Much of the 2-3% US companies charge is spent in the form of rewards in the US. The fact that US companies offer 1-1.5% back to customers as rewards implies they can support lower fees to merchants if they get rid of rewards. Do EU cards have cash back programs?
So, the card gives rewards and charges higher merchant fees. The merchant raises prices to offset the fees, which offset the customers' rewards. Friction.
This is exactly like subsidizing farm, ranch, and oil but then raising taxes to pay for the subsidies indirectly.
The rewards establish a system where everyone would be better off if no one uses reward cards, but the best strategy for each individual is to use them.
A clever application of game theory to leach wealth from the populous.
>One of the most often cited studies is one conducted by Dun & Bradstreet, where the company found that people spend 12-18% more when using credit cards instead of cash. McDonald’s reports its average ticket is $7 when people use credit cards versus $4.50 for cash.
>Those who were told they would have to pay by credit card were willing to pay more than twice as much on average as those who were told that they would have to pay by cash.
Reward cards and other benefits (such as extended warranties) encourage people to put spending on credit cards. Putting spending on credit cards causes you to spend more. Ergo "those rewards programs get people to spend more money because they get more points."
It's well established that paying with plastic over paper makes you spend more.
>But the most surprising thing about these studies? When I tracked down many of their authors this week, I found that they, too, can’t quite kick the credit card habit. Why doesn’t Joydeep Srivastava, co-author of the Monopoly money study, use a debit card or cash?
>“Mostly because my credit card is giving me lots of miles,” he said
>Once upon a time Mr. Prelec, a professor of economics at the Sloan School of Management at the Massachusetts Institute of Technology, refused to collect frequent-flier miles (or even coffeehouse stamp cards) because he thought they cluttered his decision making... Now, he doesn’t leave home without American Express card. Why not go debit-only? “The rational answer is, it’s the points,” he said, given that few debit cards offer reward points.
They don't, really, as long as they're not disadvantaged compared to the competition. The people who are getting screwed are people who pay cash or use cards without rewards programs.
Merchants will charge more when profits drop. None of this is coming out of profits. They only time it comes out of profits is when competitors have some advantage that prevents the merchant from passing increases on to the customer.
Or like throwing your change in a bucket every day for a year, and then pretending like the money came out of nowhere when you cash it in once a year and blow it on something you wouldn't normally buy.
Well you can always try the India model which is Chip and Pin for cardholder present transactions and mandatory two factor authentication for online. One result of this strict policy though is automatic subscription card billing is essentially illegal.
You can only pay online with debit cards if you use two factor authentication in Europe (eurozone). It's basically free though (cash is more expensive to handle), unlike credit cards.
No, the processor will redirect you to the page of your bank where you need to enter a code sent by sms by your bank. This is true 2fa, it works at least with all Russian banks I've used and I'm sure it works in EU the same way (I thought it was like that everywhere in the world?)
What's sad is that the rewards cards are generally only available to people with good credit which correlates strongly with the middle class and up. That makes rewards cards a transfer of wealth from lower classes up. Making us all complicit in the ursury evilness of credit cards.
Good credit isn't so hard to establish, and not so tightly based on income... My ex wife has incredible credit and she doesn't make that much more than minimum wage. It comes down to money management, and paying your bills on time, over time. Too many people will let frivolous expenses take priority over paying the bills.
I've been down and out... unemployed most of 2002, and saddled with a six figure hospital bill (after insurance max) about 7 years ago... I still have two rewards cards... I put everything day to day on them, and generally pay them off at payday. I try not to carry much of a balance, except for larger outlays that I'll do over time.
The bigger problem is that parents should talk to their kids about bills, the importance of paying them, and actually show them a spreadsheet with how much is coming in, and how much is going out just for bills, and then working with what's left. Parents don't do this, schools should as well, and even then, the stigma prevents parents from showing this to their kids, so they get to be adults with no understanding, prioritization or coping skills.
Oh please. Here's a better reward: don't buy anything you don't need. Since credit cards are commonly used to purchase luxury goods -- generally associated with middle class and up -- I could make a similarly inane argument that it's a transfer of wealth from spendthrifts to those that are disciplined and save their money.
If you do business travel, or other per-deim expenses, it's a huge boost to have a rewards card... the original bill is reimbursed and you get the points/miles.
Oh great, an incentive mechanism that rewards going for the most expensive acceptable option even if there is not only no business value in it, but also no direct personal value.
But that won't lower prices... as it stands, even if rewards programs were eliminated today, and fees were capped as in europe, the prices of goods would not go down.
Online retailers (esp small ones) are paying ~2.5-3% in credit card fees, and compete heavily on price. I run a small online store - if my credit card fees suddenly dropped by 2% the first thing I would do is drop all my prices accordingly.
Rounding to stupid numbers (.99) works just like rounding to reasonable numbers: there are some inputs where a sub-granularity change would push the result over the threshold and others where it would not.
But your observation gave me an entirely unrelated idea: could a merchant, online or not, use deliberately random "##.74 instead of ##.99" prices to give the impression of really tight margins, even when they are actually wide?
Yes, there were plenty of reward schemes - Airline, store points, hotels, cashback etc. in the UK (at least) but the number of them and the rewards are getting smaller since this ruling
Debit cards, which are huge outside the US, never have reward programs (that I've seen anyway.) Visa does not charge different fees for different product types for them.
That's cool but that's a fixed 10 cents, so basically Discover is forwarding to you some of the money they receive for handling the debit in the first place.
I have yet to see a debit card do a 1% cash back, which is really common in credit. Here in Canada, the debit charge (handled via the interbank Interac "sort of coop") are really low, 6 cents per transactions is about par. There's nowhere to tack on even a 10 cents cash back.
They used to but they are being phased out - the EU piously thinks that the merchants will pass on lower costs to the consumer - which is to borrow a line from Sir Humphrey "A brave choice commissioner"
Let's say that retailers' financial services costs drop by 1% of revenue, and they choose to raise their prices by 5%, because they're really greedy or mean. Their competitor across the street is also really mean, but only raises their prices by 4%. As a thought experiment, play that scenario through a few more turns.
The effect of lowering their costs for financial transactions is to lower retailers' minimum price for selling their products. They're "allowed" to charge as much as they like, though there are legal restrictions that make it illegal to collude with their competitors. And, even if they do collude there are motivations to defect from those illegal agreements that tend to undermine them.
A higher level view will appreciate that the higher sticker prices from higher transaction costs largely ended up being refunded to consumers through credit card reward programs, but probably distorted the prices for buyers paying with cash.
The regulation had a noticeable effect in Germany: As soon as it was in effect every chain started to accept MasterCard and Visa cards. That includes the most frugal stores that have razor thin margins. The food market is extremely competitive and if a store can afford to undercut their competition they will the first second they can.
