Reforming Retail

Credit Card Reward Programs Are Hard on Merchants

Every major U.S. carrier earned more from credit-card and loyalty programs in the second quarter than during the year-earlier period, financial disclosures show. For many airlines, those increases outpaced overall sales growth. Much of the revenue comes from the credit cards associated with loyalty programs, though the programs don’t necessarily require customers to have a credit card.

This excerpt comes to us from the Wall Street Journal, which details just how lucrative airline-sponsored credit cards are becoming.

Revenue from American’s loyalty program grew 7% to $1.4 billion in the second quarter, while overall revenue at the world’s top airline by traffic rose 4%. The loyalty program accounted for 12% of the carrier’s overall sales, roughly flat from a year earlier.

It’s even more staggering when you look at the numbers in graphic form

While airlines are making billions of dollars and travelers are racking up all sorts of travel perks, don’t forget who’s actually paying for it all:

Your local merchant.

We need to remember how the sausage gets made. Here’s a diagram that explains who makes what money when you swipe a card.

Image result for payments interchange

As you can see in this diagram, an ecosystem of payments parties – the issuing bank (the bank whose logo is on your credit card), the card networks (Visa, Mastercard, AMEX), and the acquiring bank (the “processor” who has the relationship with the merchant) – all take a cut of the $100 purchase. What the merchant ends ups seeing in their bank account is $97.55.

If the issuing bank uses a rewards program – let’s say travel rewards as the airlines have done – the majority of funds to pay for your mileage bonuses and other perks are coming right out of that $97.55 that the merchant sees. You can imagine really lucrative reward programs with better consumer benefits costing merchants even more – so maybe the merchant only gets $96.40 instead of the $97.55.

It might not sound like much but it definitely adds up – especially when we’re talking about a 5% margin retailer.

This is why there are varying interchange rates for different types of cards: some cards have higher levels of rewards and are thus more costly to the merchant. Yes, the banks might eat some of the reward costs but they’re in the business of making money.

Here’s a sample table of interchange rates. You’ll notice variable numbers; that’s mostly because the cards with more rewards cost merchants more.

We’re just making sure people are aware of how the game is played. Kinda stacked against the little guy, eh?


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