Credit card rewards are funded out of three things:
- The annual fee you pay
- Merchant swipe fees for the charges you make
- Finance charges on any balances not paid in full
Merchants pay a fee to accept credit cards, and in exchange they get money deposited in the bank. They get convenience for themselves and their customers. Customers also spend more when they aren’t limited to the cash in their wallet.
Cash gets stolen by employees. It has to be transported to the bank and deposit. Checks can bounce. Merchants can insure their checks, but that costs money too.
With credit cards stores get better access to their cash, security, and a bank that’s taking on their customer’s credit risk.
And while these services are generally less expensive than taking cash, merchants push back on the cost nonetheless.
The latest salvo comes from Amazon, along with Home Depot and Target. They want to be able to accept lower-tier Visa and Mastercard products, and not accept premium cards.
Visa Infinite costs more to accept than Visa Signature which costs more to accept than a Visa Gold or Platinum. World Elite Mastercard costs more to accept than World Mastercard. These higher interchange fees help fund the rewards on the most lucrative cards.
Visa and Mastercard premium credit cards charge some of the highest interchange fees, often north of 2.1% of the purchase amount, compared with roughly 1.2% to 1.7% on nonpremium credit cards.
Today retailers can take Visa — or not. And if they take Visa that means taking all Visa products including Visa Signature and Visa Infinite. 92% of credit card charges earn some kind of rewards, though by no means all on the most expensive cards.
Merchants want to accept some but not all cards. Payment networks have refused.
- Merchants want to contract for Visa/Mastercard acceptance unbundled, some cards not all
- Visa/Mastercard don’t want to sell their services that way. They believe there is value in ‘Visa acceptance meaning Visa acceptance’ that “Visa Accepted Here” means customers can rely on their card being usable.
So companies like Amazon and Home Depot want the government to force payment networks to do business on their terms. Costco though paints towards a different model. They pay very little to accept credit cards as part of their exclusive deal with Visa.