I’ve been using rewards credit cards for many years now. I initially used cash back credit cards to turn what was mostly necessary spending or purchases I would have made with cash or a debit card anyway into hundreds of dollars back in my hands — or by bank account — each year. Now I travel more, so I switched to the Continental Airlines OnePass card for most of my personal spending. Rewards credit cards, whether they focus on cash back, travel, or some other feature, are associated with fees, but not just for the card users.
When any merchant accepts a credit card, the business must pay a fee to the networks that allow that transaction to be processed successfully. For example, let’s say you pay for a $40 meal at your favorite local restaurant with your Visa card. If the card is a typical Visa card, without any rewards such as cash back or travel associated, the restaurant must pay Visa $0.72. If the Visa card offers rewards, the restaurant must pay $0.88. There are more tiers of Visa cards. Beyond the traditional rewards cards is the Visa Signature designation. If you pay for a $40 meal with a Visa Signature card, the restaurant owes Visa $1.02 for that transaction. A transaction with a Visa Signature Preferred card runs up the restaurant’s bill for that meal to $1.06.
These rates are as of the fee schedule published April 2011 pdf).
These fees may seem small, but considering the number of customers who can come through a restaurant, they add up quickly. Merchants blame these swipe fees, merchant fees, or interchange fees for making businesses difficult. Small businesses have a harder time with these fees because the retailers don’t have the bargaining leverage to force Visa and MasterCard to reduce them. I believe even larger retailers have little leverage to negotiate because refusing to accept either Visa or MasterCard would alienate half of their customers.
As a result of the higher swipe fees for certain cards, businesses often create policies that seem unfriendly to customers.
- Gas stations circumvented the “no discounts for cash purchases allowed” stipulation of their merchant agreements by offering different prices per gallon depending on whether a customer uses a credit card or cash.
- Although it may transgress their merchant agreements, some retailers have a minimum charge amount. If the purchase isn’t over $10 or $20, the retailer won’t accept a credit card.
- Some business are resorting to displaying signs that discourage customers from using rewards credit cards, which are often more expensive to process than standard credit cards.
It doesn’t cost the transaction networks more to process a rewards credit card payment than a standard credit card payment, but the cost of the rewards add up. Fees and interest charges aren’t enough to cover the cost of running a major financial corporation like Visa or MasterCard, nor do they cover the costs of the rewards they provide to their customers.
Knowing that rewards cards hurt smaller retailers financially — more than standard credit cards hurt them — would you forfeit your potential rewards by using another payment method in smaller establishments?
Updated January 15, 2013 and originally published July 15, 2011.