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Let’s take a look at those Credit Card “Rewards” offered by just about every bank. This came from several breakfast conversations. We put it all together and voila – for your information!

Who pays for those rewards? Are they really ‘gifts’ from the banks and credit card companies as payment for your loyalty to them or are they profit centers generating more money transferred from John and Mary Q. Public to the banks without John & Mary realizing the game plan?

Those rewards do not come from either the Credit Card companies or their underlying banks. They come from you, the consumer using those credit cards. You pay for the rewards you think are ‘free’ and you pay a substantial amount of money for those ‘gifts.’

How? When you make a purchase via a merchant with your credit card, the credit card company takes a percentage of your charge from the merchant; and takes a monthly fee; a rental fee for the equipment the merchant uses; money for telephone calls the machine makes from the merchant to the processing company to approve and record your charges; PLUS – an extra amount for whatever credit card ‘program’ your card indicates. So, the merchant is left with a fairly heavy discount taken by the credit card companies. The ‘reward’ program discounts can be pretty substantial as an addition on top of everything else.

I am sure by now you get the picture. The merchant can not absorb those discounts and stay in business so they are passed along – TO YOU!

Merchants have contracts with their credit card processing companies – just as you have a contract with your credit card company. Those contracts are changed on a basis about as regular as your contract is changed. The only ‘consent’ the merchants can give to those changes is to either agree and go along or stop accepting credit cards from their consumers and we all know what that would do to that merchants’ business. So the merchant is pretty well locked into allowing the discount percentages for the rewards to be taken from the money they receive from the credit card processing companies. Those discounts are taken and sent to the credit card banks whether you use your ‘rewards’ points or they just disappear!

Some quick calculations will point you in the direction of the ‘rewards’ system being a profit center for the credit card companies instead of ‘gifts’ to consumers.

The rewards discount is taken from each and every credit card purchase by the credit card processing companies – whether the reward is used or not and each bank has a way of limiting the amount of rewards actually used. There are rules as to when you can use your rewards and when you get stripped of them. The merchant does not receive a credit if your rewards are stripped from you, that goes to the bank’s bottom line profit.

We believe some of the ‘reward’ offers are downright fraudulent. Take for example when you start with a credit card company and they offer special promotions giving you ‘double points’ sometimes ‘triple points’ for buying stuff using their credit card. After a time, those same special promotions are offered to all credit card holders. What has happened? The ‘rewards’ which previously took 100 points to get – now take 200 points or in the case of the triple point offers – 300 points. The number of points it takes to ‘buy’ the same reward has increased two or three times. That was most noticeable when the points it took for airline tickets doubled – particularly with American Express.

On settlement day with the merchant, there are various amounts showing on the merchants statement from their credit card processor.

For example: One merchant – selling widgets – pays the credit card processor 2.99% for allowing that merchant to accept credit cards. The discount percentage varies from one merchant to another or in the case of American Express, from one industry to another.

In addition to that 2.99%, that merchant pays a monthly fee for using the service. In addition, the merchant pays for telephone calls, at so much per call, (haven’t they heard of Skype) generated to put the charge through from the merchant to the processor, in addition, the merchant pays either a rental or purchase fee for the equipment used – some as high as $80/month for a small company (our research shows that is Bank of America) and on up.

And then comes the ‘reward’ discount. The merchant is charged an extra amount, on top of all of the above discounts, depending upon which card was accepted with which program in effect. It is a place where banks can nickel and dime a merchant into capitalisms graveyard without the merchants being aware they are terminally ill because the amounts on an individual charge seem to be so little. Very few merchants are good at that kind of math – and even more don’t believe they are being robbed so blatantly.

When you add up the money across the entire credit card industry it is an overwhelmingly large amount. Then – do the math – subtract from that the amount not used by credit card holders who die with points on their credit cards; credit card holders who are stripped of their points because they had late payments; credit card holders who are stripped of their points for innumerable other reasons; credit card holders who don’t ever get enough points to use them, etc. etc. etc.

When added up, one realizes that much money is being made here and where is it going? Into the banks’ pockets and then into the preferred bankers’ pockets individually through those obscene bonuses! How is it being reported? Is there a stripped out set of numbers which accurately reports the profit banks are making from their credit card ‘rewards’ program and how much the general public is paying for ‘gifts’ that they think are free to them as a bonus for their loyalty to their credit card? That is the area where all are notoriously silent.

Don’t speak of it until we find another service with which to replace this rewards boon-doggle and then it can be trashed out of existence, while we quietly move along taking even more money from John and Mary Q Public.