit card companies for people like me: leeches or something like that.
When I and my (still fairly young) family needed to move cross-country, my wife and I accepted a credit card offer with 0% APR for the first year and put all our moving expenses on it. Then once we settled, we paid it down a bit at a time each month, and then right before it would have started charging interest we paid the rest as a lump sum.
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.
Credit card companies are still charging merchants a transaction fee for your purchases though. The fact they're only charging one side of the transaction is probably annoying for them, but you still make them plenty of money.
If the alternative was paying cash, cash has an even more demanding level of confidence of sufficient funds required and it applies earlier with no flexibility.
Well, one reason is the one described in TFA —- credit card rewards amount to a regressive wealth transfer, and if you think that is bad, you may not want to participate in it.
Another reason is that credit card companies sell your purchase data to aggregators and advertisers, and cash affords more privacy.
I paid a lot of credit card interest, as a yute, but, since getting married, I have paid in full. Been over 30 years. Leeches rule!
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.
Credit cards are cheaper than cash for most merchants. Most people forget about all the costs of cash because they are hidden, but they add up to more than the couple % credit cards cost.
I prefer my debit card because I'm more aware of how much I'm spending. Money taken out of my account is immediate and feels real. Ultimately, I spend less.
One isn’t more real than the other. They are both numbers in an online database. In one case your assets are going down, in the other your liabilities are going up. The net result is the same.
I agree with dougdude. I like debit cards better because you see the balance change immediately. The thing I dislike about credit cards is payment is deferred by a month.
Long term average? Sure, it goes up, that's inflation. But do you know what causes inflationary pressure? Visa and MasterCard adding unjustified fees because they're a duopoly and control most of the payments market, and your government won't regulate them and cap fees.
The UK and the EU both cap debit card fees at 0.2% and credit card fees at 0.3%. When the UK left the EU, Visa and Mastercard jacked up their fees over 5x for UK-EEA payments. Not because they had to, but because they could, and they love sucking money out of other peoples' businesses. https://www.psr.org.uk/our-work/market-reviews/market-review...
Retailers in competitive industries absolutely do use a reduction in card fees to lower their prices. Maybe not all the way, but they definitely don't give it all to themselves as margin; their competitors don't.
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.
You shouldn't get a cash discount - cash costs the merchant MORE than credit card fees. You have to count all the costs of cash that credit cards don't have: counting, and recounting the cash and change. Then the manager counts and recounts everything in the back room at the end of the shift. Then the manager counts everything twice again to write up the deposit forms. Plus you need a cash register with the extra cash drawer that acts like a safe. Plus other security systems just to prevent robbery (this can get elaborate in areas where robbery is common). Those all add up.
None of this is your problem: you are not a merchant. What is wrong is the analysis of various people who think cash is cheaper and thus get mad at not getting a cash discount. It is also wrong that a number of merchants are bad at accounting: they think that cash is cheaper by enough to be worth a discount - but this is not your problem either.
It's worth to think about it a bit, especially in larger purchases. Significant discounts on the order of 5% to 10% can easily beat all credit card benefits, and not taking advantage of it leaves lots of money on the table.
I have a little lookup table for this. Interest free installments mapped to cash discount necessary to beat the credit card. I just look it up.
These numbers are actually conservative. There's a lot of credit card benefits that weren't priced in. I add a couple percent to the required discount numbers and round it up to compensate.
Mathematically you are right. However those interest free payments are generally setup in such a way as to make it highly likely you won't pay it off by the end of the interest free period. The bills they send contain the minimum payment - designed to get you past that time. I don't trust my ability to get the fine print right - it only takes messing this up once to destroy all the gains from several times getting it right. So I use the credit card anyway and pay it off every month - that payoff is the one number I can get right every month.
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
I know that Discover has a card with a 5% discount category that changes once a quarter. Everything not in the category gets 1%. It's not hard to get the card (or at least wasn't) and was frequently advertised to college students.
If you combine that with a card that gives 2% on everything than it wouldn't be hard to average over 2% cashback as long as you were mindful about using the discover card for qualifying purchases and the 2% card for everything else.
There is one other rub - because I use my bank's card I get better interest rates. How does a .25-.5 % on my various loans and checking account compare to 2% on groceries - this is a complex question that it not easy to answer.
I have a 2% cash back credit card from my bank, with no monthly fee. It started as a 1% cash back card around a decade ago, and slowly crept up to 2%. It's a nation wide credit union that has certain requirements to join though.
My first US credit card was a 4-3-2-1% rewards program and I had literally zero income at the time. I was told by the banker, "oh you can't do that right away, you must first get a secured card to build your credit score, after a year you can try applying for real", but I told them I don't care and to send the application anyway, and I've got it.
Ever since then, I wondered how much of the "not qualifying" is due to misinformation like this.
The question is what percentage of overall population are 1, 2 and 3 combined, and is it big enough to warrant the perception that high reward cards are only for high earners/spenders.
Once in a while. However the truth is the large people who collect the 1% and pay off their card every month are the people who don't. These people are customers year after year, and often spend more on their cards (they tend to be higher income), and the bank gets their 2-3% from them (2-3% after rewards)
People who don't pay their card off also are on the look out for lower interest rate cards and switch all the time. they in reality are not paying the very high rates on cards, they are paying the lower introductory rates (which is still a lot of money). These people are also more likely to default and stop paying leaving the bank to write everything off. Combine that with the fact that they typically don't spend as much over several years (they hit their credit limit and their income won't allow an increase so they have to stop spending), and they are not as profitable as it seems.
Based on the downvote and your reaction, I assume I misread something. We're talking about why Americans sometimes prefer paying with cash over credit card, no?
It becomes a scorecard. Success in life is strictly about making the number go up. It doesn't matter if they could spend $100K a day for life and never go broke. They must have a bigger number and be higher on the Forbes (e.g.) list. Some people are so obsessed with it they lie and make up things to claim their number is much higher than it actually is.
> everyone else around at every possible opportunity?
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.
The study methods are closer to advocacy than science or policy.
Sure, take any slice of a vast number, and you get a big number.
It's not a "wealth transfer" when everyone gets what they bargained for and can opt in or out.
Most importantly, the transaction value of using credit cards or rewards systems - what the user actually gets - is not enumerated.
Beyond what others have noted (mainly deferred payment), credit cards offer legal transaction protections: my legal liability for fraud is limited (unlike debit or Zelle transfers), and I can challenge any transaction even later, which gives the vendor an incentive to ensure I'm happy even after they have my money. While reputation provides some incentive for repeat customers, the ability to retract a transaction governs even non-repeats. I would submit this alone has improves quality of service for everyone anywhere credit cards are accepted.
Rewards vary by type. Cash-back rewards reflect the fact that interchange fees were set to recapture initial investments, but servicing costs have plummeting (thanks to computing); governance-wise, it's almost impossible for a "representative" political system to extract a large cost from a small number of powerful agents with vested interests to provide a tiny amount of benefit to a very large numbers of other people. But that's a much more extensive governance issue.
So where does the benefit go? To competition between credit providers, initially as cash-back, and then to tying rebates to future purchases within controlled channels. For airline point systems that give free flights or upgrades, it improves retention, but other forms of rewards would seem to verge on tying, where power in one market is extended into another.
Politically-mediated wealth transfers are a political issue. Economically-mediated wealth transfers should raise market-regulation policy issues, in particular whether the law is inducing or protecting them, and then whether they are good or bad. Tallying that requires not just seeing the money flow, but seeing all the value received or cost exported.
I have several credit cards and pay them off at the end of the month. I get mostly free hotel stays when I take my family on vacation and have had many free airline tickets.
I also used a credit card to bootstrap my business 15 years ago. At it's height, I was brining in $1 million/year. The bank would have never given me a loan for the amount I was able to use on a credit card. I ended up shutting the business down a few years ago, with no debt.
Most people can't handle spending and rack up tons of debt. Credit cards can also be used to make money, instead of buying stupid things you can't afford.
The most defensible framing that I came across (maybe from patio11?) in favor of credit card rewards is that they're a "bulk discount" on interchange fees. People who spend more on their cards also pay more fees (passed through the stuff they buy), so it kinda makes sense to give them a discount[1]. That's what credit cards do. Cards with the highest rewards are geared towards high spenders, with corresponding credit score and/or minimum income requirements. It's not unlike how the 2 quart (1.89L) bottle of mayo at costco is cheaper than the 8oz (0.24L) bottle from dollar general, but nobody would frame that as a "wealth transfer".
[1] of course, this doesn't need to rely on some principle that people are entitled to discounts if they buy more, because in reality discounts arise from complex market dynamics such as competition and price discrimination.
While they’re probably right from a consumer perspective, the article skips over the fact that accepting and handling cash is a significant cost for businesses, way more than the credit card fees. Delays in checkout, making change, counterfeit bills, employee theft, external theft, safe transport, added accounting burden…all add up to an estimated 5-15% (https://plainscapital.com/blog/the-cost-of-accepting-cash/). In fact merchants can now legally pass through credit card surcharges to customers but very few choose to do so, because they’d prefer you pay by card.
More actually. Generally those rewards happen by using your credit (there are exceptions). Meaning you are more likely to pay for something that you'd probably otherwise not have spent money on.
One factor that never seems to come up in these discussions is that while businesses might not like credit card fees, they also don’t like all the issues with cash: managing it, transporting it, losing it to employee theft, etc. The cost of cash transactions isn’t 0.
Same argument for people: managing cash is a pain, swiping a card is easy. Contesting a transaction or fraud is way easier (infinitely easier?) with a card than cash. Having day to day liquidity even without ever carrying a balance is nice.
Is all this worth $9.2B across the economy? Maybe not, but again, certainly worth more than 0.
>Is all this worth $9.2B across the economy? Maybe not, but again, certainly worth more than 0.
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 don’t really care what businesses want at this point: my default position is that they are trying to scam me in some way and must be handled appropriately. Credit cards are a must-have in this situation, since they provide a mechanism other than hope to deal with recalcitrant merchants without wasting my time.
It's clearly more complex than the story these authors are telling, in particular the highest income consumers get the worst returns on their interchange payments. So stores and services catering to wealthy consumers are actually subsidizing an opportunity for savvy customers, many of whom are not wealthy
One note on patio11’s opinion on this is that he really overweights the ongoing work and innovation required for electronic payment processing. It WAS a great novelty and deserves to have made a lot of money for 30 years. But the reason they make so much money today is monopolistic low behaviors to lock in their advantages. It’s not a free marlet because of deals over time, some of the most famous of which are their prohibition on charging different rates for cards or even disclosing the rates on cards.
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.
>in particular the highest income consumers get the worst returns on their interchange payments
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
To be clear though, the higher FICO scores get hosed the most, see the graph earlier on. Your quotes are conditional on FICO so they don't take that into account.
The only way I can put these things together is that at the high FICO end, both wealthier and poorer consumers get hosed a lot but wealthier consumers not quite as much. On the other hand, lower FICO band doesn't get as bad of a deal overall but it is worse for wealther people (plausibly because they have high interchange fees and don't use their rewards).
It's complicated, but... this is not a wealth transfer right? It is a transfer mostly just from consumers to credit card companies that provide them a service.
Because merchants charge everyone the same price regardless of how they pay
Not at many gas stations. Cash gets a discount usually $.10 per gallon. I’ve also started to see restaurants either give a discount for cash, or charge extra for credit card purchases. Business suppliers from tiny shops to large national companies tack on 3% for people paying with credit cards, or like T-Mobile, a $5/line monthly fee in order to get people to pay by direct debit.
It goes a step further... previously, card agreements (between merchants and the networks), required the prices to be the same between cash and credit (with the well known gas carve-out), but Durbin made that tying illegal, so now retailers are free to charge different prices for cash, credit, and debit.
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)
They mention "premium credit cards" in the article, is there a general understanding of which cards are premium? I clicked through to the study and the only example they cited in there was Chase Sapphire Reserve but I didn't see, like, a list or something.
Credit card rewards are not a mechanism to shift wealth towards premium card holders (this is a negligible distraction), they exist purely to increase revenue/conversion rate, by decreasing customer price sensitivity (compared to cash payments) and encouraging financially irresponsible spending. If this did not actually work in practice, every merchant would just insist on cash and pocket the difference.
"Poor people" are hurt much more from the changes in spending behavior induced by credit card use than by paying for card rewards.
No. I do embedded software engineering for a living.
I use (in my view) HN appropriate levels of jargon (because lots of people here are involved with getting people to pay for some newfangled cloud thing or other, so I use their terminology).
In simple words:
People pay more for the same (and spend more recklessly) when you let them pay by credit card, and this causes much more economical "damage" to poor peolpe than any "wealth transfer from card rewards".
Merchants pay the transaction cost. In my parents business in the early 2000s customers would ask in advance if they could use a CC. Some places installed ATMs in the corner (still a thing in some places), but quite unpopular. Rather than lose a customer the merchant will accept payment with credit card and pay the fee.
One consequence of this system is the large merchants have more bargaining power and can negotiate lower fees. So large retailers, gas station chains, etc. are able to reduce the overhead of accepting CC payment. While smaller merchants have the same higher cost.
From a capitalism perspective, this is the most egregious example of "you have capital, so you can make more capital". Banks holding the capital in this case.
Fun fact: when credit cards were first introduced only to people with good credit, which paid the balance in full. this was not profitable. Only after opening the pool to other credit levels did CC start printing money for banks.
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.
What a silly article. Don’t buy things you cannot afford. Wealth transfer is a ridiculous framing. Is any heterogeneous situation involving money a wealth transfer?
So if anyone is trying to picture what 9.2 would buy. The new bridge between US and Canada (Gordie Howe) was 4.6 billion. So that is 2 giant bridges + related infrastructure ... worth of wealth transfer. That bridge had some corruption / payoffs, so we should discount that by 10% wealth transfer as well.
> Because merchants charge everyone the same price regardless of how they pay, those fee costs are factored into prices for all shoppers. However, credit card users get that money back and then some through rewards, while cash and debit users get little or nothing.
>The result: People paying cash face the equivalent of a 26% higher sales tax than premium credit card users shopping at the same store.
I am surprised this never occurred to me or has come up at all in discussions with people (in the context of rising costs/inflation specifically). I’ve literally never considered this compounding effect until now. It’s so obvious of course, it just never even crossed my mind.
I was surprised by this number too - and I’m pretty sure it’s a clever wording trick to inflate the percentage:
> 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.
I believe a similar thing happened with fast food and food delivery fees. It costs money to be listed on the food delivery app so fast food chains started charging everyone the same price to offset the cost of being listed on the apps.
Delivery apps don’t mandate that the price on their apps be the same as on the actual menu. If you walk in and order you’ll pretty much always get a lower price.
It also means stratifying card users, even if you actually make all the card users pay more than those with cash. The people who can just barely qualify for a card are paying to fund the "rewards" for the wealthy who pick the best options.
"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...
Then they get angry when the other side of the coin is discussed - they can’t get certain benefits because they’re above the threshold too, but they’re different of course.
You’re right but that’s actually not the part I’m talking about. Specifically the fact that even though we are all “being charged the same price,” as prices increase, the amount I am saving increases as well due to cashback or other benefits on a credit card. And because I am spending less money, I ostensibly have more money to make my credit better, which means the benefits only increase on top of that.
It’s a variation on a theme we are all very familiar with. It’s expensive to be poor. But this is another angle I hadn’t really considered. It’s a little more complicated than just “I can have better cards with better benefits.”
TL;DR: The actual cost per item for me is, in very literal and quantifiable terms, lower as a result - and the more expensive things get, the steeper my discount gets while the person next to me paying cash is paying a little more than I am every transaction for the same items.
Put another way: As price/inflation increases, the real number I am saving increases as well. So we aren’t just paying different prices, but their increase is also higher the higher prices get.
Many restaurants I’ve eaten at lately surcharge credit cards with a 3% fee, offering a discount if you pay cash. This is the way to nullify this regressive policy until the US commercial banking system offers instant payments for merchants, internalizing the externality of the interchange fee. If you pay with card, you
US FedNow instant payments went live three years ago, and can move $10M per transaction for a few pennies per transaction.
(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)
The problem is the way the US credit/debit card systems are setup, there's not much of a discount/surcharge that would make me switch usage to debit.
If my credit card number gets stolen, zero money ever leaves my account. It simply gets contested before the monthly bill is even due, and cancelled. I have probably had number stolen 5 times in 20 years, and its never cost me a cent. Zero dollars every left my accounts even temporarily.
If my debit card number gets stolen, the money is out of my checking account immediately. Mortgage payments and other bill payments might fail, and the onus is on my to chase up the bank to get charges reversed and money returned to my account.
n=1 of course. All US mobile carriers provide a substantial discount if you establish autopay with ACH over debit or credit. I've seen the same with Xfinity. It will take time, but we'll get there.
> You can get a $10 discount on your monthly bill if you: Have Xfinity Internet and sign up for automatic payments and paperless billing with a stored bank account
Walmart was one of the larger supporters of FedNow during public comment period, as they experience billions in interchange costs per year, and are building instant payment support into the Walmart Pay component of their app to avoid these costs.
> “It surprised me,” Henry said of adoption of Walmart’s first iteration of pay-by-bank, which is available online but hasn’t been marketed to customers. “It’s certainly surpassed our expectations of the amount of customers that have registered and actually use the payment type.”
> Walmart’s upgraded pay-by-bank offering will be rolled out in 2025. The transactions will occur over bank technology provider Fiserv’s NOW Network, which integrates with The Clearing House’s Real Time Payments network and the Federal Reserve’s FedNow. Until now, large retailers hesitated to launch real time payment options because many banks were not connected to an instant settlement system, meaning their customers would not be able to use the product. NOW Network aims to connect to as many banks as possible to reach 100% of deposit accounts by combining its own network with RTP and FedNow.
My understanding is that Meta is also pushing ad buyers to invoicing vs credit card payment.
Like the slow decline of check volume, I see the same here. Credit card rails will exist for some time, perhaps another 10-15 years, but they have likely peaked from a volume perspective. If you're a merchant, surcharge when you can, and work towards on boarding and offering customers cheaper payment rails (imho). If folks want to pay the ~3-4% surcharge, enable them to, that is a choice if they want the benefits of using a credit card. But we should not all have to eat the cost for their benefit when less expensive options are available.
(I work in financial services adjacent to payment systems, thoughts and opinions always my own, this is behavioral economics at scale, as always think in systems)
Not only would the 3% fee not make me blink, as my cards have 3% cash back for dining, I doubt I'd change my behavior even at a 5% discount. If anything it'd dissuade me slightly from patronizing the restaurant.
Credit cards are convenient and cash isn't. The genie is out of the bottle, no way to make people move back to cash.
You're not the avg person though. Most people are being squeezed by inflation and watching prices on everything and trying to claw an extra 2-3% back wherever they can.
If interchange fees were capped, people would go back to cash, imo. A lot of research shows you spend less when you pay with cash. And the lack of credit card rewards as a draw might lead people to carry it again
Car mechanics, dealerships, house fixing contractors, city (property taxes), these are the ones that I can think of in the past year I've come across charging a fee for credit card payments. What's most irritating is that most of them do not setup for and drop the fee if you pay by debit card.
Always ask if they’ll give you the discount paying with Zelle if they won’t for debit. Almost every major bank supports Zelle currently in your native banking app.
In small restaurants, that’s just a tax grift for the owner. The “smarter” ones underreport income, the dumb ones steal the sales tax and the hammer eventually drops. Over time, they’re probably paying a lot more than 3% for shrink, Due to screw ups and employees skimming the till.
Credit cards have a really high ROI. The 3% drives 10-20% more spend, sometimes even more. When I was on the board of a small private school, we bought a square terminal and used QRs for flyers. That drove 30% increases in fundraiser expenses and helped us reduce mailings and nags. We would cross-sell stuff - could buy your youth soccer registration at the fall fest or whatever.
The things where ach, check, cash make sense are where there’s no discretionary spend at point of sale or recurring payments. If you pay 75 bucks a week that have your apartment cleaned dog groomed or whatever. You’re not getting value beyond taking the payment in advance with a credit card. Those are the areas where Venmo and Cash app have really dominated.
The only way I can interpret the percentage is that they are stating the increased cost as a percentage of sales tax rather than a percentage of the sale, such that "26% higher sales tax" in a state changing 10% sales tax would mean paying 2.4% more in total. That choice seems misleading, but does make the percentage make sense.
It's just such a bizarre choice that one might hope there would be another interpretation. Why measure a percentage change on sales tax, which varies heavily from location to location, and is not what the associated fees are based on, rather than simple choice of total cost?
Credit card systems are a Ponzi scheme that favors those who already hold a lot of capital, at the expense of those who weren't lucky enough to be born heirs.
This is even more true of the American brands that are getting Trump to attack modern, open, cost-free systems from other countries—like Brazil's PIX, maintained by the Central Bank of Brazil.
From the study...
>When merchants raise prices for all consumers in response to these costs, users of low-cost payment methods (e.g., cash and debit) cross-subsidize high-reward credit card users who shop at the same merchant"
Cash handling is not a low-cost payment method, Cash handling can cost businesses between 4% and 15% of each transaction, when factoring in labor, security, bank fees, and risks like theft and counterfeit bills.
One could argue that credit card users have been lowering prices for cash payers as business avoid cash handling pitfalls and get their funds safer and faster.
Credit cards also transfer wealth from people who pay interest to people who don’t.
It’s a silly system, where everyone has to invest their time (optimizing for rewards, avoiding interest) in an ultimately negative sum game. I hate it so much.
Patrick McKenzie rebuts this here: (podcast) https://open.spotify.com/episode/2E2KRPcDvh1LcRw5bIsBms or here (article): https://www.bitsaboutmoney.com/archive/anatomy-of-credit-car...
The intuition being: people who carry balances and pay interest don't actually spend very much; they are not wealthy.
What does that graph tell you? Because I think patio11 wanted to send one message and people accidentally misunderstand the graph.
That's the interchange income corresponding to wealthy people. Interchange is paid by the card-accepting business, not by the buyer. The buyer pays interest and other fees and that graph looks very different.
From that original study the full picture table says in % of ADB that the "poorest" (below 620 FICO) pay ~45% interest and fees but bring only 2% additionally in interchange income. The wealthy (at 800+) pay ~10% interest and fees but bring another almost 10% interchange income, on 4 times higher spending, and 3 times higher rewards (so the wealthy get ~12 times higher rewards in $ value than the "poor").
Just the percentages paid by each group more than offset the difference in spending. There are also way more "poor" accounts than wealthy accounts. Intuitively you can tell that the banks are effectively subsidizing the fees and interest for the wealthy with the income from the poor, for the sake of the interchange income which is mostly generated by the wealthy but doesn't come from their pocket.
Those poorest of people (<620 FICO) pay more interest and fees (percentage and absolute terms) than any other group. There's a range in the middle on the wealth scale where the customers are actually a net loss for the banks (the 660-760 FICO range).
Businesses raise prices to account for interchange fees. So they are essentially is paid by the consumer. If we outlawed rewards credit cards (by capping interchange fees), everything would likely be slightly cheaper.
> Businesses raise prices to account for interchange fees
Agreed, which makes the picture even worse for those low income people. Even poor people are guaranteed to occasionally pay the "rich person tax" included in the prices of some of the products and services. At least until some AI pricing starts changing the price real-time based on the buyer's estimated wealth (sort of already real).
> So they are essentially is paid by the consumer.
Not from a bank's perspective. Only in the sense that prices are higher between the seller and buyer.
> If we outlawed rewards credit cards (by capping interchange fees), everything would likely be slightly cheaper.
I don't agree on the second point as a blanket statement. When Epic game store lowered its fee not a single game got cheaper for the buyers.
Outlaw rewards credit cards? Or make it compulsory that the true cost of a specific credit card is revealed to the merchant who has the right to absorb or pass on, in a line item, that cost to that specific consumer?
If I know I'm paying for my own rewards, I'd choose a card that keeps more money in my pocket. I'd go as low as the PITA factor of cash.
It's not clear to me what the net benefit is of a credit card over a debit card.
But for sure the confusion ensuing from allowing debit cards to be charged as credit cards should be illegal. The merchant account providers are probably the ones reaping the free money on the racket.
Credit is the POS default, for whatever reason. Not all POS are the same. e.g. US Post Office consistently knows if I am using a debit card, and it prompts for a PIN when I do. Every restaurant, bar, service does not ask for PIN, and the handful of merchants I've inquired with say their debit card fees changed by the merchant account providers are the same as credit. Scammy.
I think that's out of date. He links to a study showing interchange revenue net of rewards showing up to 3% by high FICO scores. (Just at a gut check that seems crazy to me, since interchange revenue doesn't really go much above 3%!). But that's from 2013. I remember when Fidelity launched its 2% flat cashback AmEx back in 2003. People didn't really know if it would be sustainable. Now 2% is a dime a dozen.
The most recent I've seen otherwise is this Federal Reserve study[0] from 2022. It finds that the marginal return on swipes is actually slightly negative because of how juicy rewards have gotten, and 80% of their profitability comes from interest (with most of the rest fees):
> we find that, on average, the credit function makes up approximately 80 percent of the credit card profitability, whereas the contribution of the transaction function is slightly negative, as rewards and other expenses on credit card transactions outpace banks' interchange revenues.5 In addition, fees—in particular late fees—comprise approximately 15 percent of credit card profitability.
[0] https://www.federalreserve.gov/econres/notes/feds-notes/cred...
Credit card companies make 3/4 of their revenue from interest. From Capital One's 10k, Net Interest Income vs. Total Net Revenue:
https://www.sec.gov/ix?doc=/Archives/edgar/data/0000927628/0...I don't really know my way around corporate filings, but...is that just for credit cards?
Capital One also is supposedly huge on car loans; I'd imagine the interest from those would comprise a big chunk of that revenue.
That "intuition" is agreeing with the parent.
Discussion of Patrick's article:
https://news.ycombinator.com/item?id=39928604
I gave up long ago trying to optimize any rewards, it just ended up being stressful and not really worth it ultimately.
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.
I've generally tried to stay with cash back rewards in categories that don't change, that's been the best way to balance complexity with rewards for me while not nudging me to buy stuff I don't actually need. I don't like messing with points or rotating categories or included subscriptions. With one exception I avoid annual fees as well.
So like, I have a card that's 6% on groceries, another that's 3% on gas and restaurants, Apple Card does 2% on Apple Pay transactions, and I have a 1.5% card for everything else.
The rewards differences can be significant. Eg 4% vs 1% cash back is $3k difference on an annual spend of $100k.
On the one hand, relative to our income it's not so important, but on the other it feels bad leaving $3k on the table.
I don't bother with rewards either, be it cards or memberships or whatnot - too much hassle if you're also working full time. BUT: one thing I use the credit card for and that is for the pay and travel insurance attached to it. Could I get it otherwise? Maybe, no idea. But if you don't carry debt (and I never do) there's no downside.
I'm 46. I've never had a credit card. I have a bank account and a debit card. If I can't afford something, I don't buy it.
You can just opt out of using credit cards.
In the US you have several legal safeguards that are not provided by debit cards. Fraud liability limitations, chargebacks, and so on.
You can still implement “if I can’t afford something, I don’t buy it” with a cc. I pay mine off every month so it’s financially the same s a debit card but use a premium card for its purchase benefits.
I used to have this same mentality (no credit cards) when I was younger, until my debit card was stolen and someone took $1000. The bank basically shrugged their shoulders and said there was nothing they could do.
I always get my money back when this happens with a credit card purchase. I've also had to dispute things occasionally, and I almost always get refunded.
If you shop at places where many customers user credit cards, and those places don't change an extra credit card processing fee to customers, then you are effectively paying for those credit card fees whether or not you use one.
Opting out doesn't save you from those costs.
Try to pay for SaaS online. Tons of them accept nothing but credit cards; and then some of them accept direct withdrawals from bank account but it takes days to verify. Services using Stripe seems to be the worst at this. (I’ve never carried a credit card balance my whole life.)
Debit cards charge as credit cards no problem. That said not having a credit card is tough on your credit history. You could just have one and pay the balance but then they still have all your data, it sucks
I’ve specifically had debit card with Visa mark declined online where credit card was expected. Don’t know how common that is because one stops doing that once it happens a couple times.
Whole Europe does this.
I never understood why whole nation wants to live in debt just to have one extra month of cash flow (which they’ll probably squander soon).
This is arguably partly because the EU caps card interchange (at 0.3%, generally). So these reward schemes don’t exist, because there’s no money for them, so why would anyone use a credit card over a debit card or bank transfer unless they need the credit? Most people in the US presumably don’t start using credit cards thinking “I’ll get in debt, that’ll be great”; it’s the reward schemes.
Because it gives me 2.5% cash back, which is basically free money.
That comes out of the merchant's pocket, who has priced it into the sale price you are paying.
It is not, thus, free money, at all.
Yet many European countries have high household debt. Switzerland, Sweden, Netherlands, Denmark, some of the highest in the world. I guess it has to be mortgages, since it's true they are not that "big" on credit cards. Although Klarna is a Swedish company.
https://en.wikipedia.org/wiki/List_of_countries_by_household...
Speaking for NL, yes it's mortgages. And those come with monthly payments towards the principal in pretty much all cases. Also, those being mortgages the rates are like 5% or so, not over 20%. Soll
After 30 years, people generally speaking own their home and that's their biggest chunk of wealth. So basically, yes a high debt to income ratio, but it's building towards wealth and its not high interest debt either.
Ex-European here. It is very common to overdraft your bank account in Europe. The overdraft interest fees are very similar to the credit cards here in the US. It is basically the same service but with a different execution.
Pay your credit card balance off every week, and it's an overly complicated debit card but you technically build up a score for future loans. Also maybe you get cash back on that?
Rational if you want a mortgage in the US at least.
I'm in Boston. I'll never earn enough to buy property here. I'll never have a mortgage.
I'm in <other US city>. It's possible to earn enough to buy property here. I already have a mortgage (as an immigrant, building a credit score from credit cards which in turn qualifies you easily for a mortgage is pretty nice).
While I hate that it's like this, you're leaving money on the table.
Currently you're keeping money in the bank accruing the bank interest to occasionally pay for stuff.
With a credit card you would get various bonuses/cashback/gameified returns by owing them money, and it costs you nothing as long as you pay them back once a month interest free.
If you however slip up/miss a payment it will cost you a lot.
Both cases suck, but the latter saves you money if you play that game.
That's from a EU perspective. From a US perspective you also require it from a credit score perspective, which EU thankfully hasn't adopted... yet.
as far as I understand it, the creditcard rewards are from the creditcard fee, which is capped in the eu, so you are not missing out much.
Cashback is definitely capped, I'm less sure on other forms of rewards, but by my napkin comparisons, I do get out more "value" from my credit cards than the fees and cashback caps. YMMV of course.
Honorable but foolish. You could effectively get a discount and still use it the same way as your debit card.
Sorry, but I don't care what other people think. It's my money and I'm careful with it.
The entire credit card industry is set up to squeeze out as much profit from people as possible. They offer discounts as an incentive, but it is a huge trap that many, many people fall into. I'm not interested in risk. I'm interested in simplicity.
It's participating in the credit card industry that is foolish.
For people who only spend what they have, what is the risk? I don't accrue credit card debt, never have, so I've enjoyed a 2-3% discount on my entire spending history. Over lifetime that will probably amount to a couple of vacations.
>For people who only spend what they have, what is the risk?
there is none. some people are just ideologically opposed to credit cards, like the parent appears to be.
their loss, really. they end up paying a portion of the cost but reap none of the benefits (rewards, additional legal protections)
I completely get where you're coming from, but credit cards are a tool, and you can came out way ahead using them properly. For starters, they are key to having a good credit rating, which opens a lot of doors - maintain 3 open cards, pay off the full balance every month, and keep those accounts open for 10+ years. Big lift.
Second, never use a card with an annual fee.
Third, which I already said, but bears repeating: pay off the full balance every month.
Fourth, look out for one good rewards card and funnel expenses through it, so you can get the rewards.
My parents taught me all of this 40 years ago, and it was exceptional advice, and has served me (and my family) very well.
Credit cards are not about carrying debt. They are the worst tool for that.
I assume you've somehow gotten access to stable housing though via that bank account (possibly a home loan, or something else), or accessed a large line of credit before 'modern' credit scoring came into play (FICO scores and the Big Three).
I see many commercials for local banking up here that pulls out 30-40+ year members of the banks boasting about the prosperity the bank provided them, but at the same time, when they'd walked into the bank back in the day A Guy just said "yeah he's good for it" and wrote out the loans they needed.
You can't opt out of the modern credit scoring system and if you fuck it up even once with a bad line item you're out of the running for quite a few things and become virtually poor.
I’ll never understand this credit card debt thing... and why should businesses eat the credit card commission cost? Is it 5%? You pay for it, why should I?
I’ve literally never bought anything with a debit card. I’ve definitely spent over a million dollars on credit cards in the last 3 decades and maybe over 2 million if you include personal and business card transactions.
That’s why businesses eat the credit card fees.
5% is a pretty high rate IMO. When I worked at retail 20 years ago we got around 2 or 3%, and that was a mom and pop shop, not big retail...
AMEX acceptance is super expensive, IIRC they are around on that level
Vampire Squid. But this is only in one country. Go other places (e.g. New Zealand) and reality is different. There every single transaction has the credit card fee added explicitly.
The reason for a business to want to accept cards is that some fraction of your customers would choose not to buy whatever it is you sell if not for the convenience. Whether that's a guy who decides not to buy donuts because then he won't have even to buy more scratch-offs or the woman who doesn't get those bald tires replaced because if she did the family will be leaving on cheese sandwiches until payday.
For the consumer the reason is that this is revolving credit. If you pay next month you can have stuff today. That's a small relief, unless it turns into a carried balance and then it's an ongoing burden, but you don't think about that burden at first because you're naturally optimistic.
> If you pay next month you can have stuff today.
There is value in this even if you always pay your full statement balance every month.
If you have a stable source of income knowing your credit card payment is due on the 7th of every month means you don't have to monitor your checking account's balance for every purchase. You only have to think "make sure you can cover $X by the 7th".
Credit isn't negative sum, it is a positive sum game. "Negative sum" has a specific meaning here and just because wealth is being transferred isn't that significant; positive sum games also have wealth transfers.
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.
Why is it so hard lol? I have the Bank of America Rewards card for 25+ years. 2.62% cashback on everything, 3.5% on dining/travel. Maybe there are better ones out there but this is good. I have auto-pay setup so I don't have to worry. I have not spent a second of my time optimizing anything in last 15 years
Lol because in order to get 2.625% cashback at BoA you need to have $1,000,000 in your BoA accounts, maybe that's why it's hard?
It was $100k for a couple decades. The $1M threshold started just now.
countries ditching those companies are making themselves a favour.
Assuming you have sufficient income, paying your balance off in full every month and instantly redeeming the rewards each month doesn’t take a whole lot of time. I just use a card that gives 1.5% cash back.
Agreed. I have my rewards configured to automatically convert to cash to reduce my bill. The button was buried deep in the website, but once I found it, I've never had to go back to the rewards site again.
I don't have to invest any time at all. I just use the (US) card that gives me the greatest benefits, be it cash back or services. Usually I just look at the reward rate, which is a base 2% for me right now going up to 5% for some things.
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.
Imagine a world where the pipeline from extra fees back to hoop-hopping cashback didn't exist and your services were just cheaper by the same percentage points instead. It's designed to make money off people slipping up instead of serving customers.
Yes, but there are so many financial injustices and inefficiencies in the world.
And it may not work the way you expect. Retailers may favor credit card users if they tend to spend more. There are substantial costs associated with handling cash, so cash users may end up paying more.
Sure, but I'm not comparing credit cards to cash, but credit card incumbents to hypothetical lower rate ones that don't offer rewards in exchange for risk and busywork.
You're not paid by the banks you're paid by other, usually poorer, customers
Incorrect. I am paid by the banks, I have no financial relationship with other customers.
But of course banks make huge amounts of money from poor customers via various fees and interest payments. It warms my heart that I get some of those ill gotten gains insead of the evil banks.
In order for the banks to retain the market power required to keep such high interchange fees in place the need to incentivise those who don't NEED to pay with a credit card to do so anyway, and the biggest way they do this is by splitting the loot with you. You share in the loot, and you share in the responsibility for how it was accumulated.
Alternatively CC companies could cut off people over certain credit risk and then be able to charge interest in line with the lower overall credit risk…
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.
It has no relation to paying interest, only to making transactions with the credit card.
If you use a credit card, but can’t pay it immediately then you pay interest. It’s a trap the less wealthy fall into.
Spending money on don’t have with no financial repercussions is known as the elusive “infinity money hack”. Which clearly does not exist.
Of course there’s going to be a a cost to spending beyond your means.
Yes that is true, and what I said is also true.
Or you could simply not pay on the credit card, and avoid the trap?
The point is they make a lot of their money from people who don't, paying 20% APR -- the 'whales' in this consumer industry aren't the richest people, unlike retail, gaming, travel, etc.
Not everyone always has the money not to.
The relationship is that the service and rewards you get are subsidised by generally poorer people who mess up their financial planning.
Rewards are paid out for transactions, not interest paid, that's all. Otherwise poor people failing payments would get more rewards than the rich which don't. The dynamics would be completely different.
This isn't correct, rewards and benefits are not 100% funded by interchange fees. They wouldn't be possible without many customers paying interest.
Why do you think it’s a negative sum game?
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.
> The merchants think so, too, or they wouldn’t accept the processors that let their banks hand out these cards.
Visa / Mastercard / American Express all have lines of premium credit cards (Visa Infinite, World Elite Mastercard, Amex Platinum), and they're very much too big to ban. You'd just be left with one processor in the US (Discover, now owned by Capital One).
So why don’t the Visa and Mastercard banks up fees across their entire card lineup?
If they’re truly too big to give up no matter the fees they charge, they’re leaving money on the table.
Of course, they can’t. If Chase started handing college students a 3% card, the merchants would riot.
This is wrong. Merchants can elect to only accept debit cards.
In recent years, all of my utilities have added 3%+ credit card surcharges, so I pay most of my household expenses with debit cards/ACH now.
Tmobile, Comcast, Verizon, ATT, Target, grocery store, electric utility and water utility (government), annual vehicle tax (government), auto body shop, daycare, and any home repair contractors all charge 3%+ (or give a discount, same thing), so I basically only use credit cards for other retail stores and travel and restaurants.
There is literally no time involved in avoiding interest. You pay your complete balance when it's due. As far as rewards go, I can't be bothered with them so I always just opt for cash back which I do maybe twice a year. Time involved: 5 minutes / 6 mo.
There's plenty of time: the time you waste by not spending money you don't have. You have to wait longer until you make more money in order to spend more without interest.
Don't spend money you don't have. Especially don't do it with 20% interest short-term loans. It's not that hard. If you're not financially responsible enough to handle a credit card, do not get one. I didn't have one until my late 20s.
I'm not arguing for myself, I agree you shouldn't spend money you don't have.
That is a spurious argument. You have a choice in whether you pay interest, you do not have a choice about a purchase including the cost of paying payment processor fees since the price is the same if you use paper money.
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.
> similar to how taxes are added after the fact
That is not a positive. I'm fine with splitting up a price if you want to show how much tax gets added, but having to continuously do the mental math of "no this item is 10.99 it's 10.99 + tax" is very frustrating. When I pick up a $11 item, I want to spend $11.
> especially in places like Europe where they’ve foolishly and enthusiastically started forcing everyone into digital payment
In Europe (or at least the EEA, but the UK and I think Switzerland have their own capping) card interchange is capped at, generally, 0.3%.
Important context: this is US thing. EU capped interchange fees at 0.2% for debit and 0.3% for credit cards.
So in US card processing is x5-x10 more expensive.
Things that are more expensive in the US for no reason:
sighs and adds "The very act of making a purchase"At least we have cheap gas? farts
Internet access isn't particularly expensive in the US.
Healthcare, education, and housing are expensive in the US for the same primary reason: political interventions that simultaneously subsidize demand and restrict supply.
it is for what you get. the US LEC and CLEC system sucks, and I had wayyyy more options in the EU, and in fairly upfront and straightforward ways.
e.g. https://documentscontractuels.orange.fr/les-offres-orange-mo...
Bit for bit, internet access is cheaper in America than it is in Canada or Australia.
Canadians like myself have ~40% of our provincial taxes spent on healthcare, so in my case about ~8% of my gross income. Somewhere in the tune of $20k/yr. While I was living in Seattle and filing American, quite a bit less of my gross income went to healthcare. Just food for thought.
But that is not because it's less efficient. With the Canadian system being socialzed and 20k$ being just 8% of your income it is to be expected that you would pay moch more than the median person into the system.
"I make $250k CAD a year, my experiences must be representative of, and relevant to, the masses," is a wild thought to have.
Well, maybe I spoke too soon, because my private American healthcare turns out to also be about 8% of my gross income (of $60k)(before copays and my deductible)(and also it's crap). Twinsies!
But yes I agree that it would be awful to have my health needs taken care of and a mere ~160k USD left to spend on everything else.
Internet access sort of has a reason: the US is geographically huge and more sprawled out. But that's not enough to explain all of the difference.
That’s not the reason. The required build out has actually already been been paid for: https://www.huffpost.com/entry/the-book-of-broken-promis_b_5.... But the US is so politically broken that corporations could just pocket the money without actually providing the infrastructure.
That does even begin to touch on crazy laws banning people from setting up their own ISP to compete: https://www.techdirt.com/2024/11/07/16-u-s-states-still-ban-....
That really explains only small parts. Even the horrible suburbs have little real reason to be that expensive. In the end it is really about lacking actual free market and enabling corporate capture as voted by the voters.
That might explain internet pricing in North Dakota, but it doesn't explain it in NYC or DC or LA.
I pay $40/mo for 500mbps in my Bushwick apartment - is that considered expensive?
By US standards? No, probably not.
But, a quick search indicates you can get similar broadband in Glasgow, Scotland for ~15 GBP/month. And Rome, Italy looks like ~25EUR/month.
I’m in Stockholm, and our condo HOA (BRF) includes 1Gbps per unit in the fee for all units because billing individually would cost more in admin than the service itself. We have FTTP and then cat6 to each unit.
To be more specific, this is a US credit card topic.
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.
That's what makes it a wealth transfer, from debit card users to you.
In my country card fees are less than cash fees, so I guess that's a wealth transfer from card payers to cash payers?
That’s a great point.
Managing cash for a merchant also brings real costs as well.
You have to take it to the bank or pay a service to pick up cash. You’re way more likely to have “leakage” when any cashier can pocket cash. Etc
In NYC, most independent shops give a debit card discount / credit card surcharge.
Card network rules in the US prohibit merchants from adding a surcharge for payment with a debit card. Most merchants are either unaware, or prefer not to care. If you are using a debit card at a business that assesses a card surcharge, point out that your card is a debit card when paying and refuse to pay the surcharge. If that does not help, there are online forms available from both Mastercard and Visa where you can submit a merchant complaint.
The card processors policies are anti-competetive (albeit legal) abuses of their oligopoly. Reporting small vendors to them does not seem right to me.
> As such, I just pay with credit and have never understood this argument.
Because the merchant pass the higher processing cost to all customers.
And often the credit card companies try to enforce this by writing wording into their contracts that try to stop merchants offering different prices for different payment methods.
This is true. In fact, if you come across a merchant that accepts credit with a minimum purchase amount or tacks an extra fee, you can take the receipt and call the terminal owner (visa/MasterCard) and report it. The receipt has a terminal ID, and it turns out the likes of Visa get really pissed if merchants do that.
I know this because I used to work on a US military base. There was a sole merchant on a particular installation that was doing this, but it was extreme. They'd force you to buy over 10 USD if you wanted to use a card, and it was the only place to grab a snack. One day there terminal was shut down, and for a period they only went to cash payments. Once they took credit again they removed the minimum purchase. Turns out somebody got pissed, and reported them.
Regarding the article, the ~390 USR sounds about right to me. I only use a credit card, pay it completely off at the end of the month. I've never once paid interest since in the 8 years I have used this card. Every few years I buy a plan ticket with the rewards.
Yeah, it propagates the problem because the price signal never makes it to the consumer.
Until 2013, visa and Mastercard forbade merchants from charging more for credit card payments if they accept their credit cards.
And it wasn’t out of the goodness of their hearts that they changed - they finally lost enough big court cases over it, it was to avoid heavy handed legislation.
Places around me have been starting to itemize the credit card fee. Only car dealerships so far have waived the fee for debit over credit in my experience.
Once ever I was requested to either pay cash or via debit in a cafe in Montreal
Good for you as you're smart but less smart people don't do this and then get scammed legally.
It's partly true: this only applies to consumer cards. That's why many EU banks still offer corporate credit cards with huge cashback etc. For example, revolut offers no cashback in France on their metal cards if you have a consumer account, but up to 1% cashback on the same card if you have a "freelance" account. https://www.revolut.com/fr-FR/metal/
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.
How does it work if I have a US credit card and use it abroad? Do I still get the kickback even though the merchant fee is capped?
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?
Issuing banks typically add an FX fee to the cardholder for cross border transactions. Not always, but many times they do.
Even if the FX is notionally "free" they pick the rates. So they can set those rates to generate exactly the same profit for them as with fees.
You will probably not see rates that are even competitive with a dodgy FX cash place at an airport, let alone with the numbers you've seen on financial networks for what FX transactions by banks cost, but you feel happy because there was "no fee".
>they pick the rates. So they can set those rates to generate exactly the same profit for them as with fees.
No, the rate is set by the card network, eg https://usa.visa.com/support/consumer/travel-support/exchang...
Huh. I wonder how long that's been true. I guess I haven't been to America since last century, but I could have sworn I had zero fee but unreasonable FX rates when I was in Poland which can't have been more than 25 years ago.
This is flat out incorrect. It's actually quite difficult to get a cash FX rate that's even close to as good as the standard credit card FX rate, which is also set by Visa/MC and not the banks.
Where the banks do get their pound of flesh, though, is the foreign transaction surcharge, which is often around 3%. No-fee cards exist but you need to look for them. And a whole new set of charges applies to doing a foreign cash advance on a credit card.
This is misleading. Banks put a fee on foreign transactions, many do this even if the transaction is in the card's native currency.
The card companies always add a margin to FX conversions, usually in the 0.5% range. This is fairly benign since the market rate can move between the transaction and the settlement, so sometimes you save money.
In Denmark most retailers will pass on the surcharge they get from accepting a foreign (non-EU) card with higher fees.
You see at the bottom of restaurant menus a note stating this.
It also applies to Danish business credit cards, as those aren't covered by the consumer credit card fee limits.
Most credit cards charge fat fees for foreign transactions (3% is common) and make some extra money on the exchange rate as well.
At least in Finland merchant contracts often specify higher rates for non-EU cards.
A lot of places in the Netherlands (particularly the low margin ones like supermarkets) don't accept credit cards.
Yes, you have outsmarted the entire US credit card industry and all of their actuaries!
How generous are credit card rewards in the EU?
Presumably not very, because the large majority of Europeans do not use credit cards.
I'd say it heavily depend on country. In some of them they are popular, but in others even debit cards is something only few people have.
With sumup I get 0.5% cashback up to a whopping 10€/ month lol. There are other cards giving cashback, I think Amex blu has a 1% with no upper bound of monetary cashback
Amex has very spotty acceptance rate in Europe.
My understanding is that they are much less generous on average compared to U.S.
E.g. for now I have the most premium card offered by my bank (50€/mo), and it gets me extra product insurance, rental car insurance, travel insurance, free lounge access, and some other things like that, but no cashback or similar.
I think some premium cards do offer cashback nowadays, but they are in the minority. Some cards also offer airline reward points. My experience is limited to Finland, though.
Normal cards not very generous. Fintech can sometimes give 1% cashback capped at 30-50-100 EUR.
Some weird crypto stuff can give more cashback, but it mostly for scheming nerds.
Usually ~1%. Some direct cashback, some via rewards points (e.g. 1.5 AMEX MRP earned per EUR are roughly worth 1ct).
There are similar caps in the UK and most credit card rewards seem to be low after an initial offer period.
There are some specific discounts and benefits but not cash rewards.
It is illegal (not banks will not let you, actual legislation) here to charge more for card payments or discount for cash or bank transfer.
In the UK (which broadly follows the same rules), I get 0.25% with a Visa and 1.25% with Amex. Sometimes there are introductory offers for a few months.
And as a result of that, Amex is often not accepted.
And is largely dying out as far as I can see; it’s only even still issued in a couple of European countries.
At least in the UK Amex interchange fees are not capped like Visa and Mastercard.
Still affects us as sticker prices are not set independently. Even if you exclusively buy locally, $ = € is extremely common for MSRP.
That's because the $ prices are without VAT
Patrick McKenzie (patio11 fame) had a great blog post in credit card rewards
There is a lot that goes into it, and it is interesting how customers like me who literally never have carried interest and have to made thousands of $ in rewards over the years still make the banks money....
https://www.bitsaboutmoney.com/archive/anatomy-of-credit-car...
Credit card points/miles are an interesting topic, and I have found them to be kind of useful cyclically myself over last 20 years.
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.
> It's generally a time-vs-money thing though in that to maximize airline/hotel programs
Credit card hotel booking portals are often much worse than what's available too.
For example, you might end up paying 30-100% more for a hotel booked through Chase Travel. At the very least you'll have way less selection. Even if price matching exists, you could still end up paying more.
I am traveling to Mexico next month and I do have a Chase Sapphire Preferred card (the one with the $95 annual fee). You get $100 in hotel credits per year if you book through Chase Travel.
In one of the spots I'll be at, there was (1) selection. It was $92 for 2 nights in a pretty low populated town that I'll be passing through. That hotel was rated 3.2 stars on Google.
If I use Google search or any hotel aggregator site, there were over 10 hotels available for half the price with much better ratings.
In this case it cost me about $50 extra to use the card's benefits.
Many people don't understand how rewards work when it's marketed towards your annual fee. The $100 credit doesn't offset the $95 annual fee. You pay $95 out of pocket for the fee. As soon as you book that hotel for $100 you've now paid $195 total out of pocket of which $100 gets credited back, so you're still out $95. If you instead didn't have the card and got the hotel at the cheaper rate, you'd only be out $45 or whatever you paid.
I mainly got the card because it had a really good sign up bonus, 0% international exchange fees and reasonable rental car coverage. Other cards can cover these benefits without an annual fee.
> 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.
What does this mean? I'm not clear what the sweet spot is - are you talking about buying points/miles/etc outright with cash rather than earning them as credit card rewards? Everything I've read is that these are almost always bad deals.
It means that the vast majority of redemptions are a bad deal, but every program has gaps in their earn/burn charts that lead to good values.
There is no one-size-fits-all answer.
If you do not have time to look into it, plan trips 6-12 months in advance, or have flexibility (will go anywhere thats a deal), then they aren't worth it.
> 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.
“Saving” airline miles is definitely suboptimal, like you said, getting 2% cash back and redeeming it immediately is the optimal strategy. Money is fungible and cash depreciates.
Plus, the “deals” you have access to with airline miles are not slanted in your favor.
Discussion of patio11's article:
https://news.ycombinator.com/item?id=39928604
As others have mentioned this is particularly prevalent in the US. I always liked that Australia's vision for a peer-to-peer payment system (note cards are mainly for merchants, hence the rewards) has inclusivity [1] as one of its core tenets "continue to transact ... without disproportionate burden or risk ... those experiencing financial hardship". They also just stopped surcharging [2] and have capped interchange fees since a long time.
1) https://a2apaymentsaustralia.com.au/wp-content/uploads/2026/...
2) https://www.rba.gov.au/payments-and-infrastructure/review-of...
And those same American companies want the US government to intervene in other countries to try to kill their local alternatives
THIS!!!
I always wondered why people in America would ever pay by cash or credit card - unless they are laundering that cash.
Otherwise, you're giving up 1-3% discount.
Set auto-pay on your credit card to pay in full every month. I've never once paid for credit card interest. I think there's a term inside credit card companies for people like me: leeches or something like that.
When I and my (still fairly young) family needed to move cross-country, my wife and I accepted a credit card offer with 0% APR for the first year and put all our moving expenses on it. Then once we settled, we paid it down a bit at a time each month, and then right before it would have started charging interest we paid the rest as a lump sum.
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.
Credit card companies are still charging merchants a transaction fee for your purchases though. The fact they're only charging one side of the transaction is probably annoying for them, but you still make them plenty of money.
This presupposes the ability to get a credit card and the confidence of sufficient funds when that auto payment hits.
If the alternative was paying cash, cash has an even more demanding level of confidence of sufficient funds required and it applies earlier with no flexibility.
Well, one reason is the one described in TFA —- credit card rewards amount to a regressive wealth transfer, and if you think that is bad, you may not want to participate in it.
Another reason is that credit card companies sell your purchase data to aggregators and advertisers, and cash affords more privacy.
I paid a lot of credit card interest, as a yute, but, since getting married, I have paid in full. Been over 30 years. Leeches rule!
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.
Credit cards are cheaper than cash for most merchants. Most people forget about all the costs of cash because they are hidden, but they add up to more than the couple % credit cards cost.
I prefer my debit card because I'm more aware of how much I'm spending. Money taken out of my account is immediate and feels real. Ultimately, I spend less.
One isn’t more real than the other. They are both numbers in an online database. In one case your assets are going down, in the other your liabilities are going up. The net result is the same.
The parent isn't explaining it well, largely because it's not rational.
I think of it like alcoholics who can't be near alcohol. It's some deep seated degeneracy or fear.
I agree with dougdude. I like debit cards better because you see the balance change immediately. The thing I dislike about credit cards is payment is deferred by a month.
It's a world of difference if one of them gets stolen vs the other.
In that case a credit card is actually significantly better than debit
Yes that was my point. A debit card stolen from you hits harder than some numbers in a database going down when you can't pay your rent.
Prices don't go down, they only ever go up.
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.
Prices do, in fact, go down. For example, eggs in the USA went down from $6 to $2 in the past few months. https://www.macrotrends.net/3052/us-egg-prices
Long term average? Sure, it goes up, that's inflation. But do you know what causes inflationary pressure? Visa and MasterCard adding unjustified fees because they're a duopoly and control most of the payments market, and your government won't regulate them and cap fees.
The UK and the EU both cap debit card fees at 0.2% and credit card fees at 0.3%. When the UK left the EU, Visa and Mastercard jacked up their fees over 5x for UK-EEA payments. Not because they had to, but because they could, and they love sucking money out of other peoples' businesses. https://www.psr.org.uk/our-work/market-reviews/market-review...
Retailers in competitive industries absolutely do use a reduction in card fees to lower their prices. Maybe not all the way, but they definitely don't give it all to themselves as margin; their competitors don't.
> Prices don't go down, they only ever go up.
Well, there was that time in the 1930s.
> Otherwise you're giving up 1-3% discount.
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.
You shouldn't get a cash discount - cash costs the merchant MORE than credit card fees. You have to count all the costs of cash that credit cards don't have: counting, and recounting the cash and change. Then the manager counts and recounts everything in the back room at the end of the shift. Then the manager counts everything twice again to write up the deposit forms. Plus you need a cash register with the extra cash drawer that acts like a safe. Plus other security systems just to prevent robbery (this can get elaborate in areas where robbery is common). Those all add up.
> You shouldn't get a cash discount
Maybe, but "should" has nothing to do with it. Either I get one or I use my credit card.
> cash costs the merchant MORE than credit card fees
That's not my problem.
None of this is your problem: you are not a merchant. What is wrong is the analysis of various people who think cash is cheaper and thus get mad at not getting a cash discount. It is also wrong that a number of merchants are bad at accounting: they think that cash is cheaper by enough to be worth a discount - but this is not your problem either.
Just pay with a credit card, it's the optimal way by far (float, flexibility, rewards). No need to overthink it.
It's worth to think about it a bit, especially in larger purchases. Significant discounts on the order of 5% to 10% can easily beat all credit card benefits, and not taking advantage of it leaves lots of money on the table.
I have a little lookup table for this. Interest free installments mapped to cash discount necessary to beat the credit card. I just look it up.
These numbers are actually conservative. There's a lot of credit card benefits that weren't priced in. I add a couple percent to the required discount numbers and round it up to compensate.Mathematically you are right. However those interest free payments are generally setup in such a way as to make it highly likely you won't pay it off by the end of the interest free period. The bills they send contain the minimum payment - designed to get you past that time. I don't trust my ability to get the fine print right - it only takes messing this up once to destroy all the gains from several times getting it right. So I use the credit card anyway and pay it off every month - that payoff is the one number I can get right every month.
> Otherwise, you're giving up 1-3% discount.
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
If you have Amazon Prime, I recommend getting the no-fee Chase Amazon card. 5% on Amazon and Whole Foods; 6% on some Amazon “no rush” deliveries.
No affiliation; just a happy user.
I know that Discover has a card with a 5% discount category that changes once a quarter. Everything not in the category gets 1%. It's not hard to get the card (or at least wasn't) and was frequently advertised to college students.
If you combine that with a card that gives 2% on everything than it wouldn't be hard to average over 2% cashback as long as you were mindful about using the discover card for qualifying purchases and the 2% card for everything else.
> as long as you were mindful about using the discover card for qualifying purchases and the 2% card for everything else.
And that's the rub. Credit card companies know most people won't be too mindful most of the time about their spending habits.
There is one other rub - because I use my bank's card I get better interest rates. How does a .25-.5 % on my various loans and checking account compare to 2% on groceries - this is a complex question that it not easy to answer.
I have a 2% cash back credit card from my bank, with no monthly fee. It started as a 1% cash back card around a decade ago, and slowly crept up to 2%. It's a nation wide credit union that has certain requirements to join though.
My first US credit card was a 4-3-2-1% rewards program and I had literally zero income at the time. I was told by the banker, "oh you can't do that right away, you must first get a secured card to build your credit score, after a year you can try applying for real", but I told them I don't care and to send the application anyway, and I've got it.
Ever since then, I wondered how much of the "not qualifying" is due to misinformation like this.
Most true not qualifying are either
1. People with proven bad credit.
2. People asking for a lot of money without proven good credit.
3. People asking for more specialized credit, such as lines for businesses or lines for high earners.
The question is what percentage of overall population are 1, 2 and 3 combined, and is it big enough to warrant the perception that high reward cards are only for high earners/spenders.
My instinct says hell no, not even close.
Most people can’t optimize for 1-3%. Life is flooded with 1-3% choices.
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.
I've heard such people referred to as deadbeats.
Once in a while. However the truth is the large people who collect the 1% and pay off their card every month are the people who don't. These people are customers year after year, and often spend more on their cards (they tend to be higher income), and the bank gets their 2-3% from them (2-3% after rewards)
People who don't pay their card off also are on the look out for lower interest rate cards and switch all the time. they in reality are not paying the very high rates on cards, they are paying the lower introductory rates (which is still a lot of money). These people are also more likely to default and stop paying leaving the bank to write everything off. Combine that with the fact that they typically don't spend as much over several years (they hit their credit limit and their income won't allow an increase so they have to stop spending), and they are not as profitable as it seems.
A lot of it is to enable the small business owners to hide their real income. At least that's how it works in immigrant communities.
Huh?
Based on the downvote and your reaction, I assume I misread something. We're talking about why Americans sometimes prefer paying with cash over credit card, no?
How hard is it for the wealthy to not smack everyone else around at every possible opportunity? What happened to noblesse oblige?
(This is not a rhetorical question, I would love to hear others' take on the psychology and history of the subject. Really, how hard is it?)
It becomes a scorecard. Success in life is strictly about making the number go up. It doesn't matter if they could spend $100K a day for life and never go broke. They must have a bigger number and be higher on the Forbes (e.g.) list. Some people are so obsessed with it they lie and make up things to claim their number is much higher than it actually is.
> everyone else around at every possible opportunity?
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.
The study methods are closer to advocacy than science or policy.
Sure, take any slice of a vast number, and you get a big number.
It's not a "wealth transfer" when everyone gets what they bargained for and can opt in or out.
Most importantly, the transaction value of using credit cards or rewards systems - what the user actually gets - is not enumerated.
Beyond what others have noted (mainly deferred payment), credit cards offer legal transaction protections: my legal liability for fraud is limited (unlike debit or Zelle transfers), and I can challenge any transaction even later, which gives the vendor an incentive to ensure I'm happy even after they have my money. While reputation provides some incentive for repeat customers, the ability to retract a transaction governs even non-repeats. I would submit this alone has improves quality of service for everyone anywhere credit cards are accepted.
Rewards vary by type. Cash-back rewards reflect the fact that interchange fees were set to recapture initial investments, but servicing costs have plummeting (thanks to computing); governance-wise, it's almost impossible for a "representative" political system to extract a large cost from a small number of powerful agents with vested interests to provide a tiny amount of benefit to a very large numbers of other people. But that's a much more extensive governance issue.
So where does the benefit go? To competition between credit providers, initially as cash-back, and then to tying rebates to future purchases within controlled channels. For airline point systems that give free flights or upgrades, it improves retention, but other forms of rewards would seem to verge on tying, where power in one market is extended into another.
Politically-mediated wealth transfers are a political issue. Economically-mediated wealth transfers should raise market-regulation policy issues, in particular whether the law is inducing or protecting them, and then whether they are good or bad. Tallying that requires not just seeing the money flow, but seeing all the value received or cost exported.
I have several credit cards and pay them off at the end of the month. I get mostly free hotel stays when I take my family on vacation and have had many free airline tickets.
I also used a credit card to bootstrap my business 15 years ago. At it's height, I was brining in $1 million/year. The bank would have never given me a loan for the amount I was able to use on a credit card. I ended up shutting the business down a few years ago, with no debt.
Most people can't handle spending and rack up tons of debt. Credit cards can also be used to make money, instead of buying stupid things you can't afford.
The most defensible framing that I came across (maybe from patio11?) in favor of credit card rewards is that they're a "bulk discount" on interchange fees. People who spend more on their cards also pay more fees (passed through the stuff they buy), so it kinda makes sense to give them a discount[1]. That's what credit cards do. Cards with the highest rewards are geared towards high spenders, with corresponding credit score and/or minimum income requirements. It's not unlike how the 2 quart (1.89L) bottle of mayo at costco is cheaper than the 8oz (0.24L) bottle from dollar general, but nobody would frame that as a "wealth transfer".
[1] of course, this doesn't need to rely on some principle that people are entitled to discounts if they buy more, because in reality discounts arise from complex market dynamics such as competition and price discrimination.
Discussion of patio11's article:
https://news.ycombinator.com/item?id=39928604
While they’re probably right from a consumer perspective, the article skips over the fact that accepting and handling cash is a significant cost for businesses, way more than the credit card fees. Delays in checkout, making change, counterfeit bills, employee theft, external theft, safe transport, added accounting burden…all add up to an estimated 5-15% (https://plainscapital.com/blog/the-cost-of-accepting-cash/). In fact merchants can now legally pass through credit card surcharges to customers but very few choose to do so, because they’d prefer you pay by card.
Credit card owners benefit. But they also pay: With their data.
More actually. Generally those rewards happen by using your credit (there are exceptions). Meaning you are more likely to pay for something that you'd probably otherwise not have spent money on.
One factor that never seems to come up in these discussions is that while businesses might not like credit card fees, they also don’t like all the issues with cash: managing it, transporting it, losing it to employee theft, etc. The cost of cash transactions isn’t 0.
Same argument for people: managing cash is a pain, swiping a card is easy. Contesting a transaction or fraud is way easier (infinitely easier?) with a card than cash. Having day to day liquidity even without ever carrying a balance is nice.
Is all this worth $9.2B across the economy? Maybe not, but again, certainly worth more than 0.
>Is all this worth $9.2B across the economy? Maybe not, but again, certainly worth more than 0.
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 don’t really care what businesses want at this point: my default position is that they are trying to scam me in some way and must be handled appropriately. Credit cards are a must-have in this situation, since they provide a mechanism other than hope to deal with recalcitrant merchants without wasting my time.
Patio11 covered this exact topic: https://www.complexsystemspodcast.com/episodes/credit-card-r...
It's clearly more complex than the story these authors are telling, in particular the highest income consumers get the worst returns on their interchange payments. So stores and services catering to wealthy consumers are actually subsidizing an opportunity for savvy customers, many of whom are not wealthy
One note on patio11’s opinion on this is that he really overweights the ongoing work and innovation required for electronic payment processing. It WAS a great novelty and deserves to have made a lot of money for 30 years. But the reason they make so much money today is monopolistic low behaviors to lock in their advantages. It’s not a free marlet because of deals over time, some of the most famous of which are their prohibition on charging different rates for cards or even disclosing the rates on cards.
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.
>in particular the highest income consumers get the worst returns on their interchange payments
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
To be clear though, the higher FICO scores get hosed the most, see the graph earlier on. Your quotes are conditional on FICO so they don't take that into account.
The only way I can put these things together is that at the high FICO end, both wealthier and poorer consumers get hosed a lot but wealthier consumers not quite as much. On the other hand, lower FICO band doesn't get as bad of a deal overall but it is worse for wealther people (plausibly because they have high interchange fees and don't use their rewards).
It's complicated, but... this is not a wealth transfer right? It is a transfer mostly just from consumers to credit card companies that provide them a service.
Discussion of patio11's article:
https://news.ycombinator.com/item?id=39928604
Because merchants charge everyone the same price regardless of how they pay
Not at many gas stations. Cash gets a discount usually $.10 per gallon. I’ve also started to see restaurants either give a discount for cash, or charge extra for credit card purchases. Business suppliers from tiny shops to large national companies tack on 3% for people paying with credit cards, or like T-Mobile, a $5/line monthly fee in order to get people to pay by direct debit.
It goes a step further... previously, card agreements (between merchants and the networks), required the prices to be the same between cash and credit (with the well known gas carve-out), but Durbin made that tying illegal, so now retailers are free to charge different prices for cash, credit, and debit.
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)
They mention "premium credit cards" in the article, is there a general understanding of which cards are premium? I clicked through to the study and the only example they cited in there was Chase Sapphire Reserve but I didn't see, like, a list or something.
It's cheaper to be rich, and expensive to be poor.
I think this is disingenuous framing.
Credit card rewards are not a mechanism to shift wealth towards premium card holders (this is a negligible distraction), they exist purely to increase revenue/conversion rate, by decreasing customer price sensitivity (compared to cash payments) and encouraging financially irresponsible spending. If this did not actually work in practice, every merchant would just insist on cash and pocket the difference.
"Poor people" are hurt much more from the changes in spending behavior induced by credit card use than by paying for card rewards.
You are an economist, aren't you?
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.
> You are an economist, aren't you?
No. I do embedded software engineering for a living.
I use (in my view) HN appropriate levels of jargon (because lots of people here are involved with getting people to pay for some newfangled cloud thing or other, so I use their terminology).
In simple words: People pay more for the same (and spend more recklessly) when you let them pay by credit card, and this causes much more economical "damage" to poor peolpe than any "wealth transfer from card rewards".
Thanks, it is better now.
I interpret this article, and all related discussion, as an invitation to talk about my personal finance habits.
Merchants pay the transaction cost. In my parents business in the early 2000s customers would ask in advance if they could use a CC. Some places installed ATMs in the corner (still a thing in some places), but quite unpopular. Rather than lose a customer the merchant will accept payment with credit card and pay the fee.
One consequence of this system is the large merchants have more bargaining power and can negotiate lower fees. So large retailers, gas station chains, etc. are able to reduce the overhead of accepting CC payment. While smaller merchants have the same higher cost.
From a capitalism perspective, this is the most egregious example of "you have capital, so you can make more capital". Banks holding the capital in this case.
Fun fact: when credit cards were first introduced only to people with good credit, which paid the balance in full. this was not profitable. Only after opening the pool to other credit levels did CC start printing money for banks.
> Merchants pay the transaction cost.
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.
What a silly article. Don’t buy things you cannot afford. Wealth transfer is a ridiculous framing. Is any heterogeneous situation involving money a wealth transfer?
Credit card fees is one of the main reasons why Brazil's Pix and India's UPI are destroying their market share in those countries.
For merchants, it just doesn't make sense to pay high fees to cater to a dwindling minority of consumers.
Credit card usage has been increasing in India.
Source: https://bfsi.economictimes.indiatimes.com/articles/credit-ca...
Besides, NPCI has introduced merchant transaction fee for UPI now causing decline in UPI transactions.
So if anyone is trying to picture what 9.2 would buy. The new bridge between US and Canada (Gordie Howe) was 4.6 billion. So that is 2 giant bridges + related infrastructure ... worth of wealth transfer. That bridge had some corruption / payoffs, so we should discount that by 10% wealth transfer as well.
> Because merchants charge everyone the same price regardless of how they pay, those fee costs are factored into prices for all shoppers. However, credit card users get that money back and then some through rewards, while cash and debit users get little or nothing.
>The result: People paying cash face the equivalent of a 26% higher sales tax than premium credit card users shopping at the same store.
I am surprised this never occurred to me or has come up at all in discussions with people (in the context of rising costs/inflation specifically). I’ve literally never considered this compounding effect until now. It’s so obvious of course, it just never even crossed my mind.
I was surprised by this number too - and I’m pretty sure it’s a clever wording trick to inflate the percentage:
> 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.
I believe a similar thing happened with fast food and food delivery fees. It costs money to be listed on the food delivery app so fast food chains started charging everyone the same price to offset the cost of being listed on the apps.
Delivery apps don’t mandate that the price on their apps be the same as on the actual menu. If you walk in and order you’ll pretty much always get a lower price.
It also means stratifying card users, even if you actually make all the card users pay more than those with cash. The people who can just barely qualify for a card are paying to fund the "rewards" for the wealthy who pick the best options.
"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...
Then they get angry when the other side of the coin is discussed - they can’t get certain benefits because they’re above the threshold too, but they’re different of course.
And there I was thinking it was obvious that merchants wouldn't just eat cc fees, and would cushion all prices to account for their costs.
You’re right but that’s actually not the part I’m talking about. Specifically the fact that even though we are all “being charged the same price,” as prices increase, the amount I am saving increases as well due to cashback or other benefits on a credit card. And because I am spending less money, I ostensibly have more money to make my credit better, which means the benefits only increase on top of that.
It’s a variation on a theme we are all very familiar with. It’s expensive to be poor. But this is another angle I hadn’t really considered. It’s a little more complicated than just “I can have better cards with better benefits.”
TL;DR: The actual cost per item for me is, in very literal and quantifiable terms, lower as a result - and the more expensive things get, the steeper my discount gets while the person next to me paying cash is paying a little more than I am every transaction for the same items.
Put another way: As price/inflation increases, the real number I am saving increases as well. So we aren’t just paying different prices, but their increase is also higher the higher prices get.
Many restaurants I’ve eaten at lately surcharge credit cards with a 3% fee, offering a discount if you pay cash. This is the way to nullify this regressive policy until the US commercial banking system offers instant payments for merchants, internalizing the externality of the interchange fee. If you pay with card, you
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)
The problem is the way the US credit/debit card systems are setup, there's not much of a discount/surcharge that would make me switch usage to debit.
If my credit card number gets stolen, zero money ever leaves my account. It simply gets contested before the monthly bill is even due, and cancelled. I have probably had number stolen 5 times in 20 years, and its never cost me a cent. Zero dollars every left my accounts even temporarily.
If my debit card number gets stolen, the money is out of my checking account immediately. Mortgage payments and other bill payments might fail, and the onus is on my to chase up the bank to get charges reversed and money returned to my account.
n=1 of course. All US mobile carriers provide a substantial discount if you establish autopay with ACH over debit or credit. I've seen the same with Xfinity. It will take time, but we'll get there.
T-Mobile, AT&T follow Verizon on discouraging credit cards for bill-pay - https://www.paymentsdive.com/news/tmobile-att-verizon-incent... - August 10th, 2023
Xfinity Automatic payments and paperless billing discount (APPD) - https://www.xfinity.com/support/articles/automatic-payment-p...
> You can get a $10 discount on your monthly bill if you: Have Xfinity Internet and sign up for automatic payments and paperless billing with a stored bank account
Walmart was one of the larger supporters of FedNow during public comment period, as they experience billions in interchange costs per year, and are building instant payment support into the Walmart Pay component of their app to avoid these costs.
Walmart Plans Instant Bank Payments, Cutting Out Card Networks - https://news.ycombinator.com/item?id=41593450 - September 2024
Walmart FedNow instant payment public comments: https://www.federalreserve.gov/SECRS/2019/December/20191227/... [pdf; 2019]
> “It surprised me,” Henry said of adoption of Walmart’s first iteration of pay-by-bank, which is available online but hasn’t been marketed to customers. “It’s certainly surpassed our expectations of the amount of customers that have registered and actually use the payment type.”
> Walmart’s upgraded pay-by-bank offering will be rolled out in 2025. The transactions will occur over bank technology provider Fiserv’s NOW Network, which integrates with The Clearing House’s Real Time Payments network and the Federal Reserve’s FedNow. Until now, large retailers hesitated to launch real time payment options because many banks were not connected to an instant settlement system, meaning their customers would not be able to use the product. NOW Network aims to connect to as many banks as possible to reach 100% of deposit accounts by combining its own network with RTP and FedNow.
My understanding is that Meta is also pushing ad buyers to invoicing vs credit card payment.
Meta Ends Credit Card Payments for High-Spend Ad Accounts: Mandatory Monthly Invoicing Starts April 1, 2026 - https://www.auditsocials.com/blog/meta-ends-credit-card-paym... - March 31st, 2026
Like the slow decline of check volume, I see the same here. Credit card rails will exist for some time, perhaps another 10-15 years, but they have likely peaked from a volume perspective. If you're a merchant, surcharge when you can, and work towards on boarding and offering customers cheaper payment rails (imho). If folks want to pay the ~3-4% surcharge, enable them to, that is a choice if they want the benefits of using a credit card. But we should not all have to eat the cost for their benefit when less expensive options are available.
https://www.visualcapitalist.com/sp/cb03-charted-the-end-of-...
https://www.federalreserve.gov/paymentsystems/check_commchec...
(I work in financial services adjacent to payment systems, thoughts and opinions always my own, this is behavioral economics at scale, as always think in systems)
Not only would the 3% fee not make me blink, as my cards have 3% cash back for dining, I doubt I'd change my behavior even at a 5% discount. If anything it'd dissuade me slightly from patronizing the restaurant.
Credit cards are convenient and cash isn't. The genie is out of the bottle, no way to make people move back to cash.
You're not the avg person though. Most people are being squeezed by inflation and watching prices on everything and trying to claw an extra 2-3% back wherever they can.
If interchange fees were capped, people would go back to cash, imo. A lot of research shows you spend less when you pay with cash. And the lack of credit card rewards as a draw might lead people to carry it again
> If interchange fees were capped, people would go back to cash, imo
And this is based off evidence from countries where interchange fees are capped?
Car mechanics, dealerships, house fixing contractors, city (property taxes), these are the ones that I can think of in the past year I've come across charging a fee for credit card payments. What's most irritating is that most of them do not setup for and drop the fee if you pay by debit card.
Always ask if they’ll give you the discount paying with Zelle if they won’t for debit. Almost every major bank supports Zelle currently in your native banking app.
https://www.zelle.com/get-started
In small restaurants, that’s just a tax grift for the owner. The “smarter” ones underreport income, the dumb ones steal the sales tax and the hammer eventually drops. Over time, they’re probably paying a lot more than 3% for shrink, Due to screw ups and employees skimming the till.
Credit cards have a really high ROI. The 3% drives 10-20% more spend, sometimes even more. When I was on the board of a small private school, we bought a square terminal and used QRs for flyers. That drove 30% increases in fundraiser expenses and helped us reduce mailings and nags. We would cross-sell stuff - could buy your youth soccer registration at the fall fest or whatever.
The things where ach, check, cash make sense are where there’s no discretionary spend at point of sale or recurring payments. If you pay 75 bucks a week that have your apartment cleaned dog groomed or whatever. You’re not getting value beyond taking the payment in advance with a credit card. Those are the areas where Venmo and Cash app have really dominated.
Same, that percentage seems absurd though.
The only way I can interpret the percentage is that they are stating the increased cost as a percentage of sales tax rather than a percentage of the sale, such that "26% higher sales tax" in a state changing 10% sales tax would mean paying 2.4% more in total. That choice seems misleading, but does make the percentage make sense.
That is what it says after all, it's pretty explicit.
It's just such a bizarre choice that one might hope there would be another interpretation. Why measure a percentage change on sales tax, which varies heavily from location to location, and is not what the associated fees are based on, rather than simple choice of total cost?
Credit card systems are a Ponzi scheme that favors those who already hold a lot of capital, at the expense of those who weren't lucky enough to be born heirs.
This is even more true of the American brands that are getting Trump to attack modern, open, cost-free systems from other countries—like Brazil's PIX, maintained by the Central Bank of Brazil.
I call it 21st-century American usury.
So i may be an anomaly but I'd say 20-40% of all places I shop have a specific fee to cover CC transactions using a CC vs Cash.
There are places I go to that only accept credit or debit cards. No cash or cheques.
Yeah and a good smattering of cash only businesses as well