alt Hacker NewsHow credit card rewards became a $9.2B wealth transfer
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This ignores the aspect of consumer data. Credit issuers generate profit through issuing rewards programs in part due to the sale of their customer’s behavioral spending data. Cash and debit users largely retain their data privacy here.
It’s hard to put a real world number on what the cost to the consumer is for losing this data ownership, but it is not zero: these data are increasingly used for targeted pricing practices which extort additional margins from the consumer at a later date.
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.
Patrick McKenzie (patio11 fame) had a great blog post in credit card rewards
There is a lot that goes into it, and it is interesting how customers like me who literally never have carried interest and have to made thousands of $ in rewards over the years still make the banks money....
https://www.bitsaboutmoney.com/archive/anatomy-of-credit-car...
The study methods are closer to advocacy than science or policy.
Sure, take any slice of a vast number, and you get a big number.
It's not a "wealth transfer" when everyone gets what they bargained for and can opt in or out.
Most importantly, the transaction value of using credit cards or rewards systems - what the user actually gets - is not enumerated.
Beyond what others have noted (mainly deferred payment), credit cards offer legal transaction protections: my legal liability for fraud is limited (unlike debit or Zelle transfers), and I can challenge any transaction even later, which gives the vendor an incentive to ensure I'm happy even after they have my money. While reputation provides some incentive for repeat customers, the ability to retract a transaction governs even non-repeats. I would submit this alone has improves quality of service for everyone anywhere credit cards are accepted.
Rewards vary by type. Cash-back rewards reflect the fact that interchange fees were set to recapture initial investments, but servicing costs have plummeting (thanks to computing); governance-wise, it's almost impossible for a "representative" political system to extract a large cost from a small number of powerful agents with vested interests to provide a tiny amount of benefit to a very large numbers of other people. But that's a much more extensive governance issue.
So where does the benefit go? To competition between credit providers, initially as cash-back, and then to tying rebates to future purchases within controlled channels. For airline point systems that give free flights or upgrades, it improves retention, but other forms of rewards would seem to verge on tying, where power in one market is extended into another.
Politically-mediated wealth transfers are a political issue. Economically-mediated wealth transfers should raise market-regulation policy issues, in particular whether the law is inducing or protecting them, and then whether they are good or bad. Tallying that requires not just seeing the money flow, but seeing all the value received or cost exported.
And those same American companies want the US government to intervene in other countries to try to kill their local alternatives
As others have mentioned this is particularly prevalent in the US. I always liked that Australia's vision for a peer-to-peer payment system (note cards are mainly for merchants, hence the rewards) has inclusivity [1] as one of its core tenets "continue to transact ... without disproportionate burden or risk ... those experiencing financial hardship". They also just stopped surcharging [2] and have capped interchange fees since a long time.
1) https://a2apaymentsaustralia.com.au/wp-content/uploads/2026/...
2) https://www.rba.gov.au/payments-and-infrastructure/review-of...
From the study...
>When merchants raise prices for all consumers in response to these costs, users of low-cost payment methods (e.g., cash and debit) cross-subsidize high-reward credit card users who shop at the same merchant"
Cash handling is not a low-cost payment method, Cash handling can cost businesses between 4% and 15% of each transaction, when factoring in labor, security, bank fees, and risks like theft and counterfeit bills.
One could argue that credit card users have been lowering prices for cash payers as business avoid cash handling pitfalls and get their funds safer and faster.
The only way to solve this is to have the user of the credit/debit card pay the fee. Sure, you can do an EU thing of 0.2-0.3% or whatever it is, but this might still be 0.2-0.3% more than it could be in a competitive market.
Im really surprised the number of comments here who think the rewards are free money they're getting. The stores are paying 3-5% transaction fees for you to use credit cards then they give you 2-3% back and force you to spend it on things they deem can be redeemed. You're paying for that 2-3% back in higher prices for everything. The whole thing is a giant scam and should be shut down.
I always wondered why people in America would ever pay by cash or credit card - unless they are laundering that cash.
Otherwise, you're giving up 1-3% discount.
Set auto-pay on your credit card to pay in full every month. I've never once paid for credit card interest. I think there's a term inside credit card companies for people like me: leeches or something like that.
Credit cards also transfer wealth from people who pay interest to people who don’t.
It’s a silly system, where everyone has to invest their time (optimizing for rewards, avoiding interest) in an ultimately negative sum game. I hate it so much.
Credit card owners benefit. But they also pay: With their data.
The most defensible framing that I came across (maybe from patio11?) in favor of credit card rewards is that they're a "bulk discount" on interchange fees. People who spend more on their cards also pay more fees (passed through the stuff they buy), so it kinda makes sense to give them a discount[1]. That's what credit cards do. Cards with the highest rewards are geared towards high spenders, with corresponding credit score and/or minimum income requirements. It's not unlike how the 2 quart (1.89L) bottle of mayo at costco is cheaper than the 8oz (0.24L) bottle from dollar general, but nobody would frame that as a "wealth transfer".
[1] of course, this doesn't need to rely on some principle that people are entitled to discounts if they buy more, because in reality discounts arise from complex market dynamics such as competition and price discrimination.
While they’re probably right from a consumer perspective, the article skips over the fact that accepting and handling cash is a significant cost for businesses, way more than the credit card fees. Delays in checkout, making change, counterfeit bills, employee theft, external theft, safe transport, added accounting burden…all add up to an estimated 5-15% (https://plainscapital.com/blog/the-cost-of-accepting-cash/). In fact merchants can now legally pass through credit card surcharges to customers but very few choose to do so, because they’d prefer you pay by card.
It's cheaper to be rich, and expensive to be poor.
How hard is it for the wealthy to not smack everyone else around at every possible opportunity? What happened to noblesse oblige?
(This is not a rhetorical question, I would love to hear others' take on the psychology and history of the subject. Really, how hard is it?)
I have several credit cards and pay them off at the end of the month. I get mostly free hotel stays when I take my family on vacation and have had many free airline tickets.
I also used a credit card to bootstrap my business 15 years ago. At it's height, I was brining in $1 million/year. The bank would have never given me a loan for the amount I was able to use on a credit card. I ended up shutting the business down a few years ago, with no debt.
Most people can't handle spending and rack up tons of debt. Credit cards can also be used to make money, instead of buying stupid things you can't afford.
One factor that never seems to come up in these discussions is that while businesses might not like credit card fees, they also don’t like all the issues with cash: managing it, transporting it, losing it to employee theft, etc. The cost of cash transactions isn’t 0.
Same argument for people: managing cash is a pain, swiping a card is easy. Contesting a transaction or fraud is way easier (infinitely easier?) with a card than cash. Having day to day liquidity even without ever carrying a balance is nice.
Is all this worth $9.2B across the economy? Maybe not, but again, certainly worth more than 0.
Because merchants charge everyone the same price regardless of how they pay
Not at many gas stations. Cash gets a discount usually $.10 per gallon. I’ve also started to see restaurants either give a discount for cash, or charge extra for credit card purchases. Business suppliers from tiny shops to large national companies tack on 3% for people paying with credit cards, or like T-Mobile, a $5/line monthly fee in order to get people to pay by direct debit.
They mention "premium credit cards" in the article, is there a general understanding of which cards are premium? I clicked through to the study and the only example they cited in there was Chase Sapphire Reserve but I didn't see, like, a list or something.
> Because merchants charge everyone the same price regardless of how they pay, those fee costs are factored into prices for all shoppers. However, credit card users get that money back and then some through rewards, while cash and debit users get little or nothing.
And they charge everyone the same price because credit cards contractually force them to. Merchants can either accept these terms, or forego credit cards entirely. This way credit cards prevent other payment methods from competing on price. Free markets for thee, contractually forbidding competition for me.
I interpret this article, and all related discussion, as an invitation to talk about my personal finance habits.
I think this is disingenuous framing.
Credit card rewards are not a mechanism to shift wealth towards premium card holders (this is a negligible distraction), they exist purely to increase revenue/conversion rate, by decreasing customer price sensitivity (compared to cash payments) and encouraging financially irresponsible spending. If this did not actually work in practice, every merchant would just insist on cash and pocket the difference.
"Poor people" are hurt much more from the changes in spending behavior induced by credit card use than by paying for card rewards.
> Because merchants charge everyone the same price regardless of how they pay, those fee costs are factored into prices for all shoppers. However, credit card users get that money back and then some through rewards, while cash and debit users get little or nothing.
>The result: People paying cash face the equivalent of a 26% higher sales tax than premium credit card users shopping at the same store.
I am surprised this never occurred to me or has come up at all in discussions with people (in the context of rising costs/inflation specifically). I’ve literally never considered this compounding effect until now. It’s so obvious of course, it just never even crossed my mind.
Merchants pay the transaction cost. In my parents business in the early 2000s customers would ask in advance if they could use a CC. Some places installed ATMs in the corner (still a thing in some places), but quite unpopular. Rather than lose a customer the merchant will accept payment with credit card and pay the fee.
One consequence of this system is the large merchants have more bargaining power and can negotiate lower fees. So large retailers, gas station chains, etc. are able to reduce the overhead of accepting CC payment. While smaller merchants have the same higher cost.
From a capitalism perspective, this is the most egregious example of "you have capital, so you can make more capital". Banks holding the capital in this case.
Fun fact: when credit cards were first introduced only to people with good credit, which paid the balance in full. this was not profitable. Only after opening the pool to other credit levels did CC start printing money for banks.
Honestly, TL;DR
I wrote a summary for you...
"Because they receive a rebate, credit rewards-card users often effectively pay less than the posted or cash register price for equivalent goods or services."
Credit card fees is one of the main reasons why Brazil's Pix and India's UPI are destroying their market share in those countries.
For merchants, it just doesn't make sense to pay high fees to cater to a dwindling minority of consumers.
So if anyone is trying to picture what 9.2 would buy. The new bridge between US and Canada (Gordie Howe) was 4.6 billion. So that is 2 giant bridges + related infrastructure ... worth of wealth transfer. That bridge had some corruption / payoffs, so we should discount that by 10% wealth transfer as well.
Credit card systems are a Ponzi scheme that favors those who already hold a lot of capital, at the expense of those who weren't lucky enough to be born heirs.
This is even more true of the American brands that are getting Trump to attack modern, open, cost-free systems from other countries—like Brazil's PIX, maintained by the Central Bank of Brazil.
I call it 21st-century American usury.
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So i may be an anomaly but I'd say 20-40% of all places I shop have a specific fee to cover CC transactions using a CC vs Cash.
What a silly article. Don’t buy things you cannot afford. Wealth transfer is a ridiculous framing. Is any heterogeneous situation involving money a wealth transfer?
Patio11 covered this exact topic: https://www.complexsystemspodcast.com/episodes/credit-card-r...
It's clearly more complex than the story these authors are telling, in particular the highest income consumers get the worst returns on their interchange payments. So stores and services catering to wealthy consumers are actually subsidizing an opportunity for savvy customers, many of whom are not wealthy
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.