The Economics of Loyalty Programmes
Credit Card Rewards and Who Pays
Cashback and points on cards are funded partly by fees charged to merchants and by interest from users who carry balances.
How ‘free’ rewards are funded.
Merchant fees
Card issuers earn interchange fees when customers pay.
Interest
Users who don’t pay in full pay high interest.
Cross-subsidy
Revolvers and those who pay fees help fund rewards for those who pay in full.
Result
Rewards benefit disciplined users but may push others to overspend.
A cashback offer
A card gives 5 per cent back at a partner store.
Assuming rewards are free
Someone pays, often merchants and other cardholders.
Key takeaways
- Interchange funds rewards.
- Interest from borrowers helps.
- Rewards cross-subsidise.
- Discipline determines who wins.
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