The Future of Rewards Credit Cards?

It seems like yesterday that AOR's and rewards credit cards were the major topics at FWF.
Are rewards credit cards going the way of AORs? Some hope so.

Link.

In The News

Retailers and Bankers Debate Credit Card Fees

By: Harry Sheff
October 08, 2009

WASHINGTON—The debate over credit card interchange fees—the percentage of credit card transactions that card companies collect from retailers—has been heating up as financial services firms and retailers square off in Washington.

The discussion centers on H.R. 2382, also known as the Credit Card Interchange Fees Act, which supporters—mostly retailers, grocery stores and convenience stores—say would rein in rising fees. The bipartisan bill is sponsored by Rep. Peter Welch, D-Vt., and Rep. Bill Shuster, R-Pa.

“There is an arms race to create cards with higher fees and more bells and whistles,” said the National Retail Federation’s general counsel Mallory Duncan. “The market checks that would normally exist to curb this escalation in fees are diminished because the card companies know that every merchant is required to take these expensive new cards or lose their ability to accept any cards. The Welch-Shuster bill would allow the most expensive cards to be refused, and while we expect that few merchants would actually refuse cards if this were passed, it would make the card companies think before they reflexively introduce cards with higher fees.”

The American Bankers Association disagrees, arguing that the bill would dismantle a fair and efficient 50-year old electronic payments system. “The value delivered through this payment system to consumers, merchants and financial services organizations far exceeds the costs,” the ABA said in a statement. It continued, “Merchants get enormous benefits—particularly the ability to maximize sales, guaranteed payments and the ability to avoid losses from bad checks, employee theft, and costs associated with billing and collections and managing and depositing cash.” The ABA called the “penny or two on each dollar” a “very small price to pay for all of these benefits.”

But the Merchants Payments Coalition, a trade group made up of various merchants supportive of the bill say that interchange fees in the U.S. are much higher than they are in other countries and warn that they may increase without new guidelines. Further, the MPC claims, only about 13 percent of interchange fees actually go toward covering the costs that they were originally implemented to cover.

“Most consumers don’t know it, but every time they swipe a rewards card with its miles and concierge services, they are driving up the price of everything they buy even higher,” the NRF’s Duncan said. “This particularly hurts less-privileged Americans who don’t have rewards cards or can’t get cards at all because Visa and MasterCard rules effectively require that everyone pay the credit card price even if they are paying with cash, check, debit card or even food stamps.”

Retailers, the NRF says, have been unable to offer consumers a lower cash price for merchandise because of road blocks set up by the credit card companies. “The result is that the average household paid an estimated $427 in higher prices last year, up from $159 in 2001,” the NRF says, blaming rewards-type cards.

The ABA’s argument is that the bill would actually increase annual fees for consumers and effectively end rewards popular programs.

The Credit Card Interchange Fees Act is currently before the House Financial Services committee, chaired by Rep. Barney Frank, D-Ma.

The AOR threads are pretty much gone. If we get rid of the rewards CC threads then this forum will be filled with worthless drivel by trolls of the likes of BrianBrianBrian!

bank lobby > merchant lobby therefore interchange stays.

Oh, brother. Another instance of "The banks are making a profit off its customers so we're going to put an end to it by playing the "choice" card."

Not to merge topics, but DaveHanson - where do we stop? Overdraft fees, interchange rates, what next? As I said, a dangerous precedent.......

catbertsf said: yeah sure. those big retail chains r known to pass savings to us average consumers instead of fattening their bottom lines.

Typical misunderstanding of how capitalism works. In a free market economy, Companies try to maximize profits, but then other companies come in freely and compete and gradually the economic profit approaches zero.

Can you give one example of where a big retail chain increased profits and maintained that larger profit margin without competition?

BTW this isnt a txt msg lol plz use full words n captlzashun

This particularly hurts less-privileged Americans who don’t have rewards cards or can’t get cards at all because Visa and MasterCard rules effectively require that everyone pay the credit card price even if they are paying with cash, check, debit card or even food stamps.”
It is interesting to me that places like Sams and Costco limit the credit cards they accept (likely to reduce fees). Furthermore, several liquor stors I patronize have a cash price (approximately 5% less). What is stopping WalMart/Kroger/Best Buy/etc from giving this 5% discount and forcing the credit card companies to renegotiate their fees?

biomedeng said: This particularly hurts less-privileged Americans who don’t have rewards cards or can’t get cards at all because Visa and MasterCard rules effectively require that everyone pay the credit card price even if they are paying with cash, check, debit card or even food stamps.”
It is interesting to me that places like Sams and Costco limit the credit cards they accept (likely to reduce fees). Furthermore, several liquor stors I patronize have a cash price (approximately 5% less). What is stopping WalMart/Kroger/Best Buy/etc from giving this 5% discount and forcing the credit card companies to renegotiate their fees?

One would have to taken into consideration the added cost of handling cash...

Cash also sometimes gets miscount or misplaced. With CC's, everything is electronic. An easier and efficient way of managing flow of funds.

Personally, I think it's rather ridiculous on what CC's charge for interchange fees. I'm looking at starting my business and it's something I'll have to build into my GP. I can see why other smaller shops limit credit cards or give a cash discount price.

The Sams/Costco "warehouse club" thing cuts both ways - they restrict to only lower-interchange-fee cards, but the cards they do accept (Discover is a good example) often give much lower rewards to customers if the item was bought at a warehouse club.

One wouold hope high interchange costs would allow another CC company to step in and win over retailers quickly.

absolut812003 said: One would have to taken into consideration the added cost of handling cash...
I personally agree that CC payments have numerous benefits in comparison to cash payments. However, if the big stores also believe there are benefits of CC payments over cash then they should stop complaining about having to pay the "unfair" interchange fees for these payments.
Example: Lets say that CC payments represent a 1% savings over only accepting cash payments (less handling costs, counterfitting, stealing, increased business volume), and the interchange fees are 3%. Obviously the business should not accept credit cards or should offer a 2% discount on cash transactions since cash transactions cost them 2% less. Now if CC payments represent a 5% savings over accepting ony cash, and the fees are 3% the business should happily accept credit cards (and discourage cash payments) and stop complaining about the unfair fees. If enough businesses stop accepting CC the CC company will lower the fees.

Dont get me wrong - I think this is an area that may need further regulating, atleast relatively speaking. When looking into merchant accounts, it was like pulling teeth to find out what rates would be charged - the promoted "1.69%" is for "qualified" transactions, of which business cards and rewards cards are not. I finally got a rate sheet from one processor, just for Mastercard transactions - it was 5 pages long with over 250 different rates ranging from 1.25% to 3.75%. And THAT was only valid for my expected merchant classification. The only way to truly know what a given transaction costs you is to look at the statement after the fact, and that only works if the transaction can be isolated (ie, its the only one on a particular day).

What I find ridiculous about this is that the proposed regulation doesnt address the rates - it only gives merchants the ability to refuse to accept individual cards. There is virtually no way a merchant nor a customer can distinguish between cards, so there would be no way to decifer what cards a merchant chooses to accept other than via trial and error with every customer and every card.

This proposal is nothing but feel-good, vote-getting regulation by appearing to stick up for David by smacking around Goliath. The only effect would be providing fodder for reelection campaigns.

DaveHanson said:
What regulation would you suggest as a remedy for this problem?
Now, that wouldnt be bait, would it?

I'd probably attack it as a fraud concern - they "sell" based on a promoted rate that few if any transactions will actually be processed at, and they do not disclose their rates in a way that could possibly be decifered. Either standardize the fees, or re-categorize them in a way that a merchant can know what he's being charged for any given transaction.

I havent thought it through at all, so I'm not sure how any such regulation would fit (if it even would at all) within my general concerns about regulation expressed in other threads, so please dont attack based on that.....

Glitch99 said: Either standardize the fees, or re-categorize them in a way that a merchant can know what he's being charged for any given transaction.I haven't thought this through either, but standardization seems an appropriate solution.

Now they require accepting fees carte blanch, without the merchant knowing in advance how the fees will be. It isn't fraud, because you know you won't know. But it's worthy of a simple, tailored relation to restore predictability and transparency nonetheless.I'm not sure how any such regulation would fit (if it even would at all) within my general concerns about regulation expressed in other threads, so please dont attack based on that.....Don't worry...not interested in attacking here or any other thread. I'm interested in this because I think it's probably the paramount issue in the merchant side of CC processing, and as I said it's kept me from accepting CCs more broadly than I do.

Now that you mention it, I suppose it a bit curious why someone so opposed to legislation protecting consumers from banking practices would be more open to regulation protecting merchants. Doesn't mean there couldn't be good reasons justifying the distinction, and I'm certainly not going to hound you about providing one.

There is little deception in the interchange fee arangement. The alleged price fixing is illegal under anti trust laws. I am not sure why the merchants can't take this to court instead of congress.

I am also wondering if the advantage of evading taxes is gone, if the metchants are still going to prefer cash.

kenmoreland said:
We may be unique, but our cash drawer is over about as often as it is short.

If you're talking about very small total differences (change) then you're fine. But for a cash drawer to be over is almost as bad as for it is to be under. Yes yes, if the drawer is over then you have that extra money, yes I know. But being over means one of several things:

1) Your cashiers are careless or are making mistakes.
2) A customer was overcharged by accident.
3) Customer was given incorrect change.
4) There is a discrepancy between the listed prices and the charged prices, or a problem with the register.

I'd look into why you have differences and how often they come up. If a customer who gets home realizes they were overcharged or shorted on the change, they may get angry and pass bad words along about the store.
People wouldn't want to shop at a store that gives wrong change or has price issues with their product. Even if sometimes it benefits the customer and sometimes it does not. (as long as it is random)

-Greyrabbit

It cuts both ways. Customers carry around credit cards because they know they'll be accepted almost everywhere. It's part of the reason Visa and Mastercard have a bigger market share than Discover or American Express - Not everyone takes Discover/AMEX, so a lot of people will just not get that card.

But it's been consistently shown that people who pay with credit cards usually spend more at the merchant than if they had to pay cash.

So the merchants have an incentive to encourage people to pay with cards. But if you make it inconvenient for people to do that, that DIS-incentivizes them.

Just theories of course, but the reasons for decreased AM*X usage, could be the reported CL cuts as well as a decrease in new AM*X cards resulting from the current financial environment. I suspect that AM*X is doing much less marketing than it's done in the past.

To me at least, AM*X was always considered more of a prestige card. Although that wasn't enough to make me an AM*X customer -- a couple of years ago, a series of great introductory offers were too tempting to pass up -- perhaps some people used their AM*X cards for this reason. Now, I think AM*X's reputation has been somewhat tarnished by the CL and marketing situations mentioned above.

Then there's the practical reason for not using AM*X as much, the devaluation of rewards points, particularly in airlines reward programs. Although this is probably true for VISA and MC, I think AM*X was well-known for its many partnerships and easy transfers from AM*X rewards points to other rewards programs. I suspect many of those other programs are less rewarding (pun unintended) than they have been in the past.

Just a few random thoughts about this issue.

kenmoreland said: Then there may be many customers who have had their CL cut to the point
where they can not use their AMEX card as a daily spender. Finally, I think that AMEX may have pissed off many formerly loyal customers who canceled their cards or put them in the drawer.

bingo. Sure it's nice to have a charge card and not have to worry about hitting limits ect but AMEX has pissed off alot of their cardholders (myself included). Now i'm sticking with my schwab 2% visa. Simple 2% CashBack is way better than travel points.

My regulation preference would be for customer choice emphasis and per-transaction fees options.

Basically on a given purchase, customer would get to register and several prices would be displayed, one for paying with cash, with VISA, MC, AMEX, Disc, business cards, reward cards, debit card, etc. Maybe for simplicity's sake, customer could be given price charged for their current method of payment and then offered a couple of lower priced alternatives.

Since nobody would be charged more but would get variable discounts, that would not work against current laws to not discriminate against some forms of payment (although in practice it does as it should).

Secondly, I think it would drive processors to tighten margins since they'd be in more obvious competition in front of the one ending up paying the price (the customer). The customers would then be empowered to decide if their rewards/convenience are worth the extra price paid at time of purchase. I think processors would quickly equilibrate their transaction fees and it'd become more competitive and ultimately less costly for the customers and merchants.

From a merchant's standpoint, you'd roll the fees into the final price which would mean passing on the processing cost more accurately to customers. So decision to take various card types would be much simpler and would not limit their business.

Only issue is that the average customer may be confused with the increased number of options. And it'd require the transaction fee % to be obtained right away and more complex registers to handle the multiple price options.

Of course, since this would IMO be more fair to customers (who have no voice) and merchants (who have less lobbying power than card processors) while increasing competition between processors, this would have no way to come into being but it's a nice pipe dream.