During the Great Recession, some of the biggest US banks – Wells Fargo, JP Morgan and Bank of America – had a problem. They weren’t making as much money from mortgages. So they shifted their business to credit cards. And in order to get customers to sign up and spend on their cards they offered bigger and better rewards. “In 2011 we saw our first ever 100,000 point offer, Chase offered on a British Airways Visa. 100,000 points for a credit card. It was wild! And really I think what JP Morgan/Chase was thinking that they gotta focus more on consumer lending and not just on that corporate lending or even mortgages.
As banks expanded rewards, more people starting using rewards cards. By 2018, 92% of all credit card purchases were made on rewards credit cards. That’s up from just 67% in 2008. These stats are just for the US. But it’s not the banks that ultimately pay for these rewards. When a customer uses a credit card to buy something, the store is charged what’s called an interchange fee. That fee is a percentage of the total sale. It’s the bank that issued the card collects the interchange fee. And it’s this money that they heavily rely on to pay for cardholder rewards. They’re making money on your annual fee and on interest. But the big way with these premium credit cards is the interchange fee. That’s the bread and butter.
Interchange fees aren’t the same across all credit cards. Cards with no low rewards typically have an interchange of about 1.5% of the purchase price, while cards with bigger rewards can have an interchange fee of nearly 3%. And the divide between these two types of cards has increased. Banks can make about $0.25 more per average purchase if the customer uses a premium rewards card over a basic one. In 2017, retailers paid card issuers $43.4 billion dollars in interchange fees. So it’s no surprise that stores aren’t a huge fan of these credit card rewards. They don’t really want to pay for your free trip to South Africa. Most stores don’t have have negotiating power over these interchange fees. Payment networks like Visa and Mastercard require them to “honor all cards” which means they have to accept both low fee and high fee credit cards. And as a result some stores reported that they’ve increased retail prices in order to make up for the cost of accepting credit cards. Which means even if you don’t have a rewards credit card, you may still be paying for those rewards.
So if you’re paying cash or using your debit card, you’re basically paying for my points.
So it can be argued that people who can’t obtain credit, those with lower incomes are basically funding the system for others. Others will basically say, well the merchants get paid more, they get paid on time, there’s less theft when people use credit cards. It’s an interesting ecosystem. I won’t get into the ethics but I will maximize my part of it. Some major retailers have indicated that they’ll challenge the “honor all cards” rule so that they can reject cards with higher fees(American Express and Diners Club). And if stores succeed at driving down interchange fees, banks are likely to respond by chopping rewards. This isn’t a hypothetical outcome.
When credit card interchange fees were capped at .3% in Europe, banks responded by cutting rewards. For now, with so many credit card rewards out there, it’s hard to know which deals are better than others. But with the cost of these rewards built into the things that we buy everyday, just using a rewards card at all can be beneficial. If you’re using a debit card or god forbid, cash, for purchases, you’re literally leaving points and money on the table.
It’s like throwing money away every time you use cash.
So get debt free, get disciplined with your finances, put your expenses on each month, pay them off, earn the points, and avoid interest. That’s how you win at the points game.