How credit card rewards became a $9.2B wealth transfer
library.hbs.edu244 points by conbrian 2 days ago
244 points by conbrian 2 days ago
Credit cards and cash have their place but the story being told doesn't track with experience.
First, businesses are increasingly differentiating pricing between cash and credit card - this is most obvious in gas stations where the price you see on the big sign is the cash price and not what you practically end up paying. Or the various restaurants and other businesses that offer cash discounts. While this is relatively new, the earlier manifestation of this is the credit card fee - eg try paying your tuition or utilities using a CC and you'll immediately find this option costs more.
Interestingly all the above usually hover around 3% so it's tellingly the rate the merchants themselves perceived CC use and infrastructure cost them.
Second, credit cards are clearly good for business volume. Most people have had the experience of wanting to buy something unplanned and not having the cash on them, but buying it anyway via credit card. On a larger scale, hard to imagine on-line shopping without a credit card.
Third, I don't find cash-only businesses cheaper. In my town there's a cash-only barber, pizza place, and ice cream shop and they cost just as much as the credit card taking ones. In every case the dynamic is there are long running businesses with sufficient clientele that they never bothered, but they don't use absence off CC fees/infrastructure to generate a consumer savings.
Fourth, poor people can play the point game too. As a broke college student I was very fond of my Exxon Mobil card that gave me cheaper gas. Now I don't really care about an extra ten cents on a gallon as much.
“Most people have had the experience of wanting to buy something unplanned and not having the cash on them, but buying it anyway via credit card.”
I believe you, but this experience is totally alien to me and I don’t know of anybody who has done this. I wonder if it’s a generational thing.
I was confused by this (because I rarely carry cash) until I saw your response below. I think OP might be using credit/debit card interchangeably? I don't use my credit cards unless I have to, but my debit card is used daily.
Are you in the U.S.? As an American I use a credit card for nearly 100% of my purchases, on a daily basis. I pay my bill in full each month. I might pay a 2–3% surcharge on a subset of those purchases, but I am reasonably sure I get more than that back in rebates. My Amex offers 2% back on groceries and the grocery store doesn’t charge extra for credit card purchases.
I basically never use my debit card for anything but ATM transactions, and the only time I have any cash in my wallet is when I have recently gone to a cash-only bar or to Las Vegas.
I default to credit/charge cards over debit cards because, in my country, debit cards offer far less consumer protection than credit cards.
Literally between posting the above and now, I went to a rural bike ride with my family. Didn't bother to bring cash. Ended up riding past an antique shop and bought my son an old school tractor toy via Google Wallet.
But with a debit or credit card?
Credit card. I never understood the point of debit cards. It's like for people who don't want points? :)
I am almost 50 years old and I struggle to imagine anyone younger than I am being any more familiar with what cash is than with what a landline is
how much cash do you walk around with?
I just use debit cards and Venmo for everything. I’ve never understood why I’d use a credit card when I can just use the debit card and pay no fee. I’ll never afford a house anyways so the credit score argument is meaningless to me.
Our family uses credit cards for everything. We don’t pay fees, the merchants do. We get the benefit of being able to settle disputes easily, getting cash backs, having extra insurance on certain goods, and not having to carry any easy-to-lose cash. We don’t spend more than we can afford, and we pay in full at the end of the billing cycle.
One big reason to use credit card is that it gives window to settle problems. You have month to charge back before have to pay bank. If hotel places hold, it comes out of the credit limit not your bank balance. If someone makes fraudulent transactions, it isn’t your money and you can still pay rent.
If you pay the balance on time, you are getting free liquidity from the bank. But they get if you don’t pay off the balance.
it is trivial to find a credit card with no fee and 1%-3% percent cash back.
Imagine everything you bought in the past 3 decades from grocery to hotel room and air travel. Now imagine having 2% of it in your pocket.
that's eaey to understand right?
additional benetit like purchase protection, vendor disputes, etc.
Okay I can understand that. I thought credit cards had fees. What’s the point of the free money credit card?
As I understand it the cc company takes the fee money from the buyer and it's usually more than the cash back and gambles with it until they give some cash back to the buyer and then pockets the rest. If you have millions of those transactions taking place then you have a huge pool of gambling money available. They also hold the sellers money for a while usually longer than necessary to also boost that pool. Edit: a less cynical view is that you are essentially loaning that money to the credit card company and then it pays you back but it keeps the interest
//Edit: a less cynical view is that you are essentially loaning that money to the credit card company and then it pays you back but it keeps the interest
It's literally the opposite. The credit card lends you money for free - if you pay your bill every month.
That's the "credit" in "credit card" - they are extending a line of credit to you, not the other way around.
There are plenty of credit cards in US with 2% cashback on any transaction and no fees if you pay bills on time (usually 20-30 days after statement closes). Some of them even throw in small sign in bonus.
So we're on topic: as the article points out - I use cash back cards so other people (like you) subsidize my spending. There are other major benefits to using a CC but anyway..
You are, apparently, well-off enough to have enough money in your venmo/checking where you don't think about it too much but I think the OP was referring to the less well-off but common situation where you are spending a little over your current ability - be it physical cash on hand (not your situation) or the amount available in your account.
I honestly don’t know what you’re talking about. I’m juggling a few hundred dollars in my checking account all the time. Is that well off? I don’t think so.
fwiw there is still a fee involved, usually just much lower so the merchant eats it
In the US debit card fees are capped (https://www.federalreserve.gov/paymentsystems/regii-average-...). The cap is low enough that there isn't enough to fund rewards like we see on credit cards. IIRC there were debit card rewards when they first came out but those went away with the fee caps.
Important context: this is US thing. EU capped interchange fees at 0.2% for debit and 0.3% for credit cards.
So in US card processing is x5-x10 more expensive.
Things that are more expensive in the US for no reason:
Healthcare
Internet access
College
At least we have cheap gas? farts
Healthcare and college are "Baumol cost disease": because they depend on skilled workers, much of that is the same as "American salaries are higher than in the rest of the world", and unlike manufacturing or software (+) you can't outsource it to lower-wage countries.
(+) there still seems to be a massive wage premium for "being physically in a San Francisco office" even if most of the work is being done by an AI, which cannot be sustainable
because code is only a small part of software development. don't forget ping pong tables. lol. I'm both making a valid point and making fun of it too.
If it was this simple, then high costs would be limited to the labor-driven portion of the bills.
This is not the case.
Bit for bit, internet access is cheaper in America than it is in Canada or Australia.
Canadians like myself have ~40% of our provincial taxes spent on healthcare, so in my case about ~8% of my gross income. Somewhere in the tune of $20k/yr. While I was living in Seattle and filing American, quite a bit less of my gross income went to healthcare. Just food for thought.
> Canadians like myself have ~40% of our provincial taxes spent on healthcare
Worth noting that taxes in the US are a lot lower than they should be because a large portion of government expenses are financed with debt. Canada owns over 400B in US debt, so that's Canada "subsidizing" US taxes.
Also, yes, that's how healthcare works: when you're young and less sick, you tend to pay more than you get out of it, and then it reverses as you get older.
Canada has a huge debt problem at the provincial and federal level. The provincial level even covers for the cities spending problems.
But that is not because it's less efficient. With the Canadian system being socialzed and 20k$ being just 8% of your income it is to be expected that you would pay moch more than the median person into the system.
"I make $250k CAD a year, my experiences must be representative of, and relevant to, the masses," is a wild thought to have.
Well, maybe I spoke too soon, because my private American healthcare turns out to also be about 8% of my gross income (of $60k)(before copays and my deductible)(and also it's crap). Twinsies!
But yes I agree that it would be awful to have my health needs taken care of and a mere ~160k USD left to spend on everything else.
Oh I certainly don’t think it’s representative to that of the masses, I was sharing an anecdote.
I think either way both of us are in really good shape. In my experience the quality of American care is better in nearly every regard (having experienced both pretty intimately), but the simplicity and the peace of mind of the Canadian system has its benefits too. In either case you end up paying.
> But yes I agree that it would be awful to have my health needs taken care of and a mere ~160k USD left to spend on everything else.
I’m confused - do you actually think it’s awful?
I think the main issue that the NHS model of 10+ years ago worked when fully funded. The Canadian model is a mix match of US healthcare and Medicare. Some drugs aren’t covered, some procedures take forever, and you don’t get guaranteed doctor. Many European healthcare system have solved the issues we have, but Canada has refused to adopt any sensible system.
You're being disingenuous. You clearly meant your anecdote to be representative, at least for "Canadians like [yourself]". But I suspect that it was meant to be a broader statement, and you're only backtracking now because the ridiculousness of that notion is apparent.
>I think either way both of us are in really good shape.
I'm lying in bed with non-specific upper abdominal discomfort that I'm hoping isn't related to digestive issues (pancreatic) that I've had for years, but which I can't get treated for because my insurance-related circumstances have made it very difficult to get consistent access to, and then to be taken seriously by, relevant specialists. These issues have combined with chronic injuries that were poorly managed in their acute phase and poor access to quality nutrition to make it difficult for me to exercise consistently. Contrarily and consequently, I'm quite out-of-shape.
The best and most consistent care I've ever gotten was while I was on Medicaid (which was still yet hampered by the professional stigma against accepting Medicaid and treating Medicid patients well).
>In my experience the quality of American care is better in nearly every regard (having experienced both pretty intimately
You experienced the quality of care available to rich people. That quality of care is not widely available, not for lack of institutional capacity, but primarily due to lack of profit.
>I’m confused
I really don't think you are.
there is a big chunk of people who wouldn't afford healthcare in the USA but still have access to in Canada. I don't mind paying more taxes if this means everyone has healthcare access.
Internet access isn't particularly expensive in the US.
Healthcare, education, and housing are expensive in the US for the same primary reason: political interventions that simultaneously subsidize demand and restrict supply.
it is for what you get. the US LEC and CLEC system sucks, and I had wayyyy more options in the EU, and in fairly upfront and straightforward ways.
e.g. https://documentscontractuels.orange.fr/les-offres-orange-mo...
The EU doesn’t have the challenging scope and geography of the US, no?
The problem in the US is less of a geography problem and more of a regulatory one. Many towns and cities in the US gave the cable companies local monopolies back in the 50s and 60s. There are technical reasons why this worked ok (not well but perhaps better than the alternatives) for television, but now that the same rules have stretched to apply to delivery of internet access they no longer have any technical basis. So at this point they’re just a barrier to competition and exist only to raise prices.
The good news is that modern fiber systems blow cable internet out of the water. It is far cheaper to supply symmetric gigabit internet to every customer over fiber than over cable. Fiber just has more bandwidth to go around. And because it’s a different technology it is not subject to the same local monopolies that cable is encumbered with. This means that the free market is correcting the problem and has been for a decade. In many parts of the country it is now possible to get internet that is faster and cheaper than what is available in the even the best built parts of Europe. The main obstacle to that build–out is probably local permitting. Many large cities require new permits, with public comment periods for each and every one of them, for every single block that an ISP lays fiber for. Cities like San Francisco have imposed a glacial pace on their ISPs.
> And because it’s a different technology it is not subject to the same local monopolies that cable is encumbered with.
Exclusive francise agreements between municipalities and cable operators have been outlawed since 1992. But it's generally uneconomic to overbuild a new network with the potential to touch every home unless a large portion will subscribe.
Fiber internet is typically much better than cable internet, but cable internet is good enough for most people, so they're unlikely to switch unless it's significantly cheaper, which it often isn't -- especially since local incumbents tend to lower prices or rollout better service when a new entrant is entering the market (or announces they will ... Google Fiber city selection announcements drove lots of competing rollouts even though Google didn't install anything in those cities).
Regulation requiring wholesale access / line sharing / or strict separation of first mile and service infrastructure would allow for competition in service and routing, without having to build a 3rd last mile network. Congress did this in 1996, but the FCC walked it back for cable, the courts said if it doesn't apply to cable, it doesn't apply to telephone, and the FCC said internet over power lines exists and provides competition despite the lack of providers. Congress never came back to make clear that it wanted line sharing, so it disappeared from the mainstream.
I have municipal fiber where the municipality handles last mile only and I have a choice of IP service providers. But installation was very expensive and monthly service is also expensive relative to the ILEC and the cable company, although the cable company service on my street ends before it reaches me.
The cable and telephone companies have a major cost advantage that they can rebuild their networks with a good expectation of customer uptake; and they're allowed to manage the finances of build out however they see fit. The muni fiber (in my state anyway) has to bill customers for the costs of install and even if it could self-finance a build out to service all homes, wouldn't see a lot of uptake because most people find their current service to be good enough.
The federal government subsidized a planned, massive fiber build-out almost 3 decades ago. The telcos pocketed the money and then refused to complete the build-out, complaining that the last mile was too expensive. Municipalities pull teeth and the telcos have slowly rolled out to-home fiber piecemeal in the intervening years, as the local capacity to handle their extortionate rates appears. Alternatively, they will lay cable to your unconnected house/neighborhood for payments in the six- and seven-figure range.
Where we are is very much not a function of the free market.
Oh, I agree. There are huge distortions that have delayed the roll out of fiber internet by decades. But money talks, and ISPs are now building huge fiber networks in some parts of the country in spite of the best efforts of our government. I subscribe to Ziply Fiber (<https://ziplyfiber.com/internet>) which is building a large network in the Pacific Northwest that provides superb service to millions. They’re not perfect, but they’ll provide up to 50Gbps (symmetric) service to residential customers across four states. Compared to Comcast/Xfinity, which tops out at 2Gbps × 300Mbs, Ziply is amazing. That’s the free market fixing the problem in spite of the distortions introduced by local monopolies.
And that competition is definitely a good thing. Xfinity’s offering was far worse before they had competition because there was no incentive to offer anything better. They’ve even introduced a new idea to the market in order to win people back away from fiber: guaranteed fixed prices for five years. No surprises when promotional rates expire, no price increases, no shenanigans at all for five whole years. That alone is a breath of fresh air compared to their own business practices of just a year or two ago. Ziply had to respond by lowering their prices and ending promotional rates because they were losing customers. You know the old saying: as iron sharpens iron, so too does man sharpen man.
It would be better, of course, if the government were not mismanaging things. Switzerland’s solution is the better way to go than what we have today. Their government paid to build a nation–wide fiber network, and any ISP can service any customer on that network. That allows ISPs to compete on price and features without worrying about having to build their own competing and overlapping network. This is already how electric service works in many states, so it’s not even like we can’t make it work.
// subsidize demand and restrict supply
I have never seen anyone articulate this so crisply.
The government has created a situation with the student loans thing where basically anyone can borrow 500k to get an obviously useless degree.
Are the colleges going to ensure they collect that money? Obviously yes.
> The government has created a situation with the student loans thing where basically anyone can borrow 500k to get an obviously useless degree.
The point applies even to the useful degrees, and more broadly to the universities irrespective of any particular degree program. Student loans and scholarships make demand almost completely inelastic -- totally insensitive to price increases. Universities compete to attract the best students, and a major mechanism for doing that is to invest in non-academic amenities, such that tuition prices are funding much more than literal tuition. Combine these two factors together, and you have a feedback loop of continuous price inflation.
Similar factors are at work in the healthcare and housing sectors, with the most important element being that external subsidies eliminate price elasticity on the demand side of the equation, and completely obliterate the dynamics that ensure downward price pressure in normal markets.
You can add Pre-K education to that list. It's on par in terms of costs with sending your kids to college.
This is why people are moving out of the US in droves, the universities are empty and nobody goes to the doctor.
Internet access sort of has a reason: the US is geographically huge and more sprawled out. But that's not enough to explain all of the difference.
That really explains only small parts. Even the horrible suburbs have little real reason to be that expensive. In the end it is really about lacking actual free market and enabling corporate capture as voted by the voters.
That’s not the reason. The required build out has actually already been been paid for: https://www.huffpost.com/entry/the-book-of-broken-promis_b_5.... But the US is so politically broken that corporations could just pocket the money without actually providing the infrastructure.
That does even begin to touch on crazy laws banning people from setting up their own ISP to compete: https://www.techdirt.com/2024/11/07/16-u-s-states-still-ban-....
> the US is geographically huge and more sprawled out.
There is ample historical evidence that this is a poor excuse.
Long ago, leaders in the US understood the value of universality. You'll likely recognize this as the Network Effect, Metcalfe's Law, etc. Back in the day, they called this "universal service." That thinking was central to the policies established for both electrification and phone service in the US: it wasn't then, and isn't now, truly universal, but what could be feasibly accommodated was, even when costs were/are quite high.
It wasn't lost on the people of those times that such policies inherently meant the cost of including sparsely populated, distant areas would be subsidized by concentrated areas. Before those systems appeared, the founders welded the same thinking into the US constitution in the form of the US postal service, with exactly the same knowledge and concerns.
We've lost that. The change happened prior to the advent of the internet. You're free to attribute this to whatever you wish; I won't offer my view on that, except to say there are no innocents: every argument that fingers ebil capitalists can be countered by examples of urban leaders damning government policies that subsidize non-urbanites. What I know with certainty is, if packet switched networking was somehow a thing in the 19th century, availability would be a given for almost any structure more significant than a hunting cabin in the US today, complete with common carrier, service baselines and rates established with clarity.
That might explain internet pricing in North Dakota, but it doesn't explain it in NYC or DC or LA.
I pay $40/mo for 500mbps in my Bushwick apartment - is that considered expensive?
By US standards? No, probably not.
But, a quick search indicates you can get similar broadband in Glasgow, Scotland for ~15 GBP/month. And Rome, Italy looks like ~25EUR/month.
I’m in Stockholm, and our condo HOA (BRF) includes 1Gbps per unit in the fee for all units because billing individually would cost more in admin than the service itself. We have FTTP and then cat6 to each unit.
In Copenhagen mine is billed individually, and is 75kr for 1Gb/s. About $10.
Otherwise the same system.
That sounds really convenient! Is it a new building? I know the odd American or Canadian build will have that, but only the newer and more expensive ones.
The building is from the 1940s.
But this is a pretty common setup for condos in Swedish cities. Rentals usually have access to the same infrastructure but at higher prices due to kickbacks demanded by the landlords from the ISPs.
The backbone of it all is a state owned fiber connecting the cities together with municipal fiber.
But even outside of the cities FTTP is quite common. There are companies which specialize in finding rural areas where there’s enough interest to justify the cost of connecting them and then coordinating getting an economic association setup to own and manage the local infrastructure.
I had that in Sweden 20 years ago. Typically our local municipality put fiber whenever they dug up anything, so fiber is everywhere.