Credit card points rewards: who actually pays for them?
Credit card rewards are often seen as a consumer benefit, but behind them lies the question of who bears the cost. Using a scenario of three restaurants as an example, different payment methods lead to differences in merchant revenue, and reward programs cause merchants to bear higher processing fees, which are ultimately passed on to all customers through price increases, exacerbating economic inequality.
Credit card points are often seen as a benefit to consumers, offering perks such as cash back, free flights, or lounge access. However, behind these "free" rewards lies a critical question: who bears the true cost of credit card points? The answer reveals a less glamorous side of this system, especially for those who cannot afford to use credit.
Imagine a simple scenario: three families dine at the same restaurant, each with a bill of $100, but they pay differently. Family A pays with cash, and the restaurant receives the full $100. Family B uses a Chase Sapphire Reserve (a premium credit card), and the restaurant receives only $97. Family C uses a Chase Freedom (a standard credit card), and the restaurant receives $98.
Why does the restaurant receive different amounts for the same bill? First, cash transactions incur no processing fees, so the cost is zero. Second, the difference between the two credit cards stems from the card fees merchants must pay to process payments. This fee varies by card type, and premium cards typically cost merchants more.
But why do processing fees differ between premium and standard cards? From a payment processing cost perspective, there is no difference. The key factor lies in the rewards programs tied to premium credit cards. For example, the Chase Sapphire Reserve offers much higher rewards than standard cards like the Chase Freedom. However, these rewards come at a cost, and merchants are forced to bear this expense, even though customers using more expensive cards bring no additional direct benefit to the merchant.
Card networks like Visa and Mastercard stipulate that if a merchant accepts any card under a network, they must accept all cards under that network. This means merchants cannot refuse higher-cost cards (such as the Chase Sapphire) unless they completely stop accepting credit cards, which is not feasible for most businesses, as customers are accustomed to paying with credit cards.
To be clear, credit cards do offer advantages over cash, but there is no reasonable justification for merchants receiving different amounts based on the card a customer presents. For small businesses struggling to stay afloat, transaction fees of 2% to 3% can quickly accumulate into a heavy burden.
To cope with these fees, many merchants raise product prices by about 3%, effectively passing the cost of credit card rewards onto all customers, regardless of whether they use credit cards. For merchants, this may be a win-win—they no longer directly bear processing fees. For credit card users, it is not a bad deal either, as they still earn points. But for consumers who cannot afford to use credit, this price increase is an additional burden, further widening the economic gap between those who can use credit and those who cannot.
In today's world, where income inequality continues to worsen, the prevalence of credit cards and their rewards systems exacerbates this issue. Although points may seem like a reward to those who frequently use credit cards, in the end, their cost is borne in the highest proportion by those least able to afford it.