Who Pays for Rewards Cards?

Earn unlimited 1.5% cash back on every purchase, every day.

Earn 60,000 bonus miles, plus unlimited double miles on every purchase, every day.

Earn unlimited 3% cash back on dining, entertainment, popular streaming services and at grocery stores, plus 1% on all other purchases.

What’s in your wallet?

Credit card marketing. Reward cards ads pitching credit card rewards with cash back or airline miles. But who pays for those “rewards?”

Credit card companies pay for rewards with revenue from two main sources: consumers—and the merchants who accept their cards. Have you ever wondered how card companies can afford to offer such great rewards?

You’re likely aware of consumer’s contribution. Interest is paid whenever a balance is carried on a card and fees whenever a payment is late, or when cardholders get a cash advance. But most consumers don’t know about the fees that retailers pay card issuers behind the scenes. These fees, called interchange fees, are set by credit card processing networks like Visa and MasterCard to cover both the risk and cost of processing credit card payments.

There are more than 100 different interchange rates that can be applied to a credit card transaction depending on the type of business, the type of card being used, the transaction amount, and whether the card is dipped, swiped, or keyed. Interchange rates include a percentage of the transaction amount plus a flat fee.

Rewards credit cards have higher interchange rates than run-of-the-mill cards because the card issuers must recoup the cost of paying the rewards. For instance, if a Visa Signature Preferred rewards credit card is used to buy dinner out, the interchange fee would be 2.4% of your bill plus a 10-cent fee. Which means, on a $100 tab, the restaurant would pay $2.50. If you used a non-rewards card, that rate might be 1.54% plus the 10-cent fee—or only $1.64. Interchange fees generate billions of dollars in revenue, helping to cover the expense of credit card rewards.

Take American Express as an example. The company, which is both a card issuer and a network, collected $6.6 billion in fees from merchants in the second quarter of 2019—75% of all its non-interest revenue. In the same quarter, cardholder rewards cost the company $2.7 billion.

Burdened by interchange fees, merchants have waged a series of legal battles with card networks and issuers since the 1990s, and Visa and MasterCard have made certain compromises. In one of the most recent cases, a class-action settlement for more than $5 billion is pending.

Some retailers may raise their prices to compensate for interchange fees, so cash buyers end up subsidizing credit card rewards programs. A 2010 study published by the Federal Reserve Bank of Boston found that the average cash buyer effectively pays $149 to card users each year. Meanwhile, the average card buyer receives $1,133 from cash users.

Changing the paradigm.

Why should merchants pay the cost for customers that want the convenience of paying with a card? And should merchants pay for their customers vacations? No? What if a merchant could charge a cash price and a slightly higher price for credit card sales that would pay for all the interchange and reward program fees? Merchants will then make the same profit on credit card sales as cash sales. Customers will have a choice of paying cash or credit and the price difference will pay all expenses, depositing the same as if cash was used. Now all profit is the same on every transaction as if it was a cash transaction. Merchants can use the cash that was paid for merchant services to invest in their business or give themselves a pay raise!

But what if… What if my customers get upset? Am I going to lose business?

Good questions. A small percentage of customers may protest. A smaller percentage might not come back. For a minute. Most customers choose to shop at a location because of convenience, the service or maybe it’s the only place to buy what they want. If a few customers are lost, weigh the difference between the small amount of lost profit and the savings realized when you are able to retain more profit. All payment processing costs are now the merchant’s to keep. There will be a day your customer will ask how much the credit price is. Why? Because most businesses will have adopted the program and customers now expect to pay a slightly higher cost for credit. Hence the paradigm shift from bearing the cost the card issuing banks have forced on merchants for years to the freedom from the burden of high credit card processing fees.

Every non-cash transaction is costing you money from already slim margins. Credit card swipe fees, after labor, remain one of the highest operating costs for retailers. You now have the freedom to change that.

Is it time to explore your options?