Amazon is Leading a New Attack on Rewards Credit Cards

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.

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 — This would be a stupid move by retailers. I don’t believe that big retailers would actually refuse VISA Infinite, World Elite MC, etc. That would be confusing to customers and would enrage many, resulting in lost business.

  2. I really have no problem with the merchants’ desire, though do have a problem with them seeking government intervention. They should just try to negotiate the best terms for themselves that they can.

    Ultimately, as a consumer, I’ll be able to choose how to pay for a product or service. If the merchant does not accept the form of payment that I choose to use, I can then either choose a different form of payment or take my business elsewhere.

  3. @Joelfreak – I think it should be legal for businesses to sell what they consider to be their products, rather than forcing them to modify their products because a politically powerful interest group prefers it.

  4. We see this in Europe already. Many OTAs charge differing amounts depending on what card you use. Its confusing, and a customer never knows what hes going to pay in the end…

  5. Too confusing and it also risks alienating higher income people that qualify for premium cards and likely spend more at these same retailers. Amazon is already less preferred for me due to the lack of shopping portal rewards. Target still hasn’t figured out it’s customer potential and Home Depot is a disorganized mess of a retailer I think. While Amazon can afford to play this game as it would be less confusing online it seems like a dumb idea.

  6. Why don’t they just simply adopt a flat rate model for all cards?

    Do the math of the revenue across all product lines and find the sweet % spot then tell them if they refuse to accept unbundled rates then we will charge this rate for all purchases.

    Leave it to them to swallow the current structure or potentially pay more under a simplified model.

  7. Don’t really understand how they justify the higher fees for the higher-end cards?

    Also, seems like the card issuers are incentivized to move people over to the higher-end card products since they make more money from the merchants that way. Basically, they could just arbitrarily lower the requirements for those cards since it generates more revenue. The whole thing seems rather unbalanced.

  8. Does this really add up to a high enough amount to justify these retailers’ raising a stink about it? Aren’t we talking about a relatively small % of the US population using these cards?

  9. I’m in the points/miles game myself, but why should merchants pay a higher interchange fee for a more premium credit card? To merchants, a credit card is just a credit card.

  10. @Golfingboy – Those with more premium cards generally have higher incomes and thus spend more

    While card issuers do earn higher swipe fees from the more premium cards, they do have minimum benefits they have to provide on the cards (some require lounge access, insurances, etc.)

  11. @Tony It’s basically the same argument amex has traditionally used. Premium cards usually require annual fees, which in turn attract wealthier customers. Wealthier customers spend more, so it’s a trade-off: “I’ll bring you a richer customer, but you have to pay me 1% more of their purchases.”

    I very much doubt that even Amazon is willing to risk forgoing a sale to try and capture that additional percentage point of revenue.

  12. The differential charges for credit cards constitutes a (small scale) upward redistribution of wealth — prices go up across the board and are rebated in the form of rewards to higher net worth individuals who qualify for the premium cards. Beneficial for those of us who qualify for the cards, but a bit skanky as a way of organizing our society.

    A possible solution for the merchants would be to accept only debit cards. I imagine that pretty much everyone with a credit card has a debit card as well. The problem for retailers is that this would eliminate purchases from people who don’t have the needed money in the bank. Not sure this would be such a bad thing, either.

    Credit card companies also have a solution — average out the cost of rewards across their portfolio use that single number to set swipe fees for every card they offer, possibly with an adjustment clause each year.

  13. The article is behind a paywall, so its’ impossible to tell what government intervention, if any, Amazon is requesting.

  14. I am really hoping that the government will not intervene. How much should we be concerned about this?

    I had thought that Target already solved its credit card problem with the Red Card. The five percent off generally gives consumers an incentive to use this card instead of a rewards credit card. This has actually always bothered me at Target, leading me to stock up when they have the ten percent off on gift cards that can be purchased with a regular credit card.

  15. @ Joelfreak It’s perfectly consistent. In both cases, Gary is [correctly] advocating letting market forces decide instead of government. If Amazon, Target and HD want to go big d*** with Visa/MC, they can do it and stop accepting them all together unless Visa/MC play by their rules. Who knows who would blink first (guessing the retailers as applying for new cards is a high friction activity – easier to shop elsewhere), but I have a feeling nobody – not Visa, MC, Amazon, Target, or HD – would win any customer service points for allowing such a detente to occur.

  16. I don’t understand why Amazon has a problem. I am a Amazon Prime member and I get 5% off if I use either the Amazon store card or the Amazon Chase Visa for purchases. This is better than what I get with Chase Freedom, Freedom Unlimited, or Sapphire Reserve (or my Amex cards) so I usually use the Amazon store card.

  17. Someone asks what does Amazon want? According to the WSJ article about this, Amazon and other retailers want to be able to choose which credit cards to accept. Now if they accept Visa, they are contractually bound to accept all Visa cards. They want to accept low cost (to them) Visa cards and reject higher cost Visa cards (Chase Sapphire Reserve was given as an example of one they would like to reject).

  18. Have always used my Chase Ink 5oints per dollar @ Staples/Office Depot to buy Amazon gift cards – CIRCUMVENTED!, you’re welcome.

  19. Why doesn’t everybody who shops on Amazon have an Amazon credit card and just use that? There’s no annual fee. I get 5x back on my Amazon Prime card. I think it is 3x for non-Prime members, but that still beats what you’d get back on any other card.

  20. It’s a well-established principle of capitalism that for market forces to work require competition. VISA/MC control 75% of the global payment transactions (Nilson Report, 2017). It’s an oligopoly, so capitalism says that government intervention is required to restore market forces. And it’s about time — why should everything I (and everyone else) buys be 2% more expensive than it otherwise would be?

  21. +1 to Mike & Maryanna. Anyone who shops Amazon regularly and doesn’t get 5 UR per dollar is leaving money on the table. I use an Ink Cash (no AF) to buy $500 Amazon GC at Office Depot earning 5 UR/dollar. I buy lots from Amazon, so it would be foolish to earn less. The Amazon credit card is not nearly as lucrative, so it is best for small time players.

  22. @Jake – nevermind that Charlie Plott and Vernon Smith (the latter winning the 2002 Nobel Price in Economics) disproved the conventional neoclassical assumption of the need for large numbers of buyers and sellers to create a competitive market, but that assumption is about the number of participants in the marketplace and not solely about each one’s share of the market.

    In the field of anti-trust how you define the market pretty much dictates your conclusion. Credit card payment networks are far more narrow than ‘global payments’ which include wire transfers, ACH, blockchain, checks, cash, paypal, etc.

  23. @Gary Leff I think it should be legal for businesses to accept or reject whatever form of payment they consider to run a profitable business, rather than forcing them to accept more expensive forms of payment because a politically powerful interest group prefers it.

  24. Merchants that only want to accept cash type payments in order to avoid bank credit card charges seem to forget that they don’t handle cash for free. The money has to be counted, safeguarded, and deposited – and that often involves an armored car company, which is going to bill them for that service. Credit card payments on the other hand just show up as deposits with no further action on the part of the merchant.

  25. I benefit greatly from Amazon, but I also feel it’s getting too powerful for its own good. If this is true, it’s not a healthy sign.

  26. > If Amazon, Target and HD want to go big d*** with Visa/MC, they can do it and stop accepting them all together unless Visa/MC play by their rules.

    That’s essentially what Costco did with Amex. They still don’t take them on their website, despite taking all the other major cards.

  27. Why not extend this even further? Many name brands such as P&G, for example, sell scores of different products and each product can come in a variety of sizes and flavors. Stores pick and choose which SKU to carry. Retailers would cry like stuck pigs if they were forced to carry all or not allowed to carry any.

  28. The “honor all card” rule has led to increased costs for retailers because banks have been pushing more and more high-end (and higher cost) cards to consumers. Renember when a “gold card” meant something? Now high interchange Visa Signature and MasterCard World cards are ubiquitous. One market based solution would be to allow the retailer to surcharge the credit card fees to make it transparent to consumers and then allow the consumer to decide which form of payment. Then consumers can choose whether they are willing to pay 2% to get 2% back or just pay cash.

  29. @cynnils: That’s not how it works, unfortunately. First of all, nobody is walking around with a few hundred dollars in their pocket and ready to pull it out when at the last minute a merchant informs them that their particular style of Visa is not accepted.

    The real solution is to allow merchants to offer cash discounts. Then you can decide whether you want to continue the transaction using your credit card or use your debit card instead. Oh, wait a minute … cash discounts are already allowed. It’s just that the whiny little greedy bitch merchant doesn’t really give a rat’s ass about the customer. They want to continue raking in the advantages of not having to handle cash, plus the benefits of increased spending when the consumer uses a credit card, and being a leech and getting this all for free.

  30. How far can the credit card companies go? Can they offer a super-duper premium card, with a swipe fee of 50%. which gives 20 points per dollar to the holders as long as they pay a $500/month fee? And the stores have to pay that fee or be denied services from that card?

    If it happened, I might be a cardholder, but I can understand the stores’ objections to that.

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