Author Topic: Who pays the price for Big Perk Credit Cards? Correct…!  (Read 7163 times)

Telecaster

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Re: Who pays the price for Big Perk Credit Cards? Correct…!
« Reply #50 on: March 18, 2023, 11:02:39 AM »
This sounds like a great anti-poverty program. Just ask people with money to give to the poor. Problem solved!

Isn't that exactly what you are suggesting?  Asking high FICO credit users to give up their rewards in hopes of somehow benefiting low FICO users. 

dividendman

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Re: Who pays the price for Big Perk Credit Cards? Correct…!
« Reply #51 on: March 18, 2023, 12:38:27 PM »
This sounds like a great anti-poverty program. Just ask people with money to give to the poor. Problem solved!

Isn't that exactly what you are suggesting?  Asking high FICO credit users to give up their rewards in hopes of somehow benefiting low FICO users.

I still don't understand what Ron Scott is saying exactly.

Should people who negotiate prices on cars/houses/etc. stop because doing so forces the prices up for others? Should people stop buying in bulk or stop using coupons because doing so makes the sticker price higher in general? All of this seems like it's in the same vein. People who are in a position to get deals necessarily make it worse for people who aren't if businesses are going to retain their margins, which they all seek to do.

I guess Ron Scott wants everyone to pay the same slightly lower price rather than giving people who put in the effort/risk/research to get better prices, which will just never happen in a market economy.

wageslave23

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Re: Who pays the price for Big Perk Credit Cards? Correct…!
« Reply #52 on: March 18, 2023, 12:58:48 PM »
This sounds like a great anti-poverty program. Just ask people with money to give to the poor. Problem solved!

Isn't that exactly what you are suggesting?  Asking high FICO credit users to give up their rewards in hopes of somehow benefiting low FICO users.

I still don't understand what Ron Scott is saying exactly.

Should people who negotiate prices on cars/houses/etc. stop because doing so forces the prices up for others? Should people stop buying in bulk or stop using coupons because doing so makes the sticker price higher in general? All of this seems like it's in the same vein. People who are in a position to get deals necessarily make it worse for people who aren't if businesses are going to retain their margins, which they all seek to do.

I guess Ron Scott wants everyone to pay the same slightly lower price rather than giving people who put in the effort/risk/research to get better prices, which will just never happen in a market economy.

This. Or pay lower prices for car insurance because their risk profile is lower. Or get interest from storing their money in a savings account because other people don't have extra money to earn interest with.

dang1

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Re: Who pays the price for Big Perk Credit Cards? Correct…!
« Reply #53 on: March 18, 2023, 01:00:26 PM »
This sounds like a great anti-poverty program. Just ask people with money to give to the poor. Problem solved!

Isn't that exactly what you are suggesting?  Asking high FICO credit users to give up their rewards in hopes of somehow benefiting low FICO users.

or no one in poverty, some people richer than others

DadJokes

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Re: Who pays the price for Big Perk Credit Cards? Correct…!
« Reply #54 on: March 18, 2023, 06:55:51 PM »
This might be the dumbest thread I've read here.

The argument OP and a few others are making is right up there with "you shouldn't buy a house that's well below your means because it's one less cheaper house for poor people."

dividendman

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Re: Who pays the price for Big Perk Credit Cards? Correct…!
« Reply #55 on: March 18, 2023, 08:35:58 PM »
This might be the dumbest thread I've read here.
<snip>

Have you seen the Vitamix thread? Or the "Why I need a tesla" thread? Those might be able to compete. We should have a meta thread about the dumbest threads, but that seems like it's against forum rules or something.

Morning Glory

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Re: Who pays the price for Big Perk Credit Cards? Correct…!
« Reply #56 on: March 19, 2023, 06:45:41 AM »
This might be the dumbest thread I've read here.

The argument OP and a few others are making is right up there with "you shouldn't buy a house that's well below your means because it's one less cheaper house for poor people."

It's not dumb to talk about a societal problem,  even if there's nothing we as individuals can do about it besides write to our congress person. If anything,  there isn't enough public discourse about consumer protection issues these days. N this case, everyone is essentially paying a 3% sales tax  that goes not to public services but instead to some company and its shareholders. It goes against the principles of democracy and someone really should do something about it. The fact that some portion of it comes back to consumers as "points" is not really relevant here.

I see this as similar to the discussion about how the costs of stroads and other car infrastructure get passed on to people who don't have cars. Yes, going car free can help a little but any real solution has to be top down.
« Last Edit: March 19, 2023, 07:53:48 AM by Morning Glory »

eyesonthehorizon

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Re: Who pays the price for Big Perk Credit Cards? Correct…!
« Reply #57 on: March 19, 2023, 08:01:38 AM »
... N this case, everyone is essentially paying a 3% sales tax  that goes not to public services but instead to some company and its shareholders. It goes against the principles of democracy and someone really should do something about it. The fact that some portion of it comes back to consumers as "points" is not really relevant here.

This part. Cap fees, benefit the public & small businesses, corps will not lower prices in response but inflation will eat the price difference within a year. I enjoy being a beneficiary of careful rewards use but I pay tradesmen in checks at greater risk to my financial information because of the price difference. Certain posted retailers I use debit, again at greater risk to my financial information, because of the price difference.

It’s like the tax system - letting things become unnecessarily complex so that an industry of navigator middlemen can insert themselves to leach fees for access really mostly benefits the leeches, with occasional dividend kickbacks to the well-off who are then disposed to keep the system as-is, to the detriment of everybody in the end. That I’m smart enough to benefit from grotesque inefficiency does not make inefficiency acceptable. Things might as well just be boring & work equally well for everyone.

wageslave23

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Re: Who pays the price for Big Perk Credit Cards? Correct…!
« Reply #58 on: March 19, 2023, 08:13:22 AM »
This might be the dumbest thread I've read here.

The argument OP and a few others are making is right up there with "you shouldn't buy a house that's well below your means because it's one less cheaper house for poor people."

It's not dumb to talk about a societal problem,  even if there's nothing we as individuals can do about it besides write to our congress person. If anything,  there isn't enough public discourse about consumer protection issues these days. N this case, everyone is essentially paying a 3% sales tax  that goes not to public services but instead to some company and its shareholders. It goes against the principles of democracy and someone really should do something about it. The fact that some portion of it comes back to consumers as "points" is not really relevant here.

I see this as similar to the discussion about how the costs of stroads and other car infrastructure get passed on to people who don't have cars. Yes, going car free can help a little but any real solution has to be top down.

It's not a societal problem. Merchants are paying 3% for a service. They don't have to pay it if the service is not worth it to them. Plain and simple. But like I said uptrend moat businesses would gladly pay 3% to have the service of not having to deal with cash or collections. If you have ever dealt with collections you would know that 3% is well worth it. There are a lot of horrible people out there who don't pay their debts. The real solution is not let credit card debt be thrown out in bankruptcy.  That would lower the collection costs of credit card companies substantially. Then poor credit score people would be given more perks to sign up for credit cards because it would be worth it to credit card companies.  That's how capitalism works, supply and demand. The invisible hand. As it stands, low credit score people don't get incentives because it costs too much for credit card companies to eat their bad debt when they run up a credit card bill and then not pay it.

dividendman

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Re: Who pays the price for Big Perk Credit Cards? Correct…!
« Reply #59 on: March 19, 2023, 08:26:23 AM »
This might be the dumbest thread I've read here.

The argument OP and a few others are making is right up there with "you shouldn't buy a house that's well below your means because it's one less cheaper house for poor people."

It's not dumb to talk about a societal problem,  even if there's nothing we as individuals can do about it besides write to our congress person. If anything,  there isn't enough public discourse about consumer protection issues these days. N this case, everyone is essentially paying a 3% sales tax  that goes not to public services but instead to some company and its shareholders. It goes against the principles of democracy and someone really should do something about it. The fact that some portion of it comes back to consumers as "points" is not really relevant here.

I see this as similar to the discussion about how the costs of stroads and other car infrastructure get passed on to people who don't have cars. Yes, going car free can help a little but any real solution has to be top down.

I'm curious as to which "principles of democracy" this goes against, can you please elaborate?

I'm also wondering why consumers rights should trump the rights of "some company and its shareholders" to profit from their businesses.

Finally, the road analogy is a bad one. Roads are public goods that you are benefiting from whether you use them or not. It's like the army or the fire fighters or police. I've never called the police or fire department, but I still pay for them. Also, gasoline has state and federal taxes, so gas car drivers are subsidizing the roads for people who don't drive (yet still benefit from roads) and electric cars.

snic

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Re: Who pays the price for Big Perk Credit Cards? Correct…!
« Reply #60 on: March 19, 2023, 10:08:00 AM »

It's not a societal problem. Merchants are paying 3% for a service.

No one is arguing that banks and card processors shouldn't be compensated for providing a service merchants find useful. What makes it a societal problem is that merchants would pay less under a different regulatory scheme in which banks were not allowed to (or discouraged from) using some of that money to reward wealthy credit card clients, which amounts to a regressive tax on the poor.

There are a zillion ways in which the market system is structured to penalize the poor and reward the rich. If you don't think that's a problem, fine - but many of us do, and believe that one of government's jobs is to regulate the market so that this sort of systematic penalty against the poor is minimized. And I say that as someone who takes full advantage of credit card points to fund fabulous vacations all over the world. I don't feel guilty about that any more than I feel guilty about finding every possible legal way to reduce my income taxes, but that doesn't mean that regressive redistribution of wealth is a good thing for society.

Telecaster

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Re: Who pays the price for Big Perk Credit Cards? Correct…!
« Reply #61 on: March 19, 2023, 11:05:30 AM »
It's not dumb to talk about a societal problem,  even if there's nothing we as individuals can do about it besides write to our congress person. If anything,  there isn't enough public discourse about consumer protection issues these days. N this case, everyone is essentially paying a 3% sales tax  that goes not to public services but instead to some company and its shareholders. It goes against the principles of democracy and someone really should do something about it. The fact that some portion of it comes back to consumers as "points" is not really relevant here.

We've seen a lot of bold claims in this thread.  We even finding out that democracy itself is at risk!   What we haven't be seeing is any evidence that these claims are even remotely connected to reality, except in fringe cases.

Credit cards are a opt-in system for merchants.  They don't have accept them if they don't want to.  Businesses are not stupid (most of them anyway).   The reason they opt in is the belief the benefits are higher than the costs.   Even retails who are focused on providing low prices like Wal-Mart and Costco accept credit cards.   
 
The dubious claim has been made several times (without evidence) that credit cards fees add 3% to the transaction.  This claim bizarrely ignores the friction of cash transactions.   There are lots of transaction costs with cash.  Cash transactions are slower.  Cash drawers have to be balanced each shift change.  Cash must be reconciled at the end of the day.   Cash has to be transported to the bank. Cash is easy to steal.    And cash makes tax avoidance easier, which screws all the honest taxpayers.    The claim also makes assumption is the prices are set by the sum total of expenses, which is not how the real world works at all.   

We are increasingly seeing businesses only accept credit cards. In flight purchases on airlines for example.   But more and more, it is the ma and pa startups who only take credit cards because accepting cash doesn't make financial sense.   

If you really want to help poor people in this area, figure out a way to bank the unbanked.  Because they rely on cash, the unbanked have higher costs for their transactions too.  Like travel time to get checks cash and cash checking fees.   

Telecaster

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Re: Who pays the price for Big Perk Credit Cards? Correct…!
« Reply #62 on: March 19, 2023, 11:08:10 AM »
No one is arguing that banks and card processors shouldn't be compensated for providing a service merchants find useful. What makes it a societal problem is that merchants would pay less under a different regulatory scheme in which banks were not allowed to (or discouraged from) using some of that money to reward wealthy credit card clients, which amounts to a regressive tax on the poor.

You realize poor people can have rewards cards too, right? 

ender

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Re: Who pays the price for Big Perk Credit Cards? Correct…!
« Reply #63 on: March 19, 2023, 11:32:46 AM »
It's not dumb to talk about a societal problem,  even if there's nothing we as individuals can do about it besides write to our congress person. If anything,  there isn't enough public discourse about consumer protection issues these days. N this case, everyone is essentially paying a 3% sales tax  that goes not to public services but instead to some company and its shareholders. It goes against the principles of democracy and someone really should do something about it. The fact that some portion of it comes back to consumers as "points" is not really relevant here.

We've seen a lot of bold claims in this thread.  We even finding out that democracy itself is at risk!   What we haven't be seeing is any evidence that these claims are even remotely connected to reality, except in fringe cases.

Credit cards are a opt-in system for merchants.  They don't have accept them if they don't want to.  Businesses are not stupid (most of them anyway).   The reason they opt in is the belief the benefits are higher than the costs.   Even retails who are focused on providing low prices like Wal-Mart and Costco accept credit cards.   
 
The dubious claim has been made several times (without evidence) that credit cards fees add 3% to the transaction.  This claim bizarrely ignores the friction of cash transactions.   There are lots of transaction costs with cash.  Cash transactions are slower.  Cash drawers have to be balanced each shift change.  Cash must be reconciled at the end of the day.   Cash has to be transported to the bank. Cash is easy to steal.    And cash makes tax avoidance easier, which screws all the honest taxpayers.    The claim also makes assumption is the prices are set by the sum total of expenses, which is not how the real world works at all.   

We are increasingly seeing businesses only accept credit cards. In flight purchases on airlines for example.   But more and more, it is the ma and pa startups who only take credit cards because accepting cash doesn't make financial sense.   

If you really want to help poor people in this area, figure out a way to bank the unbanked.  Because they rely on cash, the unbanked have higher costs for their transactions too.  Like travel time to get checks cash and cash checking fees.

+1

wageslave23

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Re: Who pays the price for Big Perk Credit Cards? Correct…!
« Reply #64 on: March 19, 2023, 12:59:35 PM »

It's not a societal problem. Merchants are paying 3% for a service.

No one is arguing that banks and card processors shouldn't be compensated for providing a service merchants find useful. What makes it a societal problem is that merchants would pay less under a different regulatory scheme in which banks were not allowed to (or discouraged from) using some of that money to reward wealthy credit card clients, which amounts to a regressive tax on the poor.

There are a zillion ways in which the market system is structured to penalize the poor and reward the rich. If you don't think that's a problem, fine - but many of us do, and believe that one of government's jobs is to regulate the market so that this sort of systematic penalty against the poor is minimized. And I say that as someone who takes full advantage of credit card points to fund fabulous vacations all over the world. I don't feel guilty about that any more than I feel guilty about finding every possible legal way to reduce my income taxes, but that doesn't mean that regressive redistribution of wealth is a good thing for society.

I dont have the data, but my guess is that low credit score people cost credit card companies more than good credit score people. So I guess instead of charging 3%, they could lower their fees to 2% and then charge low credit score users an extra 2% on top of that in order to make up for higher collection costs. That would be FAiR. You are at high risk for credit card default because you have done so before? Congratulations you get charged a fee to have a credit card because you are untrustworthy.

snic

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Re: Who pays the price for Big Perk Credit Cards? Correct…!
« Reply #65 on: March 19, 2023, 07:15:34 PM »
The dubious claim has been made several times (without evidence) that credit cards fees add 3% to the transaction.  This claim bizarrely ignores the friction of cash transactions.

It does not. Yes, accepting cash is expensive for a merchant. Let's say the cost of handling cash is 3%. Great, everything costs 3% more than if we had magic frictionless currency. Now by your own argument, credit card transactions are more efficient than cash, or at least not less efficient. How much should they cost? Well, it might cost banks and card processors 1 to 2% of the transaction (and probably a lot less). Let's say 1.5% would allow them a healthy profit. So why are they charging merchants 3%? Because banks compete for wealthy credit card customers by offering rewards, and those rewards are partly paid for by that extra 1.5% that everyone pays, rich or poor, cash or credit. So some fraction of the credit card processing fee that merchants pay essentially gets transferred from people who pay without rewards cards to people who pay with rewards cards - which is largely from poor to rich. The cost of cash transactions has nothing to do with this conclusion.

You realize poor people can have rewards cards too, right?

Of course. But those are typically not as remunerative as cards like the Chase Sapphire, which offer better rewards structures, more rewards options, and perks like airport lounge access - which together cost banks more than a simple 1% cash back card.

I dont have the data, but my guess is that low credit score people cost credit card companies more than good credit score people. So I guess instead of charging 3%, they could lower their fees to 2% and then charge low credit score users an extra 2% on top of that in order to make up for higher collection costs. That would be FAiR. You are at high risk for credit card default because you have done so before? Congratulations you get charged a fee to have a credit card because you are untrustworthy.

Actually banks charge people with poor credit for access to credit the old fashioned way - by charging extortionate interest rates.

onecoolcat

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Re: Who pays the price for Big Perk Credit Cards? Correct…!
« Reply #66 on: March 19, 2023, 09:01:05 PM »
Correct. And we have now come full circle.

Fees for big perk reward cards are baked into the price. Customers pay the same regardless of how they pay. The perks received by the holders of these cards are subsidized by poorer 50%, who are ineligible to participate.

This is why I consider it an ethical issue.

Newsflash: People who are rich and/or good with money get more perks than people who aren't. Film at 11.

I remember when I had no money and I used to get charged a monthly fee by my bank. Now I have money and the banks literally give me all sorts of free shit like Amazon prime, Costco membership, hulu, etc. Checks? No problem! Money orders/cashiers checks? Free! Wire transfers? Free!

I can even go to my myriad of credit cards when I want to buy something and often there is some "deal" like 20% off of TurboTax or $5 off my next Uber or something on top of the > 2% cash back.

Is this unethical? Meh, capitalism is unethical I guess.

As for the poor subsidizing the rich, credit card rewards are such a small piece of it I wouldn't pick it as the hill to die on. Look at all of the tax breaks for massive corporations and tax loopholes for rich folks. That's where the money is. 401ks, mortgage interest deductions, depreciation on real estate/other assets, taking loans against capital instead of selling capital to avoid taxes, each one of these by itself dwarfs the credit card rewards subsidy by orders of magnitude is my guess.

There are only two sides in capitalism: capital and labor, and it's named capitalism and not laborism because capital wins.

I know its not the intent of this thread, but what bank is giving you Amazon Prime, Costco Membership, and Hulu?

dividendman

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Re: Who pays the price for Big Perk Credit Cards? Correct…!
« Reply #67 on: March 19, 2023, 10:49:34 PM »
I know its not the intent of this thread, but what bank is giving you Amazon Prime, Costco Membership, and Hulu?

Citi: https://subscriptions.citi.com/, they give you a certain amount of of rebates depending on how much money you have there, you decide what to use it on (they have a list of merchants). I use mine for amazon prime, costco and then split between hulu and a wall street journal subscription.

If you're actually thinking of going to Citi with a significant amount of assets I have some kind of a referral code they keep mailing me that benefits both of us I think.

clarkfan1979

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Re: Who pays the price for Big Perk Credit Cards? Correct…!
« Reply #68 on: March 20, 2023, 05:38:20 AM »
https://www.youtube.com/watch?v=dydY-_7Pxvw

Dave Ramsey's daughter (Rachel Cruze) is morally against credit cards because the way in which the companies are able to pay-out the rewards to the responsible users is because of the high interest generated by the low responsibility users that carry a balance (starts at 4:30). It's kind of interesting that she admits that you can win at the credit card game, because Dave claims that you always lose. Even though she believes that you can win, she doesn't do it because it's immoral. She also states that the rewards are not worth the time for her. which can be true, because I'm guessing she is a heavily compensated social media/tv personality.

For me personally, the juice is worth the squeeze. If interested, my personal story is below.   

I had an economics professor talk about the personal benefits of a credit card in August 1997 for airline travel. He said that he got enough credit card points to fly from Chicago to Europe 2-3 times/year. I didn't have a personal credit card from age 18 to age 32 due to the fact that I was low income (undergrad and graduate school) and if I ever got behind on my payments, I would have no chance of getting caught back up. As a result, I avoided it completely.

At the age of 35, I finally took the plunge and got the Alaska Airlines credit card mostly because my wife and I moved to Kauai and Alaska Airlines had a yearly one-time companion fare for $99. We each got the card so we had two yearly companion fares. A round trip fare from Kauai to Denver was around $800 and the companion fare ended up being $150 with fees. We saved $650 twice a year ($1300). We would then acquire enough points/miles to get another 3 one-way flights for free in one calendar year. Savings on flights was around $2500/year. We also got 2 free bags every flight, which averaged $400/year of savings. The credit card fee was $99/year for each card, so our total savings was around $2700/year.

At the age of 41 with a 3-year old kid that is no longer free to sit on your lap on the plane, we switched our primary card from Alaska Airlines to Southwest. Now with the Southwest companion fare, we have unlimited companion flights for free. It actually costs $5.60 for each one-way flight. I just checked mint and in 2022 we spent $3110 on flights and credit card fees. Average is probably around $2,000/year spend for airline tickets. You only qualify for the sign-up bonuses once every two years. As a result, our yearly spend is typically $1,000 in year 1 and then $3,000 in year 2.

I count the annual fees for the credit cards as a travel cost and part of my travel budget. My ball-park estimate for the actual retail cost of the flights is around $10,000. In 2022, we saved around $7,000 on airline tickets. Below is the quick math.

We probably average around 180,000 points/year from sign-up bonuses, referrals to friends and family, regular spending and miles flown in the air for paid flights. This has a cash value around $2568. However, when you add the companion fare, the cash value is around $5136. If I spend another $2500 on flights, I get another $2500 for free with the companion fare, so total savings is around $7,636. We had $436 in credit card annual fees for Southwest, so the final total is $7200.

I think 2022 was kind of a unique year. Flights very expensive and we flew more than normal. For 2023, I'm predicting a spend of around $1,500 based on $6,500 worth of flights for a savings of $5,000 in 2023.     

Another thing to consider is that in order to pay the additional $5,000 for the flights, we would probably need about $7,000 of income. After taxes, our $7,000 of income would produce $5,000 of cash to pay for the additional costs of the flights.
« Last Edit: March 20, 2023, 05:40:02 AM by clarkfan1979 »

Telecaster

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Re: Who pays the price for Big Perk Credit Cards? Correct…!
« Reply #69 on: March 20, 2023, 08:47:15 AM »
It does not. Yes, accepting cash is expensive for a merchant. Let's say the cost of handling cash is 3%. Great, everything costs 3% more than if we had magic frictionless currency. Now by your own argument, credit card transactions are more efficient than cash, or at least not less efficient. How much should they cost? Well, it might cost banks and card processors 1 to 2% of the transaction (and probably a lot less). Let's say 1.5% would allow them a healthy profit. So why are they charging merchants 3%? Because banks compete for wealthy credit card customers by offering rewards, and those rewards are partly paid for by that extra 1.5% that everyone pays, rich or poor, cash or credit. So some fraction of the credit card processing fee that merchants pay essentially gets transferred from people who pay without rewards cards to people who pay with rewards cards - which is largely from poor to rich. The cost of cash transactions has nothing to do with this conclusion.

Nice theory, but there is no evidence that any of this is true.  The Federal Reserve study Ron Scott mentioned above showed that lower income people get substantial benefits from rewards cards.  The transfers were from low FICO to high FICO, not from low income to high income.

There is also no evidence that transaction fees are passed on 1:1 to the consumer.  Upthread there was a link that indicated a regulatory limit on rewards in Europe reduced awards.   There was no indication of a reduction in prices.   Which is to say, there is no evidence savings are passed along 1:1 either.   Amazon recently had a big round of layoffs.  They didn't lower prices to reflect their lower payroll costs.   There is no reason to believe a retailer would share savings with you.   That's not how prices work, except in fringe cases. 

On one level, of course all costs are ultimately passed onto the consumer.  But it is false to assume merchants get no ROI on expenses.  For example, Wal-Mart could reduce expenses by not air conditioning their stores in the summer.  But they do, because it encourages people to shop longer and Wal-Mart makes more money despite the increased costs.  That's why merchants began accepting credit cards in the first place. 

You realize poor people can have rewards cards too, right?


Of course. But those are typically not as remunerative as cards like the Chase Sapphire, which offer better rewards structures, more rewards options, and perks like airport lounge access - which together cost banks more than a simple 1% cash back card.

Chase Sapphire also has a $95 annual fee which is paid by the consumer, right?  There are plenty of no-fee rewards cards available to lower income consumers that offer 2-3% cash back on categories like gas and groceries. 

I see no reason why responsible lower income consumers shouldn't have access to cash back credit cards.  Who benefits by removing this benefit?  Not consumers.   


Telecaster

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Re: Who pays the price for Big Perk Credit Cards? Correct…!
« Reply #70 on: March 20, 2023, 09:22:03 AM »
Another thing to consider is that in order to pay the additional $5,000 for the flights, we would probably need about $7,000 of income. After taxes, our $7,000 of income would produce $5,000 of cash to pay for the additional costs of the flights.

The other thing that sometimes gets lost in here is that besides the obvious consumer benefit,  rewards are a major profit center for airlines.   Some years it is the only part of the airline that makes money.   For example, in 2018 American Airlines’ made 14.42 cents per passenger mile. But American's cost was 14.85 cents.  Which means American lost money operating its flights.  But American actually made $1.9 billion in pre-tax profit due to their lucrative mileage program.  The non-obvious consumer benefit is that without the rewards program American would have had to raise its prices.  At least for that year. 

Interesting video below explains how it works. 

https://www.youtube.com/watch?v=ggUduBmvQ_4

snic

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Re: Who pays the price for Big Perk Credit Cards? Correct…!
« Reply #71 on: March 20, 2023, 08:40:29 PM »

On one level, of course all costs are ultimately passed onto the consumer.  But it is false to assume merchants get no ROI on expenses.  For example, Wal-Mart could reduce expenses by not air conditioning their stores in the summer.  But they do, because it encourages people to shop longer and Wal-Mart makes more money despite the increased costs.  That's why merchants began accepting credit cards in the first place. 

Well, exactly - all costs are passed on to the consumer. You can't have it both ways. Either customers are paying more due to high card processing fees or they are not. And we all know they are, so why this weird argument that merchants won't pass the savings on to them? Some merhants will compete on price, and that will drive costs down. We already see this with gas stations - those that charge a lower price for cash undercut the stations that charge the same price (at least for cash customers). This is just the way a market works.

And as for ROI on expenses, I am not sure how a merchant benefits from paying those extra costs at all. Paying for a/c to keep your customers shopping longer has obvious benefits. Paying 3% for a service that should cost 1% does not.

You realize poor people can have rewards cards too, right?


Of course. But those are typically not as remunerative as cards like the Chase Sapphire, which offer better rewards structures, more rewards options, and perks like airport lounge access - which together cost banks more than a simple 1% cash back card.


Chase Sapphire also has a $95 annual fee which is paid by the consumer, right?  There are plenty of no-fee rewards cards available to lower income consumers that offer 2-3% cash back on categories like gas and groceries. 

I see no reason why responsible lower income consumers shouldn't have access to cash back credit cards.  Who benefits by removing this benefit?  Not consumers.

If a card gives "2-3% back on categories", the average person is probably earning about 1-2% back across the board on all purchases. So the "benefit" the consumer is getting is pretty close to the extra cost she has to pay over a more reasonable card processing fee structure in which these benefits didn't have to be paid for. So it's not a "benefit" at all; it is, like most other marketing schemes directed at consumers, a huge gimmick to get you to spend more. One would think a Mustachian would be against such nonsense. Of course, savvy consumers can game the system and extract outsize value from this "benefit" - but those outsize benefits largely go to the wealthy who have both access to the cards that allow the best gaming and the ability to spend the most to get those benefits. So we are right back where we started from with the OP's argument that the poor pay for the card benefits that go to the wealthy.
« Last Edit: March 20, 2023, 08:42:37 PM by snic »

snic

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Re: Who pays the price for Big Perk Credit Cards? Correct…!
« Reply #72 on: March 20, 2023, 08:59:15 PM »
I count the annual fees for the credit cards as a travel cost and part of my travel budget. My ball-park estimate for the actual retail cost of the flights is around $10,000. In 2022, we saved around $7,000 on airline tickets. Below is the quick math.

We probably average around 180,000 points/year from sign-up bonuses, referrals to friends and family, regular spending and miles flown in the air for paid flights. This has a cash value around $2568. However, when you add the companion fare, the cash value is around $5136. If I spend another $2500 on flights, I get another $2500 for free with the companion fare, so total savings is around $7,636. We had $436 in credit card annual fees for Southwest, so the final total is $7200.

I think 2022 was kind of a unique year. Flights very expensive and we flew more than normal. For 2023, I'm predicting a spend of around $1,500 based on $6,500 worth of flights for a savings of $5,000 in 2023.     

Another thing to consider is that in order to pay the additional $5,000 for the flights, we would probably need about $7,000 of income. After taxes, our $7,000 of income would produce $5,000 of cash to pay for the additional costs of the flights.

I might have you beat. Over the past 16 years, my family of 3 has taken 8 overseas vacations to Asia or Europe, all in business or first class, all paid with points (mostly credit card points). I am not sure how much it cost for us to procure these points, but it's probably well under $2,000 per year: annual fees, plus the cost of paying for things like gas with a credit card when it's cheaper to pay with cash (probably <$100/year), plus the occasional need to spend money on points-related expenses such as buying points to top up an account so it has enough to buy a ticket. If we assume each business class ticket would have cost $5000, that's $120,000 worth of tickets for less than $32k.

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Re: Who pays the price for Big Perk Credit Cards? Correct…!
« Reply #73 on: March 20, 2023, 09:31:11 PM »
I know its not the intent of this thread, but what bank is giving you Amazon Prime, Costco Membership, and Hulu?

Citi: https://subscriptions.citi.com/, they give you a certain amount of of rebates depending on how much money you have there, you decide what to use it on (they have a list of merchants). I use mine for amazon prime, costco and then split between hulu and a wall street journal subscription.

If you're actually thinking of going to Citi with a significant amount of assets I have some kind of a referral code they keep mailing me that benefits both of us I think.

If I read this correctly, you can send $200k or $1m in investment accounts to Citi and that qualifies for this program?  Users don't actually need to keep $200k etc in cold hard cash?  If you can keep your same funds (index funds at the same ER), then I don't see a downside in doing this and getting the perks.  Vanguard/Fidelity don't give you anything.  If so, send me the code.
« Last Edit: March 20, 2023, 09:34:00 PM by onecoolcat »

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Re: Who pays the price for Big Perk Credit Cards? Correct…!
« Reply #74 on: March 21, 2023, 07:58:31 AM »
I might have you beat. Over the past 16 years, my family of 3 has taken 8 overseas vacations to Asia or Europe, all in business or first class, all paid with points (mostly credit card points). I am not sure how much it cost for us to procure these points, but it's probably well under $2,000 per year: annual fees, plus the cost of paying for things like gas with a credit card when it's cheaper to pay with cash (probably <$100/year), plus the occasional need to spend money on points-related expenses such as buying points to top up an account so it has enough to buy a ticket. If we assume each business class ticket would have cost $5000, that's $120,000 worth of tickets for less than $32k.

Out of curiosity, what's your home airport? We've been stacking points for nearly a decade, have never flown business class or higher, and a single round-trip in business class to Europe or Asia for us 2 would completely clean us out. I don't understand how people are finding these deals.

Michael in ABQ

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Re: Who pays the price for Big Perk Credit Cards? Correct…!
« Reply #75 on: March 21, 2023, 09:56:33 AM »
I might have you beat. Over the past 16 years, my family of 3 has taken 8 overseas vacations to Asia or Europe, all in business or first class, all paid with points (mostly credit card points). I am not sure how much it cost for us to procure these points, but it's probably well under $2,000 per year: annual fees, plus the cost of paying for things like gas with a credit card when it's cheaper to pay with cash (probably <$100/year), plus the occasional need to spend money on points-related expenses such as buying points to top up an account so it has enough to buy a ticket. If we assume each business class ticket would have cost $5000, that's $120,000 worth of tickets for less than $32k.

Out of curiosity, what's your home airport? We've been stacking points for nearly a decade, have never flown business class or higher, and a single round-trip in business class to Europe or Asia for us 2 would completely clean us out. I don't understand how people are finding these deals.

Prices are very elastic for business class/first class. Many people with points would probably be unwilling to pay those prices in cash. There's also lots of deals if you're flexible since air travel is almost entirely fixed costs. If there are empty seats on a plane the airline can make more money selling that ticket at a fraction of the normal price than letting it go empty since it's almost entirely fixed costs.

I was just looking at tickets for our family of 8 to go see relatives this summer. Round trip tickets are looking like $500-600 per person but we have enough Amex points from our business to cover it. The only problem is as soon as you start trying to buy more than 4-5 tickets on a single flight the prices start escalating quickly or they simply don't show any availability. On the Amex travel portal they will specifically say "7 seats left at this price" for basically every single flight.

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Re: Who pays the price for Big Perk Credit Cards? Correct…!
« Reply #76 on: March 21, 2023, 10:44:52 AM »
I know its not the intent of this thread, but what bank is giving you Amazon Prime, Costco Membership, and Hulu?

Citi: https://subscriptions.citi.com/, they give you a certain amount of of rebates depending on how much money you have there, you decide what to use it on (they have a list of merchants). I use mine for amazon prime, costco and then split between hulu and a wall street journal subscription.

If you're actually thinking of going to Citi with a significant amount of assets I have some kind of a referral code they keep mailing me that benefits both of us I think.

If I read this correctly, you can send $200k or $1m in investment accounts to Citi and that qualifies for this program?  Users don't actually need to keep $200k etc in cold hard cash?  If you can keep your same funds (index funds at the same ER), then I don't see a downside in doing this and getting the perks.  Vanguard/Fidelity don't give you anything.  If so, send me the code.

Sent a DM

snic

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Re: Who pays the price for Big Perk Credit Cards? Correct…!
« Reply #77 on: March 21, 2023, 03:30:32 PM »
I might have you beat. Over the past 16 years, my family of 3 has taken 8 overseas vacations to Asia or Europe, all in business or first class, all paid with points (mostly credit card points). I am not sure how much it cost for us to procure these points, but it's probably well under $2,000 per year: annual fees, plus the cost of paying for things like gas with a credit card when it's cheaper to pay with cash (probably <$100/year), plus the occasional need to spend money on points-related expenses such as buying points to top up an account so it has enough to buy a ticket. If we assume each business class ticket would have cost $5000, that's $120,000 worth of tickets for less than $32k.

Out of curiosity, what's your home airport? We've been stacking points for nearly a decade, have never flown business class or higher, and a single round-trip in business class to Europe or Asia for us 2 would completely clean us out. I don't understand how people are finding these deals.

I'm near NYC, so we have several airports to choose from. Having JFK, EWR, LGA and a couple of smaller airports all within 90 minutes drive helps a lot to find availability. To accumulate points requires opening new cards for the bonus points fairly regularly (although I don't actually go crazy with it, just one or two new cards per year), coming up with a strategy for opening cards and making the minimum spend to maximize points that are combinable, paying attention to forums where people discuss how they accumulate and use points (FlyerTalk is great, as are some blogs), paying careful attention to bonus categories when choosing a card to pay for purchases, understanding how dynamic award ticket pricing works and taking advantage of lower points costs and airlines that still have fixed award pricing, planning trips a year in advance so you can get award tickets on those airlines that reliably release seats when the schedule opens, and spending as much as possible on credit cards. I imagine that the latter is probably the hardest thing for a true Mustachian to do. I'm not one. (I'd say my family is Mustachian-adjacent.)

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Re: Who pays the price for Big Perk Credit Cards? Correct…!
« Reply #78 on: March 21, 2023, 08:02:21 PM »

On one level, of course all costs are ultimately passed onto the consumer.  But it is false to assume merchants get no ROI on expenses.  For example, Wal-Mart could reduce expenses by not air conditioning their stores in the summer.  But they do, because it encourages people to shop longer and Wal-Mart makes more money despite the increased costs.  That's why merchants began accepting credit cards in the first place. 

Well, exactly - all costs are passed on to the consumer. You can't have it both ways. Either customers are paying more due to high card processing fees or they are not. And we all know they are, so why this weird argument that merchants won't pass the savings on to them? Some merhants will compete on price, and that will drive costs down. We already see this with gas stations - those that charge a lower price for cash undercut the stations that charge the same price (at least for cash customers). This is just the way a market works.

And as for ROI on expenses, I am not sure how a merchant benefits from paying those extra costs at all. Paying for a/c to keep your customers shopping longer has obvious benefits. Paying 3% for a service that should cost 1% does not.

You realize poor people can have rewards cards too, right?


Of course. But those are typically not as remunerative as cards like the Chase Sapphire, which offer better rewards structures, more rewards options, and perks like airport lounge access - which together cost banks more than a simple 1% cash back card.


Chase Sapphire also has a $95 annual fee which is paid by the consumer, right?  There are plenty of no-fee rewards cards available to lower income consumers that offer 2-3% cash back on categories like gas and groceries. 

I see no reason why responsible lower income consumers shouldn't have access to cash back credit cards.  Who benefits by removing this benefit?  Not consumers.

If a card gives "2-3% back on categories", the average person is probably earning about 1-2% back across the board on all purchases. So the "benefit" the consumer is getting is pretty close to the extra cost she has to pay over a more reasonable card processing fee structure in which these benefits didn't have to be paid for. So it's not a "benefit" at all; it is, like most other marketing schemes directed at consumers, a huge gimmick to get you to spend more. One would think a Mustachian would be against such nonsense. Of course, savvy consumers can game the system and extract outsize value from this "benefit" - but those outsize benefits largely go to the wealthy who have both access to the cards that allow the best gaming and the ability to spend the most to get those benefits. So we are right back where we started from with the OP's argument that the poor pay for the card benefits that go to the wealthy.
To some degree this is all pretty simple. A friction cost could be 1% but it's instead 3% sometimes. The people who cause 3% get extra rewards. That 2% difference has to come from somewhere right? It probably comes from people who don't have access to cards in that tier, at least somewhat and probably mostly. Or maybe all stores collectively make it up on volume and all parties are better off overall anyway. If we're free market believers we have to believe that at least some equilibrium will be reached, and maybe that's exactly where we are now.

The underlying difference is probably one's tolerance for difference in outcomes in life and what we think leads to the best society. Democrats probably read the above paragraph as damning evidence of poor subsidizing the rich and Republicans read it as evidence of a free market working and a rising tide raising all boats. Maybe some think different friction costs have no or negligible impact.

And all along the planet burns.

Just in this thread we see huge incentives for air travel. I mentioned above my usage of wasteful travel lounges and I'm zero percent innocent in this. I think discussing possible changes on this part at least makes sense. The free market is damaging the planet and we should consider collectively incentivising better behavior even at economic cost.

wageslave23

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Re: Who pays the price for Big Perk Credit Cards? Correct…!
« Reply #79 on: March 22, 2023, 12:53:51 PM »
So we have established that all credit card transactions are affected by say a 3% fee.  With some high FICO score people getting 2% cash back and the poor saps who don't have a rewards card getting 0% back.  Now the question is why are the credit card companies giving the better credit score people more rewards than the lower credit score people?  Do you think they give the higher rewards to higher credit score people out of the graciousness of Chase's heart? Or do you think its all the invisible hand?  I don't think large corporations have feelings.  They don't care if you are a nice person, they don't care what your skin color is, or what your religion is.  Large corporations see consumers as $$$.  They only care about algorithms that assess your risk and expected profit based on your income and prior credit history.  If higher risk was only compensated through higher interest rates, then credit card companies would be motivated to market to low credit score individuals just as aggressively as to high credit score individuals.  If Chase wasn't willing to offer lower credit score individuals higher rewards then Discover would see a market opportunity to swoop in and get these so called huge profit centers.  That is basically what you are implying is that credit card companies are making a larger spread on the credit card fees with low score people and the difference is poor profit.  If that's the case then these billion dollar corporations are missing a huge opportunity.  I don't buy it.  I think the larger spread helps compensate for the higher collection costs and bad debt. 

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Re: Who pays the price for Big Perk Credit Cards? Correct…!
« Reply #80 on: March 22, 2023, 03:12:21 PM »
So we have established that all credit card transactions are affected by say a 3% fee.  With some high FICO score people getting 2% cash back and the poor saps who don't have a rewards card getting 0% back.  Now the question is why are the credit card companies giving the better credit score people more rewards than the lower credit score people?  Do you think they give the higher rewards to higher credit score people out of the graciousness of Chase's heart? Or do you think its all the invisible hand?  I don't think large corporations have feelings.  They don't care if you are a nice person, they don't care what your skin color is, or what your religion is.  Large corporations see consumers as $$$.  They only care about algorithms that assess your risk and expected profit based on your income and prior credit history.  If higher risk was only compensated through higher interest rates, then credit card companies would be motivated to market to low credit score individuals just as aggressively as to high credit score individuals.  If Chase wasn't willing to offer lower credit score individuals higher rewards then Discover would see a market opportunity to swoop in and get these so called huge profit centers.  That is basically what you are implying is that credit card companies are making a larger spread on the credit card fees with low score people and the difference is poor profit.  If that's the case then these billion dollar corporations are missing a huge opportunity.  I don't buy it.  I think the larger spread helps compensate for the higher collection costs and bad debt.
To be clear there are three levels of people in this scenario.
1. People who qualify for high rewards cards that charge 3%. Might have low interest rates.
2. People who don't, but qualify for low rewards cards that charge 1-2%. Might have high interest rates.
3. People who don't qualify at all and therefore pay cash

I think your point is that businesses have optimized their approach under the current rules and regulations to maximize their efficiency and overall economic output. People are suggesting that the current rules and regulations hurt group #3 in favor of helping group #1 and card companies. And suggesting changing the rules and regulations in a way that they believe drives behavior towards helping people in #3, even if it lowers overall economic output or efficiency for banks or overall, perhaps also at the expense of group #1 and/or group #2.

Not wanting to do that is, in a vacuum, both a rational opinion to have and to disagree with. So is raising points of uncertainty that the status quo hurts #3 and/or relatively benefits to #1/#2 directly or even all parties through increased overall efficiency and economic output.

Not to be too self-centered but we can all at least agree that rewards points incentivize things that are bad for the planet right? To me that at least merits revisiting the regulatory environment. We aren't beholden to maximizing economic efficiency and output at all costs since our goal is the best society not the highest output one.

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Re: Who pays the price for Big Perk Credit Cards? Correct…!
« Reply #81 on: March 22, 2023, 03:22:26 PM »
And all along the planet burns.

Just in this thread we see huge incentives for air travel. I mentioned above my usage of wasteful travel lounges and I'm zero percent innocent in this. I think discussing possible changes on this part at least makes sense. The free market is damaging the planet and we should consider collectively incentivising better behavior even at economic cost.

You can rest, if not easy, at least easier.   For a long time, I've wondered about the economics of credit card points and miles.   Because on the face of it, they don't.  For example, for $95 you can get the BofA Alaska Airlines card.   After you meet the spend, you have enough miles to fly anywhere in the US including Alaska and Hawaii.   That could easily be worth $800 or more.   Sometimes a lot more.   It doesn't make any sense until you drill down a little bit.   Most people buy airline tickets based on price.  The exception is business travelers, and the airlines screw them about as hard as they can possibly be screwed.   So it is a race to the bottom in race to compete on price.   For that reason, all of the major airlines except Alaska and Southwest have declared bankruptcy at least once, and some of them multiple times.   I'm reminded of a Warren Buffett quote from his annual letter:

The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down. The airline industry’s demand for capital ever since that first flight has been insatiable. Investors have poured money into a bottomless pit, attracted by growth when they should have been repelled by it.


That's not really true anymore.  The airlines have figure out ways to stay profitable.   If you look at an awards chart the mileage requirement can vary a lot by day and by month.   So it is tough to book with miles unless you have some flexibility.  What they are really trying to do is encourage you to book seats they wouldn't have otherwise sold.    In effect, the airlines are selling the banks seats at a steep discount they wouldn't have sold anyway.   In the American Airlines example above, that year AA made more money selling discount seats to banks than they did selling fully priced seats to consumers. 

Acknowledging the consumerism/climate aspect of it all, that plane is leaving on that date and time whether you are on it or not.  The incremental climate cost of you jumping aboard an otherwise empty seat isn't very much.

Similarly, the bank winning you as a customers by giving you lounge access comes with a cost to them.   But acquiring customers other ways has costs too.  From Superbowl ads, to sponsoring sporting events, to direct mail.   

swashbucklinstache

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Re: Who pays the price for Big Perk Credit Cards? Correct…!
« Reply #82 on: March 22, 2023, 05:27:25 PM »
And all along the planet burns.

Just in this thread we see huge incentives for air travel. I mentioned above my usage of wasteful travel lounges and I'm zero percent innocent in this. I think discussing possible changes on this part at least makes sense. The free market is damaging the planet and we should consider collectively incentivising better behavior even at economic cost.

You can rest, if not easy, at least easier.   For a long time, I've wondered about the economics of credit card points and miles.   Because on the face of it, they don't.  For example, for $95 you can get the BofA Alaska Airlines card.   After you meet the spend, you have enough miles to fly anywhere in the US including Alaska and Hawaii.   That could easily be worth $800 or more.   Sometimes a lot more.   It doesn't make any sense until you drill down a little bit.   Most people buy airline tickets based on price.  The exception is business travelers, and the airlines screw them about as hard as they can possibly be screwed.   So it is a race to the bottom in race to compete on price.   For that reason, all of the major airlines except Alaska and Southwest have declared bankruptcy at least once, and some of them multiple times.   I'm reminded of a Warren Buffett quote from his annual letter:

The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down. The airline industry’s demand for capital ever since that first flight has been insatiable. Investors have poured money into a bottomless pit, attracted by growth when they should have been repelled by it.


That's not really true anymore.  The airlines have figure out ways to stay profitable.   If you look at an awards chart the mileage requirement can vary a lot by day and by month.   So it is tough to book with miles unless you have some flexibility.  What they are really trying to do is encourage you to book seats they wouldn't have otherwise sold.    In effect, the airlines are selling the banks seats at a steep discount they wouldn't have sold anyway.   In the American Airlines example above, that year AA made more money selling discount seats to banks than they did selling fully priced seats to consumers. 

Acknowledging the consumerism/climate aspect of it all, that plane is leaving on that date and time whether you are on it or not.  The incremental climate cost of you jumping aboard an otherwise empty seat isn't very much.

Similarly, the bank winning you as a customers by giving you lounge access comes with a cost to them.   But acquiring customers other ways has costs too.  From Superbowl ads, to sponsoring sporting events, to direct mail.
That makes sense as a first order impact. I don't know much about this to be fair. But, I wonder if profitable airlines means more flights happen overall? Probably hard to disentangle data.

On the lounge, speaking solely for me, this sounds like an example of a bad incentive for the planet at the first order horizon. I'd rather the bank buy a superbowl ad than incentivize me to go to a lounge I wouldn't otherwise go to and use a lot of plastic. Overwhelmingly less important than any influence on number of flights that happen for sure.



FWIW some studies I'm not qualified to evaluate weighing in on some related points. The literature community seems very clear on the point that cash buyers subsidize rewards card users as a first order impact for what it's worth.

2010 a pretty damning* analysis of negative first order and what I'd call second order impacts of rewards cards generally, with full text available:
https://www.bostonfed.org/publications/public-policy-discussion-paper/2010/who-gains-and-who-loses-from-credit-card-payments-theory-and-calibrations.aspx
First order:
Quote
On average, each cash-using household pays $149 to card-using households and each card-using household receives $1,133 from cash users every year. Because credit card spending and rewards are positively correlated with household income, the payment instrument transfer also induces a regressive transfer from low-income to high-income households in general. On average, and after accounting for rewards paid to households by banks, the lowest-income household ($20,000 or less annually) pays $21 and the highest-income household ($150,000 or more annually) receives $750 every year.

Second order:
Quote
[So, eliminating the merchant fee, and hence rewards, would result about in a 0.105 percent + 0.045 percent = 0.15
percent increase in consumer welfare compared with the benchmark starting point.


2006 (sooooo old)
An attempt an analyzing total costs to merchants, direct consumers, and banks for in person purchases, the use of cash, checks, debit, credit. This gives a good picture of 3rd and 4th order impacts us non-bankers probably don't even know about. For example, if the group #1 allows more #2 people to have credit cards it may provide them more flexibility in how long they have to pay for something.
https://www.degruyter.com/document/doi/10.2202/1446-9022.1095/html?lang=en

2010, US?
This focuses on a small part but summarizes the overall uncertainty around impacts pretty well, with references that address some of them. In modern times we can probably substitute low reward cards for debit cards in the quote below.
https://www.sciencedirect.com/science/article/abs/pii/S0378426610001196

Quote
The answers to these questions are important for the debate about the welfare consequences of payment card rewards. On the one hand, the proponents argue that rewards can reduce total costs to the economy by inducing consumers to switch from a more costly payment method, such as checks, to a less costly payment method, such as credit and debit cards.3 Rewards may also increase the gross benefits of merchants and card issuers by increasing the total number/value of transactions. The proponents also believe that consumers would benefit from rewards. On the other hand, the opponents argue that rewards may not reduce the costs of the payment system if most consumers simply substitute rewards credit (debit) card transactions for non-rewards credit (debit) card transactions. In addition, the society would need to incur additional costs to maintain rewards programs. Rewards may also lead to distorted price signals to consumers, and cause some consumers to choose socially less efficient payment methods (Simon, 2005). Merchants may not benefit from rewards if they hardly increase the number/value of transactions. Moreover, rewards may lead to higher card transaction fees to merchants, which may cause higher prices for their goods and services. As a result, consumers, especially those who do not use rewards cards, could be hurt by the higher retail prices.

*
Quote
Nevertheless, with scant empirical evidence on the effects of rewards, it is not clear whether these fee regulations are appropriate for them, and whether other countries should follow suit.5

2015, Canada data. https://www.sciencedirect.com/science/article/abs/pii/S0378426615000321
Quote
Having a reward feature raises the likelihood of paying with credit cards by a range of 3.6–12.8 percentage points for transactions of $25 and above at the expense of both debit card and cash payments. We find that the intensive margin of rewards is inelastic; a 10 percent increase in rewards raises the likelihood of paying with a credit card between 1.8 and 2.7 percent, depending on the transaction value and the type of reward plan.

2005 data, America
https://www.sciencedirect.com/science/article/abs/pii/S0378426610001196
Quote
Our policy experiments suggest that for the sub-population who hold both credit and debit cards, removing rewards would increase their share of paper-based payment methods (i.e., cash and checks), measured in terms of in-store transactions, by no more than 4 percentage points.

wageslave23

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Re: Who pays the price for Big Perk Credit Cards? Correct…!
« Reply #83 on: March 23, 2023, 10:19:41 AM »
So we have established that all credit card transactions are affected by say a 3% fee.  With some high FICO score people getting 2% cash back and the poor saps who don't have a rewards card getting 0% back.  Now the question is why are the credit card companies giving the better credit score people more rewards than the lower credit score people?  Do you think they give the higher rewards to higher credit score people out of the graciousness of Chase's heart? Or do you think its all the invisible hand?  I don't think large corporations have feelings.  They don't care if you are a nice person, they don't care what your skin color is, or what your religion is.  Large corporations see consumers as $$$.  They only care about algorithms that assess your risk and expected profit based on your income and prior credit history.  If higher risk was only compensated through higher interest rates, then credit card companies would be motivated to market to low credit score individuals just as aggressively as to high credit score individuals.  If Chase wasn't willing to offer lower credit score individuals higher rewards then Discover would see a market opportunity to swoop in and get these so called huge profit centers.  That is basically what you are implying is that credit card companies are making a larger spread on the credit card fees with low score people and the difference is poor profit.  If that's the case then these billion dollar corporations are missing a huge opportunity.  I don't buy it.  I think the larger spread helps compensate for the higher collection costs and bad debt.
To be clear there are three levels of people in this scenario.
1. People who qualify for high rewards cards that charge 3%. Might have low interest rates.
2. People who don't, but qualify for low rewards cards that charge 1-2%. Might have high interest rates.
3. People who don't qualify at all and therefore pay cash

I think your point is that businesses have optimized their approach under the current rules and regulations to maximize their efficiency and overall economic output. People are suggesting that the current rules and regulations hurt group #3 in favor of helping group #1 and card companies. And suggesting changing the rules and regulations in a way that they believe drives behavior towards helping people in #3, even if it lowers overall economic output or efficiency for banks or overall, perhaps also at the expense of group #1 and/or group #2.

Not wanting to do that is, in a vacuum, both a rational opinion to have and to disagree with. So is raising points of uncertainty that the status quo hurts #3 and/or relatively benefits to #1/#2 directly or even all parties through increased overall efficiency and economic output.

Not to be too self-centered but we can all at least agree that rewards points incentivize things that are bad for the planet right? To me that at least merits revisiting the regulatory environment. We aren't beholden to maximizing economic efficiency and output at all costs since our goal is the best society not the highest output one.

I would be curious what percentage of the population doesn't qualify for credit cards and just how terrible of a credit history they must have. I'm a landlord and have seen lots of people with terrible credit that have numerous credit cards. But otherwise point taken. I still just see it as a penalty for not being responsible in paying your bills.

In regards to the environment, I agree that more needs to be done to disincentive air travel. But I think the best way to do it is directly by taxing fuel to raise the cost to equal the external environmental costs. This allows the free market to adjust accordingly.  Right now the airlines are using cheap fuel that doesn't properly reflect the total cost to the environment.  That increased cost will trickle down to all users both normal, business, and miles users.  And naturally decrease the amount of airline travel since costs would double or triple or more.

Must_ache

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Re: Who pays the price for Big Perk Credit Cards? Correct…!
« Reply #84 on: March 23, 2023, 11:06:26 AM »

I dont have the data, but my guess is that low credit score people cost credit card companies more than good credit score people. So I guess instead of charging 3%, they could lower their fees to 2% and then charge low credit score users an extra 2% on top of that in order to make up for higher collection costs. That would be FAiR. You are at high risk for credit card default because you have done so before? Congratulations you get charged a fee to have a credit card because you are untrustworthy.

Banks aren't dumb.  They are going to offer a certain product and/or charge an interest rate so that the low credit score people are as profitable as any other class.  Otherwise, rather than just lose money they wouldn't offer the credit cards in the first place.  Working as an actuary I am always trying to make sure that everyone pays a fair rate based on their risk as measured in any number of categories.  I'm not here to gouge any particular people group.  When all is said and done I want the ratio of losses paid out to premiums paid in to be an identical ratio for everyone.  Of course that means some people need to pay a lot more than others.  And maybe they'll find a different insurer that assesses risk differently.     

I charge about $30,000/yr on my Citi Double Cash card so that's $600/yr in rewards, although it's probably less because at some points that spend is directed toward an introductory airline award.
« Last Edit: March 23, 2023, 11:17:32 AM by Must_ache »

wageslave23

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Re: Who pays the price for Big Perk Credit Cards? Correct…!
« Reply #85 on: March 23, 2023, 02:13:26 PM »

I dont have the data, but my guess is that low credit score people cost credit card companies more than good credit score people. So I guess instead of charging 3%, they could lower their fees to 2% and then charge low credit score users an extra 2% on top of that in order to make up for higher collection costs. That would be FAiR. You are at high risk for credit card default because you have done so before? Congratulations you get charged a fee to have a credit card because you are untrustworthy.

Banks aren't dumb.  They are going to offer a certain product and/or charge an interest rate so that the low credit score people are as profitable as any other class.  Otherwise, rather than just lose money they wouldn't offer the credit cards in the first place.  Working as an actuary I am always trying to make sure that everyone pays a fair rate based on their risk as measured in any number of categories.  I'm not here to gouge any particular people group.  When all is said and done I want the ratio of losses paid out to premiums paid in to be an identical ratio for everyone.  Of course that means some people need to pay a lot more than others.  And maybe they'll find a different insurer that assesses risk differently.     

I charge about $30,000/yr on my Citi Double Cash card so that's $600/yr in rewards, although it's probably less because at some points that spend is directed toward an introductory airline award.

Yes, this is my point. Everyone pays their fair share. If you aren't getting offered high rewards by the cc companies it's because it's not as profitable to them.

lifeisshort123

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Re: Who pays the price for Big Perk Credit Cards? Correct…!
« Reply #86 on: March 25, 2023, 12:27:25 PM »
I think having companies compete for my business is a good thing.

I qualified as a graduate student for many of these “high end” credit cards.  They let anyone who can afford the fee, and many who cannot, get them.  There is no “income requirement” per se.  They care about your FICO score, and your ability to pay the annual fee and ideally a considerable amount of interest to them.  That’s where they really make their money.

I like that companies will compete for my business and when they incentivize me to use their card or to not use a card at all.  Giving the consumer choice is a wonderful thing.  I also am okay with companies creating exclusive ways to pay (Costco or Neiman Marcus and Amex in the old days for example) if it helps lower the card transaction fees.

I prefer to pay by card (in full) whenever possible.  I enjoy the purchase protection, the fact there is an intermediary between my money and a business owner, etc.  I know many companies hate it, but what can you do!

There are many things I worry about ethically in the world.  The fact that my interchange fee might be slightly higher than someone else’s, really doesn’t come close to rising to the level of inequality concerns I think we need to be addressing as a society.  Let’s help families afford healthcare that doesn’t bankrupt them for starters, or be able to be on solid economic footing when they get sick and can’t work for a year or two.

LoanShark

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Re: Who pays the price for Big Perk Credit Cards? Correct…!
« Reply #87 on: April 04, 2023, 09:03:16 AM »
This might be the dumbest thread I've read here.

The argument OP and a few others are making is right up there with "you shouldn't buy a house that's well below your means because it's one less cheaper house for poor people."

Agreed. But par for the course of the "virtue" signaling that goes on in here with more and more regularity.

YttriumNitrate

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Re: Who pays the price for Big Perk Credit Cards? Correct…!
« Reply #88 on: April 04, 2023, 09:19:20 AM »
I would be curious what percentage of the population doesn't qualify for credit cards and just how terrible of a credit history they must have. I'm a landlord and have seen lots of people with terrible credit that have numerous credit cards. But otherwise point taken. I still just see it as a penalty for not being responsible in paying your bills.

It's probably in the low single digits. According to Forbes, "84% of U.S. adults had a credit card in 2021" https://www.forbes.com/advisor/credit-cards/credit-card-statistics/. In the article, it appears that most of those without credit cards have less than a high school diploma, and are making less than $25,000.

libertarian4321

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Re: Who pays the price for Big Perk Credit Cards? Correct…!
« Reply #89 on: April 06, 2023, 02:59:38 PM »
Good piece in the Times today about credit cards with perks, like Safire. These cards are popular with the banks as they attract the well to do. But the usual suspects end up paying the cost.

The processing fees charged to merchants in the US is 8X what Europeans pay. This is to offset the costs of the big perk cards. Merchants increase the price of their goods to afford it.

More than half the population of the US, and about 80% of black Americans, are ineligible for big perk cards.

The less fortunate pay more for goods and services so the well to do can avoid the riff raff at the airport and relax in the Delta Lounge.

Welcome to capitalism.

Where being poor is more expensive.

Poor or irresponsible?  There are plenty of poor people who pay their bills on time and have excellent credit/credit scores and qualify for great rewards cards.  Irresponsible people, who spend more than they earn, will have low credit scores and not qualify- whether their income is high or low (there are plenty of people with 6-figure+ incomes and bad credit).

Gronnie

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Re: Who pays the price for Big Perk Credit Cards? Correct…!
« Reply #90 on: April 06, 2023, 05:07:17 PM »
Also, consider the fact that the providers of these programs were sued by their business customers for prohibiting them to charge the fee to end consumers—and they lost the suit as we know. Doesn’t sound like the businesses are as thrilled with the arrangement as you’d expect from a great efficiency tool…

I've never heard of any business owner who likes credit card fees.  But as you point out--while it is a bit of a grey area--in many or most cases businesses can indeed pass along credit card fees to the consumer if they choose.   But most of them don't, which says to me that most of them believe it is not worthwhile to do so.  Otherwise Target and Walmart would be posting the cash and credit card price separately.  But they don't, and most other businesses don't either, which says to me that despite all the complaining they believe they get utility out of accepting credit cards at the agreed rates.

Honestly any business, the fees are absorbed into the pricing of products. 


Correct. And we have now come full circle.

Fees for big perk reward cards are baked into the price. Customers pay the same regardless of how they pay. The perks received by the holders of these cards are subsidized by poorer 50%, who are ineligible to participate.

This is why I consider it an ethical issue.

Now that we are here prices aren't going to come down if interchange fees go down. Prices (almost) never go down.
« Last Edit: April 06, 2023, 05:18:37 PM by Gronnie »

ender

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Re: Who pays the price for Big Perk Credit Cards? Correct…!
« Reply #91 on: April 06, 2023, 07:59:13 PM »
Good piece in the Times today about credit cards with perks, like Safire. These cards are popular with the banks as they attract the well to do. But the usual suspects end up paying the cost.

The processing fees charged to merchants in the US is 8X what Europeans pay. This is to offset the costs of the big perk cards. Merchants increase the price of their goods to afford it.

More than half the population of the US, and about 80% of black Americans, are ineligible for big perk cards.

The less fortunate pay more for goods and services so the well to do can avoid the riff raff at the airport and relax in the Delta Lounge.

Welcome to capitalism.

Where being poor is more expensive.

Poor or irresponsible?  There are plenty of poor people who pay their bills on time and have excellent credit/credit scores and qualify for great rewards cards.  Irresponsible people, who spend more than they earn, will have low credit scores and not qualify- whether their income is high or low (there are plenty of people with 6-figure+ incomes and bad credit).

Why not both?

It is certainly expensive to be poor in general vs affluent. Based on where you can live, shop, what you are able to keep/save/etc, there's just so many things that make it cheaper to live if you are not poor.

Valley of Plenty

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Re: Who pays the price for Big Perk Credit Cards? Correct…!
« Reply #92 on: April 07, 2023, 09:14:18 PM »
More than half the population of the US, and about 80% of black Americans, are ineligible for big perk cards.

The less fortunate pay more for goods and services so the well to do can avoid the riff raff at the airport and relax in the Delta Lounge.

FWIW I was only making about $50k a year whenever I got approved for the Sapphire Preferred 4 years ago. My credit wasn't exceptionally high either, something like low 700s.

It's not terribly difficult to qualify for a decent rewards card. You just have to have decent credit and average income. I don't think it's accurate to say rewards cards are only for the privileged elite

rocketpj

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Re: Who pays the price for Big Perk Credit Cards? Correct…!
« Reply #93 on: April 09, 2023, 10:45:17 AM »
Here in Canada we recently had a court decision that allows us (small businesses) to charge CC processing fees.  I am in the process of setting that up, because CC fees amount to a 3-8% tax on my revenues.

As it stands now I encourage my customers to pay by etransfer, which costs me nothing (and usually costs them nothing).  I will absolutely make it clear that CC payments are going to get an extra fee.  Worst of all is cash because then I have to carry it around until I can get it to the bank.

Gronnie

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Re: Who pays the price for Big Perk Credit Cards? Correct…!
« Reply #94 on: April 10, 2023, 02:29:56 PM »
Here in Canada we recently had a court decision that allows us (small businesses) to charge CC processing fees.  I am in the process of setting that up, because CC fees amount to a 3-8% tax on my revenues.

As it stands now I encourage my customers to pay by etransfer, which costs me nothing (and usually costs them nothing).  I will absolutely make it clear that CC payments are going to get an extra fee.  Worst of all is cash because then I have to carry it around until I can get it to the bank.

I assume if you find yourself making less money as a result of this you will walk it back?

NWGriot

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Re: Who pays the price for Big Perk Credit Cards? Correct…!
« Reply #95 on: April 12, 2023, 12:20:41 PM »
Here in Canada we recently had a court decision that allows us (small businesses) to charge CC processing fees.  I am in the process of setting that up, because CC fees amount to a 3-8% tax on my revenues.

As it stands now I encourage my customers to pay by etransfer, which costs me nothing (and usually costs them nothing).  I will absolutely make it clear that CC payments are going to get an extra fee.  Worst of all is cash because then I have to carry it around until I can get it to the bank.

I assume if you find yourself making less money as a result of this you will walk it back?

This is just the problem with merchant fees as they are currently set up. The pricing is so opaque that consumers don't even see the charge at all. It's also legal in the US for merchants to charge a card fee at checkout, but pretty much no one does. Customers would revolt if they actually saw the charge as a line item on their bill. Merchants just roll the fees into the price on the shelf, making it opaque to the customer.

I gradually raised my prices by about 3% maybe 10 years ago, and at the time I also offered a 3% cash discount. As far as I know, no one really noticed that I raised prices, but some were really thrilled to get the cash discount. These days I don't automatically give a cash discount anymore, but I will if asked. Instead, I encourage people to support small businesses rather than banks by encouraging them to pay cash. Since I don't really have any employees, cash is really not a lot more difficult for me to handle.

Merchant fees are also very opaque for the merchants. When someone hands me a card, I may have an idea of how much I'll pay to do the transaction, but hardly ever do I have really high confidence in what the fee will be. There are dozens or maybe hundreds of different rates, and there's no way to find out while I'm doing the transaction just what rate I'll be paying. In general, the more generous the consumer rewards program, the more I will pay. Even when I get my monthly statement, I don't know which transactions were at what rate. I just have to take the processor's word for it. I get a whole page full of rates and fees and assessments and monthly charges, but nowhere is it laid out what transactions go into what rate. Many processors don't even pass along the true cost to the merchant, rather they simplify the billing into three rate tiers and use that to increase their markup. The only other industry I can think of that's so opaque in pricing and so expensive is medical care in the US, which is clearly ripe for reform as well.

 

Wow, a phone plan for fifteen bucks!