Who Pays for Your Credit Card "Rewards?"

When you use that credit card that provides airline miles, cash back or other "rewards," who pays for the reward? Most people assume that credit card companies pay for these rewards out of the money they make from consumers using their cards. But that is not how it works. The retailer pays fees, called "swipe fees,"  for the service of accepting the credit card. The card company pays for the "rewards" by charging additional percentage points in the swipe fee to the retailer who accepts the card as payment. This is a cost over and above the normal fees charged to the retailer for using credit card services. Thus, if a retailer pays a normal swipe fee of 1% to 2% for a credit card sale, a rewards card sale might cost him an additional 2% or 3% of the sale price. Total fees for a rewards card transaction can approach 5% of the price of the merchandise.

The use of these rewards cards is growing and businesses, like convenience stores, that operate on low profit margins are particularly hard hit. A percentage point or two may not seem like a lot of money, but if your profit margin is normally 10%, paying 5% of the sale for the transaction essentially means you have to double your sales to get back to normal. Moreover, there is no ceiling on the percentage that credit card providers can charge back to the merchant. Small retailers are not in a position to negotiate these fees or to refuse credit card purchases altogether. They cannot determine what fee they will have to pay by just looking at the card. So most retailers are forced to raise prices to cover the rising cost of these fees. Price increases apply to cash sales as well as credit card sales. Every buyer is subsidizing the use of the rewards cards even if they do not use one.

Credit cards are a convenience, but they are not free even if you pay the whole balance every month. Visa and MasterCard collected about $48 billion in swipe fees in 2008, triple what was collected in 2001. In 2008, the average American family paid about $427 in swipe fees. Convenience stores have organized to fight back and have a web site called Fight Swipe Fees. If you want to see what your credit card fees really cost, there is a great little site called True Cost of Credit that gives you the fees charged on your particular card for various sized purchases. It is an eye opener.