The Harsh Truth: How Credit Card Companies Finance "Cash Back" Offers

Most credit card companies offer rewards in the form of “cash back” in order to lure new customers and retain existing ones. In fact, reward points and cash back offers are the primary reason why some cardholders choose to pay for their purchases through cards instead of cash. After all, if your cards could get you 5% cash back at the grocery store and 3% at restaurants, why wouldn’t you use them at these places, even if your pockets were filled with cash?

But have you ever stopped to think about how credit card companies finance such rewards programs? Although getting cash back on purchases can be a nice incentive for card holders, companies certainly don’t distribute these rewards out of any sense of heartfelt generosity. The primary source of these cash back offers are the hefty fees that credit card associations and card-issuing banks charge merchants. Merchants, in turn, pass these high fees on to … guess who?

That’s right, you and I wind up paying higher prices so that we can later get some of that cash back. And woe to he who still pays in cash – paying an additional 3% or more on merchandise to help fund the rest of our cash back cards.

If you’ve ever wondered why some merchants refused to honor American Express cards, this is why. While their rewards are some of the best, their fees are oftentimes the highest. It can cost a merchant up to 50% more to accept an AMEX card.

Cash back and reward points offers indirectly encourage cardholders to transact more and more via credit cards. Often, this results in huge balances, higher interest and late fees, which help in increase the credit card company’s profits. Sometimes companies offer cash back cards with no initial annual fee, and they often are loathe to mention that there is an annual charge that kicks in once the first year is over. Additionally, card companies are entitled to change the terms of their rewards programs at any time. And what’s more, these rewards don’t cost the company anything – they simply raise the fees they charge merchants, which in turn raise prices for shoppers, whether they are card holders or not.

Essentially, cash back offers aren’t really rewards per se; they are discounts on inflated prices. In the past, merchants had tried to pass on the cost of credit card purchases to consumers who used cards, by charging them a premium. However, as credit cards grew in popularity, it became possible for card holders to take their business anywhere they chose. Hence in order to sustain, merchants were forced to raise prices across the board.

Up until fairly recently, credit card companies did not allow merchants to charge different prices based on whether customers were using cash or credit. And although legislation made that option available in 2013, most merchants don’t implement a policy of charging a surcharge for credit card users or a discount for folks paying by cash.

Therefore, the system is most unfair to struggling merchants and shoppers who transact in cash. While cardholders are still entitled to a small amount of cash back, consumers who pay in cash get no discounts at all. It’s the credit card companies that are in a win-win situation, not the consumers. Even those cardholders who pay no interest on credit cards and instead get rewards on purchases are, in fact, still in the clutches of card companies.

At Fund&Grow, we are committed to helping our clients get the money they need to fulfill their business goals, without having to pay huge financing fees. Over the years, we have succeeded in establishing relationships with high-end lending institutions. As a result, we can provide our clients who have legitimate uses for business credit and other merchant services, access to these organizations. In order to obtain a solution for your credit requirements, contact us today.