Credit Card Rewards Aren’t “A Tax On The Poor,” Here’s Who Actually Pays For Your Points

Big merchants like accepting credit cards, because it’s a convenient way for consumers to pay, and puts money right in their bank accounts. But that comes at a cost, which they’d rather not pay. They want the government to legally require banks and payment networks to provide their services for less.

Retailers don’t want to come out and say this, of course, so they cloak their argument in doing good… for the poor, whom they claim are the ones paying credit card fees. And they claim that rewards cards, which bring in bigger spenders who buy more and are more expensive, especially hurt the poor. That’s not actually true.

An op ed in the New York Times frames the case against credit card rewards, using faulty logic or a misunderstanding of actual credit card economics.

Credit card perks for educated, usually urban professionals are being subsidized by people who have less. In other words, when you book a hotel room or enjoy entry to an airport lounge at no cost, poor consumers are ultimately footing the bill.

Credit Cards Are Better For Merchants Than Other Forms Of Payment

It’s cheaper to accept cards than other payment methods, so cards aren’t what pushes up price. Merchants say “I have to spend 3% to accept credit cards and that’s a cost that gets baked into how much I charge” but it’s even more expensive to accept cash (cashier gives the wrong change, cashier pockets money from the register, cash is more easily stolen and comes with higher insurance cost, and cash has to be deposited). Meanwhile, checks bounce. Merchants benefit from credit cards.

Meanwhile consumers don’t benefit from interchange caps. Where caps have been implemented prices haven’t fallen. They didn’t fall in Europe and Australia, and they didn’t fall in the U.S. after rates on debit transactions were capped. So there’s no reason to believe the merchant argument.

Meanwhile consumers benefit from cards, not just from rewards, but from the protections offered by credit cards including fraud protections, and on cards offering these benefits from price protection, extended warranty, and repair coverages. International experience suggests that capping interchange leads to higher fees on consumer cards in any case.

In Australia, when merchants were allowed to charge extra to accept credit cards, not only did prices go up overall but consumers were being overcharged so much that government stepped in to protect consumers from merchants adding on too much for credit card payment. This is 100% about merchant bottom lines, not consumer protection or disadvantaged consumers.

Who Really Pays For Rewards

Rewards aren’t primarily for the rich, and don’t come at the expense of the poor. The idea that the ‘rich’ and ‘poor’ are buying the same things at the same store (which is necessary for the claim that higher prices are the result of higher interchange on rewards cards) doesn’t reflect actual store and consumer experience.

Studies suggest merchants aren’t passing all of interchange onto the consumer anyway, it’s a cost of their business. So it’s not possible that lower income consumers are ‘subsidizing’ rewards.

Moreover lower-income consumers frequently have rewards cards! It’s credit score rather than income that correlates with rewards card usage, and wealthier consumers in the general population may pay less attention to the margins at which they can benefit from card rewards. Earning something back matters more when it’s a bigger percentage of your income.

But who actually pays for rewards? Banks has faced increasing rewards costs, to the point where lucrative rewards cards are rebating the entire value of interchange to the consumer and sometimes even more. A product like Sapphire Reserve has cumulatively lost a couple billion dollars since it was launched. That’s because the product is expensive to offer and isn’t attracting customers who revolve. Ironically the Times op-ed talks about Sapphire Reserve’s “enormous success.”

When banks are offering lucrative rewards, and funding those rewards with interchange, they’re effectively doing it in order to find customers who won’t pay off their balance in full each month. If there’s profit to be made it’s on the financing.

That means that any ‘redistribution’ is from customers who don’t pay off their bill, to those who do, on the same product. That’s not rich versus poor.

It’s also not really fair to say that it’s redistribution, except from Chase or Citibank’s pockets to the pockets of some consumers (on net) which they’re willing to do, taking a portfolio approach to their customers, in order to find customers who are profitable to them through borrowing.

The Cost Of Rewards Is Going Up

Rewards costs are rising, but it doesn’t mean what the op-ed authors thinks it means.

In 2022, the Federal Reserve published data showing that the cost of rewards, as a share of total transaction volume on credit cards, increased 25 percent from 2015 through 2021.

Rewards expense has meant that banks have had to spend more on customers and on brands, in order to find customers. It does not mean ‘the poor are paying more’. Rising rewards expense is why banks are more reliant than ever on revolve for profit.

After American Express lost the Costco co-brand to Citibank, in an unprecedented deal, they quickly started bidding up the renewals of their Delta, Hilton and Starwood deals. They couldn’t lose another big partner. And those deals set a high bar for other co-brands, like American’s, United’s, and Southwest’s.

Moreover, airline co-brands have been the most successful at attracting customers (the three largest co-brand portfolios each represent over $100 billion in annual spending) but airline mergers have meant fewer airlines to play with. The pendulum has shifted from banks to airlines, with airlines earning more per mile. That’s why Delta has a goal of $7 billion per year in revenue off of its Amex deal now.

Authors Recognize That Banks Need To Make Money On Lending

The authors aren’t totally naive here. They suggest that customers of cards like Sapphire Reserve aren’t revolving at the same rate as others, so their cards cost more to accept.

But these high-income travelers are also less likely to carry balances that incur interest charges and late fees, which traditionally increase profits for card issuers. So, to offset the cost of paying lavish rewards to these consumers, banks have sought to maximize other usage-based revenues.

Enter interchange fees, or the money it costs merchants to accept noncash payments.

We’ve seen more cards issued as Visa Infinite and World Elite Mastercard which come with higher interchange. The op-ed authors think this is a solution to the dilemma of relying on revolve, but it’s not. Sapphire Reserve was a Visa Infinite out of the gate and still disclosed massive losses in SEC filings.

But the fees for these higher-end cards come in conjunction with more affluent consumers who spend more. And those fees, by most estimates, are still lower than the acceptance cost of cash.

Indeed even the Federal Reserve study the authors cite highlights the importance of redistribution from those who borrow on the card to those who do not, within a given card portfolio. And that’s really redistributing from the bank to some consumers, whom a card issuer loses money on, and not to other consumers.

Capping Interchange Is Harmful

Capping interchange is bad for the economy. Limiting the supply of credit reduced economic output.

In Australia, credit card annual fees went up. That makes credit less available. We can look to Europe, which is much poorer than the United States, to see the effect of charging extra for using credit. Interchange regulation isn’t the only reason Europe is poor, it’s a bundle of policies, but the U.S. would be ill-advised to follow European economic, financial and regulatory policy.

Now, just like merchants who push their self-interest, I benefit from rewards programs. I benefit when readers use my link to sign up for a rewards credit card (this is a very small portion of my income, while those I’m criticizing have billions of dollars at stake). Writing about this issue, though, does not benefit me in any way that I can tell. I have no financial relationship with anyone which improves as a result of this piece, nor does the future of credit card rewards hinge on my blog.

Moreover I’ve been writing about this issue before I had any personal benefit from card signups, dating back to debates over the Durbin Amendment to 2010’s Dodd Frank legislation. I believe strongly that the arguments I’m making are correct. Disagree in the comments, but please keep it substantive and free of mood affiliation.

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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  1. @ Gary,

    The media has stepped into your arena and you can immediately identify they are professing faulty logic or have a fundamental misunderstanding of the industry. Same goes for us airline pilots, whenever they touch on our subject matter as they seem to always get it wrong. In fact I betcha most professionals feel the same way when the media decide to cover their subject of expertise. I doubt (for the most part) it’s for any nefarious reason on their part, probably in a lot of cases they are co-opted first by one party in any of the myriad of disputes of normal life, or just innate preconceptions on the matter. Just as a gentle reminder when covering topics on here when it comes to what happens on the flight deck sometimes many of us who work there feel just as taken aback by what you say at times when you interject opinion that is grossly mis or underinformed and then dig in your heels without any humility. Just a cautionary note and I hope you take it as constructive.

  2. @Dan77W – It’s a stanford business school professing writing here, though I understand why the New York Times wanted the piece.

    The problem with pilot objections to things i write is that they almost never specify what they object to. They don’t like the conclusions, but offer nothing in the way of specific disagreements on facts or argument. I welcome any factual corrections!

  3. I have tried to correct you on specific facts or add context to several or your write ups and many times you have clarified or seem receptive. Again recognize we all come to issues with underlying preconceived notions. Be open to the fact you might be getting it all wrong or only hearing one side (with no ill will intended). Realize you have a wealth of subject matter experts on here that try to contribute to help your blog!

  4. @Dan77W – I usually assume I am not 100% correct on most things, everything I write is a first draft, and I am always learning.

  5. @Gary,

    Kudos to you then. That’s something honestly we all should be doing more in life these days, the fact that you are conscious of that and approach your work from that angle is an asset and puts you above most others, but like you said it’s a constant effort. In threat and error management we always have loops that we constantly go through during abnormal situations: asses , action, manage and you keep on looping that (or some version of that), avoiding confirmation bias and never coming to a definitive conclusion as to the right course of action until you are safe on the ground. Same goes for analyzing every issue when you don’t have all the information you need! Keep doing what your doing Gary but try to avoid pride of authorship which can be hard.

  6. You can pretend the miles game is a zero sum gain, but that would be anything but true. Airline and cash rewards are not free, no matter how you try to hide it.

  7. I think you’re right.

    This feels a lot like when the fixed retailers when after the online retailers to make the collect sales tax.

    The poors didn’t get helped out then, either. Walmart bought Jet. So thanks for that tax hike, Walmart, hope you got a good quarter at least from screwing me over.

  8. @ Gary

    You might consider the following to nuance your narrative:

    “In Australia, credit card annual fees went up.”

    In the current credit card environment in Australia there are various rewards based cards on the market which attract either ZERO or VERY LOW (USD35 to USD150) annual fees. You can verify this in seconds with a Google search of “rewards cards Australia” or similar search term.

    FWIW I carried a Bankwest card which earned QF points throughout the period in question with zero fees (accepting it was bundled with a mortgage product).

    Of the “elite” level cards, it is true to say that the Amex Platinum has trended upwards over the years in its annual fees and levies and now costs just over USD1000 per annum. The Centurion Card jumped from USD2450 to USD3500 long before they messed with the interchange fees, which was the trigger for me to ditch that card. But these are charge cards, not credit cards.

    Historically, if merchants didn’t want to pay the fees on a card transaction, they simply refused to accept the card, which is why formerly Amex was not widely accepted.

    Australian providers of rewards cards have generally lowered point earn rates in response to fee caps. My overall net return from Amex Platinum halved, my net return from Citi Prestige went down between 3 to 15 times depending on spend category and local / overseas spend.

    My understanding of the rules in Australia is that the capping is supposed to match the cost of processing the transaction, so such should be cash neutral (cost = income). Some merchants appear to ignore the rules (looking at your airlines!) with apparent impunity.

    It’s still possible to secure substantial sign up bonuses in Australia. My wife’s Amex Explorer offered 240,000 MR points whilst I enjoyed the referral of 50,000 MR points (equals 145,000 airline points once transferred).

    Yes, it seems reasonable to presume that card providers make their cash from the excessive interest payments levied on those who don’t pay their cards off.

    I have only anecdotal evidence to propose the hypothesis that richer people pay them off and cash strapped people do not, thus incurring huge credit fees, locally running over 20% compared with the 3.55% current cash rate.

    If that hypothesis generally holds, then the less affluent are indeed effectively subsidising the more affluent. By default, also, subsidising those Peter attuned to the loyalty lark.

    One way or another the consumer IS paying for the rewards programs (accepting exceptional cases, these card issuers are profitable – no?).

    It’s a moot point whether a system that tolerates such excessive interest rates is supporting the economy by providing a supply of ready credit. Sure, card holders are buying stuff on that credit, but then their personal cash flow is redirected into the pockets of the card providers in interest payments rather than stoking the revenue of businesses that actually make, build, service and supply real stuff, including the vast numbers of small businesses that represent the powerhouse of the economy.

  9. Ironically the Times op-ed talks about Sapphire Reserve’s “enormous success.”

    LOL. There he goes again. I am surprised he did not get into how it cost Chase $300M — small change for a bank like Chase — to launch the CSR. How much do you think it cost CapOne to launch its VentureX?!

    I would like to see hard evidence for the claim that “a product like Sapphire Reserve has cumulatively lost a couple billion dollars since it was launched”, but even if that were the true, the launch of the CSR would still be “enormously successful” because it spooked the competition into emulating it and making similar offerings, thus revolutionizing the “premium” card business. That is an “enormous success”.

  10. @ DCS

    As an aside and to be fair on @ Gary, he is not blocking the comments of anyone who has ever challenged his opinion like another certain blogger over at OMAAT. I may disagree with Gary on occasion, but I do admire and respect his position in encouraging debate and his tolerance of disagreement (as even stated at the end of the article above).

    FWIW I agree with your call for evidence plus a more penetrating analysis and I also agree with his call for comment to be substantive.

    PS. Trust you had a great vacation…;)

  11. My business loses exactly nothing when people pay cash. That’s after 20 years in business. I do accept that people increasingly prefer to pay with plastic and eating the 3% is just the price of doing business. The rest of your arguments seem pretty spot on.

  12. As for Australia, you are WRONG: “The goal of the RBA’s surcharging standard is to improve price signals to consumers about the relative costs of different payment methods.”

    That’s 100% market at works.

    Furthermore, “merchants have the right to impose a cost-based surcharge on card payments, but any surcharge is limited to the amount it costs the merchant to accept that type of card for that transaction. There are three key elements to the surcharging framework: (1) The definition of card acceptance costs. Acceptable costs are limited to fees paid to the merchant’s acquirer (or other payments facilitator) and certain other observable costs paid to third parties for services directly related to accepting particular types of cards. (2) Acquirers and payment facilitators must provide merchants with an annual statement that clearly sets out their average cost of acceptance for each of the card payment systems regulated by the RBA. Acceptance costs must be expressed in percentage terms. (3) The Australian Competition and Consumer Commission (ACCC) has investigation and enforcement powers over cases of possible excessive surcharging.”

    So yeah, there’s cost to accepting cards.

    You can pretend that commissions paid to people like you to sign up new cardholders don’t come out of anybody’s pockets, but that would be anything but true. Commissions (and rewards) are not free, no matter how you try to hide it.

  13. Like in Australia, Swedish bank-issuers of rewards cards have generally lowered point earn rates following fee caps. But perhaps some have also lowered the earn rates because the airline/hotel/other partners wanted more money for the points.

    Did the cap on debit card fees in the US precede Citi putting a halt on issuing AA mileage earning debit cards linked to Citi’s current/checking accounts?

  14. @platy:
    “As an aside and to be fair on @ Gary, he is not blocking the comments of anyone who has ever challenged his opinion like another certain blogger over at OMAAT. ”

    I think that is a reflection of a blogger’s/site’s level of confidence in being able to engage opposing views. To be fair to OMAAT, I challenge the host’s claims, views or opinions quite a bit and cannot say that I’ve had my comments blocked there. What I can say, though, is that there are many more trolls there than here.

    “PS. Trust you had a great vacation…;)”
    Maybe because it was a “reboot” of an annual event since 2010-2011 that was interrupted for 2 years by the pandemic, my just completed 4-week Asian Escapade was so gratifying I would rank it at the very top.


  15. I always struggle with business owners who claim that accepting cash is costless. Please tell me what bank offers free cash management for business accounts. No, seriously. Sure, cash management is bundled in with the monthly fee, but the more cash you need to deposit, the more “premium” a bundle you need. Also, have you ever looked to see what the limit is on your insurance coverage for cash? How about asking your insurance carrier how much it would cost to increase that coverage. Obviously, for each business, this may or may not add up to the cost of accepting credit cards, but it’s definitely nonzero.

  16. There is a definite cost to cash acceptance.

    Making change, counting multiple times. safe guarding, shrinkage, recording, accounting for, depositing, banking, reconciling, etc, far exceeds the 3-4% charged in total, especially in small but frequent dollar transactions of a small businesses like pizza, deli, bakeries, cleaners, etc. where cash was once 100% dominant. Now one swipe and everything administratively is done but also its 100% reportable as income.

    So this is why the signs and fees charged at the register, to try & swing back the tide to cash after the great rush to install terminals and give customers the option. The rules changed in the 2010’s.

    Now you have the rest of the story…

  17. @Christen you are 100% wrong you loss a lot when you accept cash.

    Your cashier takes longer to count the cash and make change
    Your cashier has greater opportunity to steal the cash
    Your cashier has greater opportunity to give back the wrong change in either direction.
    Your employee has to count the cash that is in the register
    Your employee has to make a deposit receipt and count the cash to be deposited.
    your employee has to go to the bank
    Your employee can be shot robbed or lose the deposit before it is deposited into the bank
    Your employees have to touch DIRTY GROSS money that is full of germs
    Your employee has to verify that the deposit was actually made.
    Your employee has to make sure there is enough currency on hand in your business to make change for each customer that comes in.

    You have to pay all these employees to do this rather than help customers or make sales.

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