On Credit Cards and Local Business

Where do credit card points come from? Before I learned more about how the whole credit card ecosystem worked, I thought points came from the credit card companies themselves. I thought that credit cards offered those points as an incentive to people who use their card, and the cost was recovered by the people that don’t pay their balance each month. My naïve view was this: Pay your bill on time, earn cash-back or free points towards a flight. No downside. If other people get charged 19% interest, that’s their problem.

Then I started talking to local businesses.

Businesses pay significant fees to process credit card transactions. Many of the businesses we work with pay over $15,000 a year for the privilege of processing Visa and MasterCard transactions. And while $15,000 might not sound like a lot for some businesses, keep in mind that all $15,000 costs are not equal. Increasing some costs can increase value – a restaurant that spends $15,000 on higher quality or specialty ingredients can charge more for those menu items. Or that same restaurant could spend $15,000 on renovations, choosing to add more tables to increase capacity. But spending $15,000 on credit card processing fees can be looked at more like a tax. A tax of a few percentage points on every transaction where a customer chooses to pay with a credit card. There’s no difference between the credit card customer and debit card customer. Everything is the same until the moment of purchase when the business asks how you’ll be paying. Debit? It’ll cost the business around 7 cents. Credit? They’re lucky to receive 97 cents on the dollar.

There are a few reasons why credit cards are so expensive.

First, they’re a loan product. Like any loan product, there are some people who can’t pay it back and default. The credit card companies, who are in business to make money, need to build defaults into their pricing. And since they need to attract customers with low annual fees and high cash-back incentives, they pass the fee to the businesses. This means that although you might pay your bill every month, every time you use your credit card you’re burdening the business with fees that have to cover customers who don’t pay their balance.

Second, they’re prone to fraud. Yes, it’s great that credit card companies offer some protections if your card number is compromised and used for fraudulent purchases. But how do they cover that cost? Just like the loan defaults I mentioned, the credit card company builds fraud into their pricing. This means that although your card may not be compromised and used for fraudulent purchases, you’re burdening the business with fees that have to cover fraud everywhere else for that credit card company.

Last, they offer rewards. Credit cards that offer cash-back or points of any kind are more expensive for businesses to process. That’s because the value of the rewards you get is paid for by, you guessed it, the business.

What can a business do about it?

Unfortunately, nothing. Credit cards are commonplace today, and it would be difficult for a business to draw a line in the sand and stop accepting them altogether. Some do, but it’s a difficult decision. Most businesses don’t want to inconvenience their customer, so they accept all forms of payment. And once you agree to accept credit cards, you’re all in. Merchant agreements prevent businesses from “discouraging the use of any method of payment”. This is a clever bit of lobbying on behalf of the credit card companies that effectively restricts the local business from charging a customer an additional fee to use a credit card, even though they’re paying a significantly higher fee than if the customer chose debit.

I don’t play the credit card points game. I used to until I learned more. Airline booking is limited, most of the cards with higher rewards come with an annual fee that doesn’t make it worth it, and I don’t have the time to keep track of the details of how the points work. At the end of the day, it doesn’t add up to anything much, and it’s not something I care about. I feel better when I spend with a debit card or with Local Dollars. I’m conscious about how these things work and want to spend money in a way that aligns with my values. I don’t support the massive profit generating machine that is a credit card. I don’t need to slowly earn my way to a limited availability airline booking through Air Miles or buy an overpriced toaster in the Aeroplan store. To each their own, but it just doesn’t make sense for me.

That’s why we designed Local Dollars to be different. For the business, it’s cheaper than accepting a debit card payment, and you earn cash-back that can be spent back within the network of local businesses. Not rewards that flow to an airline flight or some other entity, but rewards that continue to benefit local independent business. Local Dollars are designed to be good for you and good for local business.