This week on Complex Systems, a continued discussion of credit card rewards, interchange, and what I believe is a persistent misconception about how society should want justice done via payments systems. It ends with the following, which the team took the liberty of putting into a short clip. (Sound... on if you like hearing my voice, but video is subtitled.)show more

Last week the Atlantic published an opinion piece which argues that the poor are subsidizing the rich's receipt of credit card rewards. This view has wide currency among certain advocates and among opinion writers. It is not true.

Credit card rewards are actually funded by interchange, a cost which is ultimately paid by card-accepting businesses for a combination of services they get from the payments industry. Rewards have a few equilibria globally; the U.S. is in a high rewards, high interchange one.

Very few credit card users are rebated more in rewards than they earn their issuer (the bank) via interchange. Individual card products are designed to avoid this, while having other design considerations, including the desire to be facially appealing on a landing page.

Fun is also a consideration. Some people buy video games. My wife uses a Japanese payment method which previously gave her a sense of accomplishment for earning rewards levels while shopping. That company was more successful at selling her software-based fun than Nintendo was.

A more sophisticated version of the critique of cards is that they accomplish a stealth cross-subsidization, by causing everyone to share in payment costs (which reward drives up, some might argue) but only well-off users to benefit. More sophisticated. Still not right.

This is fundamentally an argument about math, and it is a frustrating argument to have with people who do not think that math governs the universe they live in. People who work with credit cards professionally generally are selected for having some regard for the power of math.

When those people talk to some advocates and explain the math to them, the advocates throw up their hands and say "Well that is what you *would* say. Your incentives dictate you'd lie to me." This is a frustrating thing to hear, if e.g. you work at a card issuing bank.

It is a frustrating and confusing thing to hear when you previously worked for a payments processor, which—and one really should understand this if one wants to have a strong opinion on the issue—is a net payer of interchange, not a net recipient of it. By, you know, billions.

Anyhow for a bit more Someone Is Wrong On The Internet and a whole lot more talk about the work which goes into portfolio construction by card issuing program managers, see the full episode of Complex Systems. It's anywhere you listen to podcasts, or:

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Reading through replies on your old thread, a common complaint is "if cash users and credit users shop at the same stores then the cost of interchange drives up prices for the cash users".