Credit card rewards: A regressive tax on the poor?
Visa and Mastercard, the world’s largest payment processing networks, have long been the target of criticism for their high interchange fees. Interchange fees are the charges that merchants pay to accept credit and debit cards as forms of payment. Typically, these fees, which are levied by the card issuer and passed on to the merchant, range from 1.5% to 3% of the transaction amount.
But a recent post on Hacker News has sparked a fresh round of debate on this issue. According to the post, Visa and Mastercard don’t keep much of the interchange fee at all, with the vast majority paid to issuing banks to pay for loan origination, fraud, and cash back or points. In Europe, Visa and Mastercard charge 0.2% for debit and 0.3% for credit as per regulation, but there are no rewards offered on these cards.
The post argues that credit card rewards are a regressive tax on the poor since only those with good credit can get the best rewards. The rest, who pay with debit or cash, are effectively subsidizing those who get a 2% cash back or points on their credit cards. The author suggests that the solution is to reduce interchange fees to 30 basis points and eliminate rewards altogether.
While this proposal may sound appealing, it overlooks some fundamental issues with the payment processing industry. Visa processed $11.6 trillion in payment volume last year, with net revenue of $29 billion and net income of $16 billion. This means that their net revenue is approximately 0.25% of transaction volume, which is in line with the EU-mandated numbers. However, credit card companies operate as an oligopoly, with huge regulatory and structural barriers to entry. This limits competition and incentivizes high fees.
Reducing interchange fees may affect the bottom line of issuing banks, making it harder for them to offer credit to low-income individuals. It is also unlikely to happen in the US, where market-dominant corporations have a tremendous lobbying power and can ensure the rules are written in their favor, making it difficult for potential upstarts to enter the market.
However, the post suggests a potential solution that might be more effective than capping fees. Instead of requiring merchants to pay interchange fees, the fees could be assessed on the consumer side. For example, the issuing bank could charge the cardholder 200 basis points instead of taking it from the merchant cut. This approach would make consumers shop around for the lowest fee cards, putting pressure on card issuers to reduce their fees.
Ultimately, the issue of interchange fees is complex and multifaceted. It affects merchants, consumers, card issuers, and payment processors alike. While there is no easy solution, one thing is clear: the status quo cannot stand. As technology advances and new payment options emerge, the industry will continue to evolve, and policymakers must adapt to ensure that the payment processing system is fair, transparent, and accessible to all.
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Author Eliza Ng