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 overall use of credit cards increases so too does the demand for rewards credit cards. Credit card rewards programs have virtually no negative aspects for issuing banks. Credit card rewards programs are an incentive to consumers to use credit cards even when they have cash. Rewards programs promote credit card use which increases the banks' revenue from merchant account fees.

There's no denying that banks have created an excellent marketing tool through credit card rewards programs, 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 banks' credit card rewards programs. 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 credit card rewards programs to merchants through mid and non-qualified processing fees. Visa and MasterCard maintain interchange fees that dictates the cost 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 merchant account 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.

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On July 30, 2010 mark said:

credit card reward programs, are the merchants allowed by law (New York State or Federal)to dis-allow use of reward program credit cards? We accept Credit cards over the phone, and would like to send to our customers who regularly use corporate reward cards, that we will no longer accept reward, bonus, cash back cards, but will accept non reward program cards.

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On July 30, 2010 said:

Hello Mark,

Your processing agreement forbids discrimination based on payment method or type. This includes discriminating against certain cardholders because of the brand of card they are presenting for payment.