Vox is trotting out an old complaint about reward points that credit card users get for making purchases and gets the story wrong.
“The long and short of it is that the fancier the credit card rewards, the higher the swipe fees for merchants,” Vox said. “Those merchants often pass along the costs of those swipe fees to all customers, whatever the payment mechanism,” Vox added, noting that people who paid cash tended to be poorer so they helped subsidize the rewards of the rich people using credit cards.
Vox cited a 12-year-old paper that found households that paid cash paid $149 of the swipe fees that went to households that got $1,133 in cash back from credit card companies.
“The American payment system has evolved into a reverse Robin Hood whereby middle-class and working-class Americans who pay with a debit card, prepaid card, or cash are subsidizing the wealthy, who pay less for everything,” Aaron Klein told Vox in an article detailing the horrors of the cash-back rewards system.
The problem with the argument is that it simply isn’t true.
How reward points are paid for is a complex topic that is made even more complex because how credit card companies generate money is complex. Swipe fees are certainly part of the equation but it would be wrong to say that swipe fees directly pay for rewards that credit card companies give customers.
There are other dollars that contribute to the equation, which one expert said was more like a stew.
“When you put all the dollars in, it’s like making stew,” Brian Riley, director of the credit advisory service at Mercator Advisory Group told Nerd Wallet about how rewards are paid for. “You don’t say ‘these dollars came from this’ and ‘these dollars came from that.’”
Riley said some categories of rewards are loss leaders, where a credit card company offers bigger rewards for purchases on items they know they’ll take a loss on from the rewards versus the swipe points, but offer anyway because the interest that the purchase generates makes up the loss.
It’s also untrue that rewards programs just favor the rich.
“Even among households earning less than $20,000 per year, 82% own a rewards card, and 90% of their spending dollars are charged to these cards,” said Greg Weed, director of card performance Research at Phoenix.
That means that even the poor are getting cash back.
The real problem is that fees that banks generate—including swipe fees– are now more important in their business than they used to be.
Generally speaking, the old model of the bank that generated interest on deposits by loaning the money people deposited in the banks, ala George Bailey’s Building and Loan in It’s a Wonderful Life, doesn’t exist anymore.
Congress killed it. And with it, a lot of services banks used to provide for free.
“Before 1980, banks’ earnings depended heavily on the difference between the interest they paid to depositors and the higher interest rate they charged to borrowers,” said the Los Angeles Times.
Congress has passed one banking reform law after another since 1980, including Dodd-Frank, which was supposed to cap swipe fees. One bank, at least — Bank of New York Mellon Corp. — has even charged fees for deposits in excess of $50 million.
That’s right: A bank charged money for a company to deposit $50 million in its bank.
“The decision to impose a charge, however, reflects how pressed banks feel to control costs as interest rates wallow near zero in an economy that shows little signs of recovery,” Reuters reported at the time.
And unfortunately, little has changed since 2011 when that report surfaced, and now, as the economy struggles and interest rates still remain near zero — a policy set by the Federal Reserve Bank.
Bank fees, including swipe fees, fall on high and low alike, and rewards are just a way of generating more transactions.
And they continue until banks can get back to providing “free” services that they used to offer by using the profits they generate on higher interest rates in the healthy economy that’s been so sorely missing for decades.