Reward Cards, Interchange Fees, Class Warfare

by Rob Horning

22 June 2010

Part of my skepticism stems from a belief that companies don't particularly deserve any loyalty -- why blunt the beneficial effects of corporate competition?

I have never really understood the popular zeal for enrolling in airline-loyalty programs and collecting miles toward discounted flights or whatever else one uses that company scrip for. Part of my skepticism stems from a belief that companies don’t particularly deserve any loyalty—why blunt the beneficial effects of corporate competition?—and if they did, it wouldn’t be because they bought it with an intentionally confusing price-discrimination scheme that charges different prices according to how many arbitrary, bureaucratic hoops one is willing to jump through in hopes of bargains. (It’s especially weird when airline-mile-collecting chumps are depicted as corporate-class swashbucklers. The film Up in the Air had an ambivalent take on this—it seemed to admire its characters for the loyalty-program mastery that seemed to be part of the attempt to satirize them as tools.) Loyalty programs seem to present the promise of a deal down the road as a beguiling substitute for an actual deal in the here and now. It’s an ongoing implementation of the rebate strategy, in which retailers get consumers to pay full price and hope they screw up or forget to apply for the money that they understood at the point of sale as a discount. it is confusion as a business strategy, and creates even more of an incentive for businesses to flood the zone with disinformation and fine print.
These programs are a manifestation of what Michael Betancourt, in this article, calls “agnotologic capitalism: a capitalism systemically based on the production and maintenance of ignorance.” In such an economy, profits are secured by duping or trapping people, distracting them at the key moment in which they enter into contracts not in their best interest. Or to put this another way, firms sell consumers the pleasures of distraction, paid for by entering into unfavorable contracts regarding the goods the consumers are ostensibly interested in instead of the pleasures. Airline customers are buying the pleasures (such as they are) of playing the miles game as much as the flights themselves.

Lately, in an effort try to take the world as it is rather than stubbornly refuse to acknowledge it, I have signed up for rewards programs for several airlines, but all that I’ve accomplished by doing that is a tremendous spike in the amount of junk mail I receive—mainly offers to sign up for miles-based credit cards through which I earn miles for using the card instead of cash. Such rewards cards are the basis of the credit-card-company racket of collecting more interchange fees—the processing costs merchants must pay when their customers use plastic. This leads to a roundabout series of cross-subsidies, as Kevin Drum argues here, in which the poor subsidize the rich:

Banks charge merchants far more in interchange fees than it costs to actually run their payment networks, and merchants pay because they have no choice. Visa and Mastercard are functional monopolies, so if you want to do business with them — and what merchant can afford not to? — you have to pay whatever they tell you to pay. This cost gets passed on to consumers, of course, and the poor and working class pay it. The middle class and the rich, however, don’t: they basically get the fees rebated in the form of reward cards.

The most diabolical aspect of this is that I become the agent of destruction: reward cards give me an incentive to use credit, which makes retailers increase the cost of goods for all customers, regardless of whether they use credit or not. It enlists me in the effort to exploit the poor, investing me in the structure of society that makes my advantage seem contingent on the continued disadvantage of those below me. Rewards programs are basically disguised class warfare. Middle class people like me get “rewarded”—that is, we don’t get punished by having to pay the passed-through interchange costs—for being middle class.

Mike Konczal has much more about interchange fees here. Two highlights:

1. “The system is set-up to encourage you to use credit as much as possible, and then pay that credit off later. This is not an accident. The common phrase among credit card company people is that people are “sloppy payers”, and these sloppy payments function as a major profit center for businesses. This system also transfer money upwards in a regressive, tax-free manner and distorts prices so that shareholders of financial companies can get a cut.” This is more agnotology at work. We basically pay for privilege of being care free about money, not simply the stuff we get with a credit card. Companies hope we will slip up and be careless, and thus promote such carelessness in most of their marketing materials. Credit card companies have put themselves in the business of encouraging us to be “sloppy.” 

2. “this is the payment system. If it was a random consumer good, I would care much less about cross-subsidies and squeezing. If people who drink their coffee black subsidize cream and sugar coffee drinkers, whatever. But this is the very mechanism of which our economy runs – the way in which we trade goods and services. If distortions goes to the core of the economy, it doesn’t surprise me that we have a lot of bad scenarios much further downstream.” The payment system is not some God-given thing, as Konczal points out, it’s “not a state of nature event” but the complex product of institutions, regulation, convention, social trust, and so on. All payment systems have clearing risks, and it seems to me that one of the justifications for federal states is to minimize that risk so that commerce can flourish; banks, on the other hand want it to be a profit center.

Happily, it seems that interchange will indeed be facing new regulation soon. Felix Salmon notes that this may have some effects that middle-class credit-card users won’t like: “if credit-card interchange fees stay high while debit-card fees fall, then merchants will simply start offering broad discounts to anybody using cash or debit, essentially forcing customers to pay extra for all those frequent-flier miles and cash rebates.” I hope that eventually means the end of credit-card reward programs in general.

UPDATE: Salmon has more on payment systems in this post. The essential point: “Being able to easily pay for things without worrying about the mechanism is a great public good.” We don’t want to have to decide between modes of payment anymore than we want to have to second-guess our doctors about what they prescribe for us, as advocates of competition in health care demand we do. Competition among payment systems seems like a libertarian idea that can be logically defended but is wildly impractical and would b counterproductive in reality. As Salmon writes, “The fact is that payments are a utility; they’re regulated like utilities; and utilities tend not to see much in the way of innovative new entrants.”

And as my friend’s old landlord, who refused to take checks, liked to say, “Cash is king.” 

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