Earning 1% Cash Back on Card Purchases? LOL, You’re More Likely Losing Money on Every Card Purchase

Lately there’s been a barrage of credit card commercials telling consumers how much money they’ll get back if they use their card. 1% cash back. 1.5% cash back. 5% cash back on dining. All of these rewards are coming at the expense of the merchant, but they’re about to come at the expense of the consumer, and it’s hilarious.

Those of us in the payments business already know how this works, but let’s give a little refresher.

Every time a card is swiped the merchant gets about 3% less what you’re charged. How? Well, there are three middlemen that stick their hand in the cookie jar. The first is the card issuer – your bank. They collect about a third of the 3% “tax” and their logo is right on your credit card. The second is the network – Visa, Mastercard, etc. – and for simplicity’s sake we’re going to say they take a third. Lastly is the merchant acquirer, a contingent of companies that are invisible to most consumers, but think of these agents as the merchant’s bank (although they often do highly unethical things and don’t deserve anything near the trust of a bank). They also take a third.

See, the name of the game for merchant acquirers is most often not to provide more value, but to make more money doing less. Of course any reasonable person would say to themselves, “make more money doing less? Sounds impossible unless it’s illegal…” but oh, you don’t know how payments work.

Payments are a legislated monopoly: every merchant must effectively accept cards. And because the rules around payments were made intentionally nebulous (because no sober person would accept a 3% tariff for moving money in any year after 1990) there are all sorts of crooks lurking in the shadows – and none of the middlemen has a larger concentration of evil-doers than merchant acquiring.

The most promising opportunity for merchant acquirers as of late is a nefarious form of cash discounting. You’ve probably been exposed to cash discounting previously when driving haphazardly down a highway, pushing your gas tank to E as you scour turn-offs for the lowest priced fuel. Suddenly you spot what you think is a great deal: 3 digits of illuminated elegance that’s 10% cheaper than the pit stop four mile markers back. You pull over, threatening your record pacing, only to discover that underneath the glowing glory of pricing godliness reads “cash only”… in size -10 font.

In this instance you, the consumer, would receive a lower price for paying cash, saving the merchant the 3% processing fees on a credit card. Yet cash discounting is a euphemism among euphemisms, and you might have heard terms like convenience fee in its place. But the most euphemized euphemism? Surcharging.

Yea, check this out.

Because seeing that lower cash price at the gas station might have made you cringe, what if the merchant acquirer just increased the price of gas by, I don’t know, 5%, to cover the 3% cost of accepting card payments? The pitch to the gas station owner goes a bit like this:

Hey buddy, your customer might see your cash pricing and go somewhere else because he only has a card in his pocket. How about we remove the confusion of multiple pricing tiers and I just increase the price of your fuel automatically to cover the 3% fee so you pay nothing? The customer feels great and you keep all 3%? Also, I’ll make more money than anyone in my industry would ever deserve in a lifetime but just pretend I didn’t tell you that.

So what happens mathematically? Let’s say the price of gas is $10. In a normal situation, the customer pays $10, the gas station gets $9.70, and the payment ecosystem gets $0.30. Our good friend Payments Acquirer Bro gets $0.10.

Now Payments Acquirer Bro increases the price to $10.50 with a 5% surcharge fee. The customer pays $10.50. The issuing bank middleman gets their 1% of $10.50, or $0.105. The card network middleman gets their 1% of $10.50, or $0.105. Let’s subtract these values from what the customer pays:

$10.50 – $0.105 – $0.105 = $10.29.

Payments Acquirer Bro will scoop that $0.29 into his own pocket, leaving the merchant with $10, the price he was originally charging. Payments Acquirer Bro, representing the ultimate middleman of the payments middlemen, has just nearly tripled his take of 1% to 2.9% by adding an insane amount of value fleecing the card carrying consumer.

Now you, the hapless and clueless customer, just spent $10.50 on fuel believing that you’re somehow “winning” by earning 1% of that purchase ($0.105) in cash back. But not so fast!

You’re actually losing $0.395, or 3.95% on every transaction you make with your card thanks to the clusterfuck that is peak Payments Acquirer Bro in cash discounting/surcharging/whatever euphemism you want to use.

And what if that 2.9% fee isn’t enough? What if Payments Acquirer Bro, representing Payment Bro middleman which is a public company, needs to show 10% annual growth? Now that fee will double in about 7 years, and you, the hapless and clueless consumer, are paying 10% more for whatever you’re buying.

But just think about all that value your increased prices are creating!

And it will continue until the government steps in, or disruption from an outside entity that eliminates the payment rails entirely (Google, Apple, Amazon, Facebook, and Buy Now Pay Later players are real options). And by then, the Payments Bros will have whatever they need to ride out the rest of their days.

Until then, Payments Acquiring Bros be like:

Even if they can’t do basic math and will sit at the right hand of Satan upon death, Payments Bros are one step ahead of the market in every way. You just gotta tip your hat to this global scale of rackateering.