Buzz
Credit card rewards like cashback and travel benefits are loved by many, but not everyone is a fan. A lot of business owners end up covering the fees that make these rewards possible, sometimes even passing the extra costs on to customers.
A small business owner I know recently shared her frustration with me—she dreads seeing customers pay with a rewards card because it means credit card companies take a larger portion of the sale. This cut has only grown in recent years, especially with the rise in popularity of rewards cards.
Forbes has covered this issue several times. In one article, they mention:
The fees merchants pay to accept credit card payments fund rewards programs. These fees, known as interchange fees, are higher in the U.S. compared to many other countries...Card issuers began aggressively supporting credit card rewards programs to steer more customers toward this payment method, largely due to a significant decrease in their profits from debit card transactions a few years ago.
In a more recent article, Forbes highlighted that credit card issuers take their share from these fees and then channel the remainder into their rewards programs. This fee usually hovers around 2%, and to compensate for it, some merchants raise their prices with a surcharge, making the entire “rewards” system of using a credit card rather ineffective.
In other words, “business owners fund credit card reward programs in the United States.” At times, they transfer this additional cost onto their customers.
For instance, certain rewards cards offer up to 2% cashback on purchases, which sounds great, but if a 2.5% surcharge is applied, you’re actually paying more than you would by paying in cash. According to Forbes:
Currently, 10 states prohibit credit card surcharges – California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma, and Texas. These laws are often subject to change, with lobbyists in places like New York and Florida actively pushing to lift these bans.
Of course, it’s not only small businesses that are impacted. Retail giants like Walmart have also been challenging the credit card companies over these fees, and in recent years, numerous companies have been lobbying to reduce these charges, as explained by Forbes.
They contend that these charges are unjust and place a strain on small business owners who operate with narrow profit margins.
Visa
V +0.51%
Inc. and Mastercard Inc. are also
facing off against retailers
in court over accusations of price-fixing schemes. They are up against major players like
Wal-Mart Stores
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Inc., and Amazon. Just last month, Visa and Mastercard proposed a $5.7 billion settlement to resolve the case, but the federal appeals court turned down their offer.
This issue isn't as significant in other countries where there are limits on these fees. For now, they anticipate rewards will continue to expand and improve for customers, so their advice is to take full advantage while you can. Either way, it's crucial to understand how your rewards are funded and what the future holds for them.
By U.S. Navy photo by Mass Communication Specialist 2nd Class LaTunya Howard [Public domain], via Wikimedia Commons
