Probably going against the grain here, but I think it’s great that at least a modest fraction of the benefits of highly risk-optimized revolving credit and low-friction electronic payments are feeding back to the consumer, vs. having all the value derived from that technology captured by the banks and merchants.
In a world where these high-exchange-fee / high-reward cards were outlawed, merchants would pay less in aggregate in fees. But almost surely they’d lose out net from a drop in overall consumer spending.
That affiliate programs inspire gamification for consumers to optimize their spending patterns to “win prizes” seems like a neat bit of competitive market pressure: It’s obviously a win for all involved or they wouldn’t be so popular.
> It’s obviously a win for all involved or they wouldn’t be so popular.
Definitely not a win for consumers, who in aggregate lose out. The margins to make the system work are built into the prices you pay at the checkout.
Other markets like Europe and Australia capped interchange and made it cheaper for retailers and consumers.
This forced banks to redesign their products/rewards/pricing to give consumers a real choice of whether to play or not.
Some consumers decide to fund more of the rewards cost themselves (via cards with annual fees). Some keep high rewards by using new bank-issued Amex (but pay surcharges at the checkout). Some keep much of the gains for themselves (via no rewards/low cost cards, with lower costs for the retailer).
So now, consumers who don't want to pay the overhead of interchange-funded rewards for everyone else don't have to.
(Disclosure: I ran portfolio management/cross sell/profitability/customer retention for an Australian credit card issuer during the period that interchange there was capped and progressively forced down. Later, I was the Netherlands representative on one of the card schemes' European advisory committee.)
> Definitely not a win for consumers, who in aggregate lose out. The margins to make the system work are built into the prices you pay at the checkout.
While not wrong don't forget that cash also has costs that are built into the system - there are a number of theft ways to lose money with cash that don't apply to cards. Even when everyone is honest there is the time cost to count all that cash. Somewhere between the two is mistakes in counting.
Definitely not a win for consumers, who in aggregate lose out. The margins to make the system work are built into the prices you pay at the checkout.
Prices are a function of supply and demand. Higher interchange fees hit supply (costs more to produce and sell the same quantity of goods) but they also spur demand, or no merchant would accept the cards with these fees. And indeed some large merchants have (for example) excluded American Express or Discover from their available payment methods for just this reason.
> It’s obviously a win for all involved or they wouldn’t be so popular.
Why is it obvious that it's "a win for all involved", as opposed to some big powerful financial companies taking advantage of a bunch of less organized merchants while providing benefit to some subset of cardholders? Obviously the merchants benefit overall from accepting credit cards, but I don't think it's anywhere near obvious that they benefit from funding the rewards programs. If there was any way for them to opt out, I feel a lot of them would. And it's hard to see how the non-rewards cards customers are benefitting from the current system---would any of them choose the current system if given a choice?
I definitely agree that someone is winning from the current system, but I don't think it's obvious that it's everyone.
As the article says, those who get rewards are richer people who spend more money. so merchants are indirectly rewarding their customers who spend the most money.
> That affiliate programs inspire gamification... It’s obviously a win for all involved or they wouldn’t be so popular.
It's not a win for consumers having to spend their time learning the "game" in order to not be left behind and essentially lose money.
I use basically a single credit card with a simple, universal cash-back scheme. I do some extremely simple and low-touch investing on the side. I choose not to waste my time attempting to do a billion other things that everyone else is doing to extract more value from the system, but I'm well aware that I'm probably coming out behind a lot of people as a result. That's not a "win," it's a race to the bottom that I've partially conceded.
My problem with the system is the fact that merchants are prohibited from handling different cards differently, for example by passing reward fees to the consumers.
If that were not the case I would be happy and let the market pick the preferred way. My 2c.
>low-friction electronic payments are feeding back to the consumer, vs. having all the value derived from that technology captured by the banks and merchants.
Are you talking about the cash back? Isn't that just a shell game? If the consumer is getting 2% cashback, but the merchant is charging consumers 2% more to pay for it as well, how is it "feeding back to the consumer"?
> Are you talking about the cash back? Isn't that just a shell game? If the consumer is getting 2% cashback, but the merchant is charging consumers 2% more to pay for it as well, how is it "feeding back to the consumer"?
One of the issues is that the cash back rate is not evenly distributed across the buying population.
The other disadvantage to the customer who gets that extra 0.5% is that they know they're profiting off the misery of those worse off than them, that they enjoy rewards while those with low credit scores, struggling to feed their family, face 1.5% higher prices.
I would hope the tarnish on your immortal soul and realization that you're profiting directly off other's misery would be a bigger downside.
If you start seriously considering all the misery required to bring us cheap iPhones and all we ravenously consume, you'll quickly end up in a shack in the woods sending packages USPS.
In a world where these high-exchange-fee / high-reward cards were outlawed, merchants would pay less in aggregate in fees. But almost surely they’d lose out net from a drop in overall consumer spending.
That affiliate programs inspire gamification for consumers to optimize their spending patterns to “win prizes” seems like a neat bit of competitive market pressure: It’s obviously a win for all involved or they wouldn’t be so popular.