In the world of consumer finance, credit card rewards have emerged as a powerful tool for cardholders and banks alike. Offering incentives such as cash back, miles, or points, these loyalty programs have become an integral part of credit card usage.
For cardholders, these rewards represent an opportunity to earn tangible benefits based on their credit card usage. Meanwhile, for banks, they serve as a strategic mechanism to incentivize consumers to not only adopt but also increase their utilization of credit card products. However, the intricacies of credit card payments and rewards extend beyond the simple interaction between cardholders and issuers.
In a standard credit card transaction, the payment flows from the cardholder to the card-issuing bank, which then rewards the cardholder and retains an interchange fee to the tune of 1-3%. The merchant acquirer receives the remaining amount and pays a network fee to the card network before passing on the funds to the merchant. These fees are largely what allows this lucrative miles and points system to exist.
Merchants receive a fraction of the initial purchase amount due to interchange fees and merchant service charges. Although these fees may seem invisible to consumers, the widespread use of credit cards has prompted merchants to incorporate these costs by increasing retail prices for everyone.
Essentially, this means that consumers who choose to pay with cash or debit cards end up subsidizing the rewards earned by credit card users who maximize their returns on purchases. While this redistribution of costs underscores the complex interplay between consumers, merchants, banks, and payment networks within the credit card ecosystem, it also presents unique opportunities for consumers to capitalize on an under-utilized form of currency.
You are paying for it, so you might as well get the most out of it. Over the next few blog posts, we'll explore some of the main concepts in the Miles & Points community that will help you become a savvier consumer.
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