Credit card rewards programs have grown at an astonishing rate. As consumers, we love to reap the benefits of our spending but few of us stop to think about who's paying our rewards.
Credit Card Reward Programs - Merchants Lose, Consumers and Banks Win
Frequent flyer miles, retailer discounts, cash back and more; if it exists, you can get a credit card to earn rewards for it. As the use of credit cards increases so too does the demand for cards that offer an added bonus. Rewards programs have virtually no negative aspects for issuing banks and they provide an incentive to consumers to use cards even when they have cash. Rewards programs promote card use which increases the banks' revenue from processing fees.
There's no denying that banks have created an excellent marketing tool by offering rewards, but with millions of cardholders accumulating rewards, who's paying them when they want to collect their bounty? The answer is perhaps to most ingenious aspect of credit card rewards programs.
Merchants provide the financial backing for the rewards that banks give away. Banks create expensive rewards programs that increase the use of credit cards, which increases the revenue they generate from processing fees, and they don't even have to pay for the rewards that they're offering.
Banks pass the cost of their rewards programs to merchants through mid and non-qualified processing fees. Visa and MasterCard maintain an Interchange Reimbursement fee schedule that dictates the fees a merchant pays to accept credit cards. Processing fees vary depending on the type of credit card that a merchant processes and the manner in which they process it.
The majority of merchant accounts generalize the more than 200 different interchange fee classifications into three main categories called qualified, mid-qualified and non-qualified with transactions that fall into the qualified category being charged lowest fees.
When a consumer uses a rewards credit card the transaction is downgraded, or bumped up to a higher fee category, and the merchant is charged more to process the transaction. The extra income that is generated as a result of the transaction downgrading is used by the issuing bank of the customer's credit card to pay for their credit card rewards.
For merchants, the ability to accept credit cards often translates to benefits such as higher average tickets, increased cash flow and even greater gross sales. The cost of accepting credit cards is justified by these benefits. This logic leaves many merchants searching for justification of the increased cost associated with credit card rewards programs. For banks, rewards programs increase revenue. For cardholders, rewards programs deliver cash back or other bonuses. For merchants, rewards programs increase processing costs.
Merchant account information to help MerchantCouncil.org business owners for their individual needs Resources think the best merchant account.
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