Thursday, January 12, 2012

Cashback bonus

I'd wondered off and on for a while why some credit card reward programs give you extra points or percent cashback for transactions at gas stations and restaurants.  And even though my card doesn't, I think the reason finally hit me while I was filling up my tank tonight: because those are the businesses that don't want to accept credit cards.

To oversimplify things a little bit, credit card companies charge fees to the businesses based on a percentage of the transaction cost.  The agreements that the businesses sign with Visa and the other credit companies prohibit them from passing those costs onto you on top of the purchase price, with very few exceptions.  They can offer a discount for paying with cash, but they can't charge you 2% more for paying with a card.  Anyway, generally gas stations and restaurants would make more money if everyone just paid in cash.  They accept credit cards because credit cards are convenient and people demand that they accept them.  Those few gas stations and restaurants that don't accept them lose business because of it—given a choice between two gas stations only one of which accepted credit cards, I'd always pick the one that accepted plastic unless there was like a 1-in-10 chance of being murdered at that one.  I hate dealing with cash.  Pretty much the only thing I use it for is splitting bills when I get dinner with friends; everything else goes on the card.

So why are gas stations and restaurants special?  I sure don't know, but it probably has something to do with margins.  2% on the total purchase price means a lot to a business with a 10% profit margin compared to one with a 40% profit margin.

So rather than reduce fees for gas stations and restaurants, the credit card companies chose to drive even greater demand for those businesses to accept credit cards by offering their customers extra rewards for shopping there (and insisting that the business continue to accept cards).  The customers presumably end up paying exactly the same amount for their gas as they would if things were less complicated—the gas stations just raise prices by a couple cents to cover the couple cents in credit card fees that they pay.  You pay the gas station a couple extra cents, the gas station begrudgingly gives it to the credit card company, and then the credit card company gives you back your couple of cents except now you're happy about it because it's a cashback bonus.

I have no idea if any of that is how it actually works.  But it seemed plausible at least.  Bear with me here, I'm new to weaving economic conspiracy theories.

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