How do Credit Card Points Programs Work? Who is really paying for your points?

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by Lorraine Rekmans

When you pick up a debit machine to put your card into it, and enter your secret PIN number to pay for goods or services, you may have noticed that the machine will have a company name on it, possibly Chase or Elavon. Many merchants in small business must pay a service provider for a point of sale device (debit machine) and must pay the service provider for every single transaction that is put through the debit or credit machine.

The service provider handles the transaction on behalf of the merchant and arranges for the money to be withdrawn from the consumer’s bank account or credit card and deposited into the business account of the merchant. Fees for transactions are set in percentage points, depending on the cards that are used. Cards issued by Visa, Mastercard, or American Express have varying transaction fees which are paid by the merchant or small business.

Credit cards that offer the consumer points or rewards or Aeroplan miles are the cards that carry the highest transaction fees for the merchant or small business owner. In some cases, the small business may pay 2% to 2.5% of the total transaction to the point of sale service provider. In some cases, it is more. These transaction fee rates are reviewed periodically and change throughout the year.

Once the transaction is completed, the consumer has paid for the good or service, receives reward points, and walks away happily, thinking that Visa or Mastercard has given them something. In reality, the cost of this program is borne at the point of sale by the merchant, or small business. The business owner pays increased transaction fees to the point of sale provider, and the point of sale provider ensures the transaction is complete with the transfer of money, the recording of the transaction, and transfer of points. The service provider transfers a portion of the fee to Visa or Mastercard. Every single time money moves from one place to another, at each stop there is a percentage that is taken. Between the merchant, the service provider, the bank and the credit card company, each transaction has a cost. Typically, most of the cost for all transactions between all these groups is paid by the merchant.

The Financial Post reported that a consortium led by Air Canada reached a deal to acquire the Aeroplan loyalty program from Aimia Inc. for $450 million in cash. The purchasers also agreed to assume $1.9 billion in liability associated with Aeroplan miles customers have accumulated. Note this astronomical figure of $1.9 billion in unpaid or unused Aeroplan miles.

Whenever the Aeroplan points card is used, the transaction fees that are collected from the merchant are distributed between the point of sale provider and the Credit Card company that issues the points. The credit companies actually collect fees from merchants to pay for the rewards or points. In this case alone, it seems that the credit card company has collected $1.9 billion, through transactions run through the point of sale devices. When you stop and think that Aeroplan is worth $450 million in cash, you realize that points and rewards are really big business. And when you think that $1.9 billion in Aeroplan miles is owed, you have to wonder how much more than $1.9 billion was collected from small businesses in Canada.

The merchants and small business owners in Canada sustain these programs and bear the costs for these points programs, but get no recognition or rewards, because the consumer mistakenly believes the credit card companies have gifted them something. In fact, it is small business that is carrying the cost and is paying for these rewards through transaction fees. Credit card companies want you to use their cards as often as you possibly can. There is a reason for this: they are earning money every time you swipe or tap your card. The more you swipe, the more fees they are collecting from merchants, it is that simple. The credit card companies have created a business of trading in debt by encouraging the use of credit and rewarding consumers who use credit instead of cash. Consumers are rewarded, in the form of points, based on the value of the transaction. The larger the transaction value, the more rewards or points are earned, and the more the merchant has to pay.

In 2017, CBC reported that Bond Brand Loyalty, a marketing services agency in Mississauga, Ontario, estimates that collectors are sitting on a whopping $16 billion worth of unused rewards points. When you consider that the merchants and small businesses in Canada are paying for this, you have to wonder how much more than $16 billion did the credit card companies make on these transactions, and you have to wonder how much of this was sucked out of the Canadian economy. Some merchants complain to the banks that the transaction fees are too high. Some banks have responded by telling the merchants to tack on the increased transaction fees and pass it onto the consumer. Perhaps it’s time to have a really close look at these rewards and points programs, and decide if you are the one actually paying for your own points. Did Canadians unwittingly pay the credit card companies more than $30 billion in exchange for a discount at the drug store, or a free movie with popcorn? It’s something to think about because, if we did, this is quite a swindle.

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