How Your Credit Card Rewards Are Funded and Why They Might Disappear
We all love credit card cashback rewards and free rides , but not all are fans. Many business owners actually pay a commission to help you earn those rewards, and sometimes pass the added value onto customers.
A small business acquaintance recently told me that she is scared when customers pay with a bonus card because that means credit card companies are taking over most of her sales. This decline has increased in recent years, mainly because reward cards have become so popular.
Forbes has addressed this a couple of times. In one article, they write :
Seller commissions pay to accept fuel reward programs when paid by credit card. These fees, called exchange fees, are higher in the United States than in most countries in the world … Card issuers have begun to actively fund credit card reward programs in an effort to attract more of their customers to this payment method, mainly because their transaction profits with debit cards dropped sharply a few years ago.
In a later article, Forbes explained that credit card issuers take their cut from these fees and then put the rest into their reward programs. This commission is usually around 2%, and in an attempt to offset it, some sellers raise their prices at a premium, making the whole “reward” aspect of using a credit card meaningless.
In other words, “business owners are subsidizing credit card reward programs in the United States.” Sometimes they pass this cost onto the buyer.
For example, some bonus cards give you up to 2% cashback on your purchases, which is great, but if you have a 2.5% markup, you are actually paying more than if you were paying in cash. Forbes reports:
There are currently 10 states that ban credit card copayments – California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma, and Texas. However, laws are constantly changing and may be changed in the future. In states like New York and Florida, lobbyists are fighting to get these bans lifted.
Of course, this affected not only small businesses. Retail giants like Walmart are also battling credit card companies over these fees, and many companies have lobbied for a cap in recent years, Forbes explains.
They argue that the accusations are unfair and create a burden for small business owners operating with low profit margins. Visa V + 0.51% Inc. and Mastercard Inc. are also battling retailers in courts on charges of price-fixing schemes. They are confronted by giants such as Wal-Mart Stores WMT -0.25% Inc. and Amazon. Visa and Mastercard offered $ 5.7 billion in compensation last month to end the proceedings. The Federal Court of Appeal rejected their offer.
This is not such a big problem in other countries where there are restrictions on these fees. For now, they expect rewards to continue to grow and improve for customers, so their position seems to be to take advantage of them while you can. Either way, it’s worth knowing exactly how your rewards are funded and what you can expect from their future.