Bittersweet on Rewards Credit Cards

One of the chief complaints I hear from my retailers is the high costs of credit card interchange fees in the Greater Mystic area. Most savvy business owners already realize that not all credit cards are assessed the same fee. Putting aside the costly corporate cards for the moment, the culprit is that visiting shoppers coming to Mystic and Watch Hill tend to use rewards cards and thus drive up those interchange fees.

Let's unpack that·

In 2019 Alone $35 Billion In Rewards Were Paid Out Nationally.

This is America, friends, nobody gives away that volume of money unless there is a return especially banks. And is there ever.

First off, some of that rewards money is paid by you, the merchants due to higher interchange fees. When compared to common credit cards, rewards cards run about a half percent higher in fees to you. And, when compared to regulated debit cards, they run a full 2% higher!

Banks earned over $22 Billion nationally in just rewards cards Interchange fees. If you're following my math, there is approximately a $13 Billion gap nationally between rewards paid out and interchange fees collected. That gap is easily filled by the roughly 20% interest rates (an all-time high) on credit card balances not paid off by the end of the month – cha ching.

But that is nationally, let me tell you what's happening in your back yard.

In Greater Mystic 45% of Purchases Are Spent Using Rewards Cards

I pulled the transactions from Downtown Mystic, Stonington Borough, and Watch Hill to see just what percentages we were experiencing. While I was pulling the data, because we're in a "tourist area", I wanted to see if the percentage of rewards cards was less in the off season because supposedly we're patronized by more local buyers that may, or may not, be using their cheaper, non-rewards cards.

So, I pulled the transactions using July, 2023 as indicative as the high season, and also pulled the transactions from February 2023 as being indicative of the "off season".

Here's what the numbers tell:

• In the total aggregate, there was a 60% drop off in top line revenues from July to February. (No surprise there after all it's winter).
• The percent of rewards cards used in July was 44.5%
• The percent of rewards cards used in February was 39.2% This was a surprise. It indicates that our locals that patronize our shops in the off season also use rewards cards.

What's in Your Wallet?

OK, so we're business owners and we keep a watchful eye on our bottom line and we hate it when customer whip out their expensive rewards cards to pay for our goods, but wait, after work we're also consumers and we love to save on our travel expenses, so we too whip out our rewards cards whenever we can.

As a Consumer, Rewards Are Free – But Only if You Play the Game Right

I have to admit that, for the last 40 years, I had always used my bank debit card to pay for everything.

However, my wife and I enjoy traveling and that gets expensive fast with hotels and car rentals. I realized that I was leaving a ton of money on the table in rewards that I could have had to pay for some of those rentals – Duh!

So, about a year ago even I started using my Chase Freedom Visa card and built up a hefty rewards balance. But, I also know it could very easily become a false savings if I mess up – that reward balance could end up costing more than it's worth.

Worth a quick review·

The Trap – Overspending – When You Can't Pay Off The Balance at Month End

So, what's the concern of using our rewards cards if we can amass all those savings? Well, if you're disciplined, nothing. But Visa and MasterCard aren't stupid, they won't give you a quarter if they can't make a buck in return.

When I was using my debit bank card, it was impossible for me to spend more money than I had in my bank account, the bank would decline my purchases once I spent all the money.

My Chase rewards card couldn't care less, in fact they just keep raising my credit line. It would be very easy to overspend.

So, I guess we are all chameleons, we hate to get paid by expensive rewards cards, but we sure do love using them. Funny, it is false economics perpetrated by the banks to skim oof more profit from the unsuspecting. Something that could not exist in days of cash.