In my last article, I covered the increased prices merchants pay for processing rewards credit cards. But, who actually bears the burden of that increased cost? Is it the merchant?
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The evidence suggests, no, the merchant (as we would expect) simply passes these costs on to all consumers. Costs go up for all consumers, including those paying with cash or debit. But, only some consumers (using credit cards) get cash back or rewards. That creates a transfer of wealth from cash or debit users to rewards credit card users.
Check out this 2010 study by the Boston branch of the Federal Reserve.
Some selected excerpts from the study include:
- “cash buyers must pay higher retail prices to cover merchants’ costs associated with the credit cards’ merchant fees. Because these fees are used to pay for rewards given to credit card users, and since cash users do not receive rewards, cash users also finance part of the rewards given to credit card users”
- “On average, each cash buyer pays $149 to card users and each card buyer receives $1,133 from cash users every year, a total transfer of $1,282 from the average cash payer to the average card payer.”
That’s a huge amount of money! $1,133 of extra benefit when paying with credit? If you visit here often, you know that its possible to get thousands of dollars worth of travel or cash back for free every year. It only takes a bit of careful planning for your spending to receive sign-up bonuses or utilize rotating reward categories. But, did you ever consider that if you aren’t using credit cards to earn rewards points, you’re paying higher prices at the register anyway (and getting nothing for it)?
You may be asking yourself: why do merchant’s put up with the higher fees? The answer is, in most cases, they don’t have a choice!
In some states, the big card companies, like Visa, impose “no surcharge rules,” which force merchants to either take all Visa cards at the same price, or they aren’t allowed to accept Visa at all. These no surcharge rules existed in all states until very recently. But, for a national retailer, it probably isn’t worth the cost to set up different information systems and policies for every state. It’s easier to just raise prices for everyone.
Of course, the merchant could stop accepting credit cards entirely. But, how long would most merchants stay in business if they only accepted cash? Probably not very long. Some merchants may only accept some types of credit cards, often excluding American Express (which is notorious among merchants for its high transaction fees). But, not enough merchants push back hard enough to force the card companies to reduce the fees, or the rewards.
So, over time, credit card rewards have gone up, interchange fees charged to the merchants have gone up, and prices for consumers have gone up as well.
But, that’s not all. Why wouldn’t the same thing be happening for debit cards? If the merchant’s can push through these interchange fees, why would they only choose to do so on credit cards? Well, the short answer is, they aren’t allowed to with debit cards.
In 2010, after the Great Recession, congress passed a bill called the Dodd-Frank act. Inside the Dodd-Frank act was a section called the Durbin Amendment. In effect, the Durbin Amendment capped the fees for debit transactions on cards issued by the largest banks. So, when you use a Bank of America debit card, the fee charged to the merchant can’t be higher than the cap in the Durbin amendment. As a result, you often don’t see rewards tied to debit cards; and, since the Durbin amendment became law in 2010, we’ve seen less and less banks offer “free” checking without stipulations. Banks have attempted to make up for the lost debit card fee revenue from checking account fees and other sources.
As they say, “there’s no such thing as free lunch.” We could also say “there’s no such thing as free vacations” and “there’s no such thing as free checking.” You, and everyone else, is paying for the rewards program when you buy things, interact with a bank, or do just about anything else that involves a card.
So, remember, you’ve already paid for your free vacation. You just have to go get it!