Earlier this month a group of companies won a class action lawsuit against American Express, as outlined in this New York Times article that allows them to charge a different price for a product based on the method of payment selected at point of sale. Basically, what these retailers were asking for is the ability to pass on the cost of the credit card transaction to the consumer.
Of course, this has a lot of interesting implications for people like myself who benefit greatly from credit card bonuses and rewards (by greatly I am talking in the thousands of dollars per year) since it could take away my ability to earn miles, points or cash back, it would be a simple mathematical calculation, if my card offers 2% cash back and they ask for 3% extra for it then I think I would opt for a cash option.
Earning miles, points and cash back from transactions is a great way to add onto my earnings, but let’s think big picture for a moment, the image above is a rough view of how the money moves, in other words, the Card company acts as a broker between the retailer and the consumer, and in this example charges a 50% transaction fee for the privilege. In order for the retailer to be able to afford that fee they need to raise prices to the point where the profit includes enough money to cover transaction fees. They could calculate a raise of say 2.5% across the board (since some transactions would be in cash and these could offset those that are by credit card).
- The card company forces small businesses to raise prices, that are passed onto us as consumers.
- Credit card companies take a large percentage cut of the transaction fee, on a 1% card that fee could be as high as 66% of the transaction.
Does Credit Card use improve the economy?
For people like me, I use a card simply because it pays me rewards, by doing so I am raising prices and hurting small businesses, but I am doing it with a greedy, me first attitude and passing on the cost of my rewards to the people who pay cash (sorry folks). However, there are people who rely upon credit cards to actually provide short term credit.
These people do inject more money into the economy and can help local businesses thrive, but in the big picture these folks are in a downward spiral, anyone that actually uses a card as a credit source in the intended way is not adding value to the economy on the larger scale, they are creating all manner of problems for it with debt spiraling out of control.
Therefore the answer, for me, is no. Taking the short term influx of revenue from credit cards off the table is better for a healthy view of the progress of an economic cycle and allows us to capture a realistic snapshot of the state of a sustainable economy.
So, if everything goes up in smoke when I can no longer earn my credit card rewards, I’m OK with that because it puts more money back into the pockets of retailers, can lower prices (or increase profits, which encourage expansion and employment). I’ll throw it all away and won’t be resentful at all.
Who would really lose?
The real losers if stores started offering a ‘for cash’ discount would be the credit card companies. They would have to think about new ways to encourage and incentivize credit card adoption, and I could see a couple of solutions to this:
- Increase signup bonuses – a lucrative signup bonus is intended to get the customer hooked on the new card, most signup bonuses require minimum spend in the first 90 days, the reason for this is that it is intended to become natural for you to reach for the card as you make your payments, and once the introductory period is over they hope enough people will continue to make that reach, in true Pavlovian style
- Increase reward category multipliers – by raising the rate of rebate on a reward above the cost of the transaction one can still benefit. Of course in theory this would be a loss leader for the card company the following concepts would alleviate that:
- Rotating Categories -by using the rotating card category concept the card company effectively implements the same 90 day conditioning that applied above in the signup bonus phase, there will be many people who will continue to associate Gas Station payments with the Freedom card with Chase long after it ceased to offer 5% rewards. This can be further abused by the card company by requiring users to ‘register their card’ for the promo.
If the game goes away, I’ll move onto the next game and be grateful for what I have experienced to date, but it is my suspicion that card companies will offer, in desperation to retain earnings, increasingly attractive incentives to offset changes in legislation, so this ‘terrible news’ could actually be very good news for people who are savvy enough to find the value opportunities within them.