The 'Cash Back' You Get From Your Credit Card Comes From the Guy Behind You in Line

by Alex Johnson 0

Business Insider recently published an excerpt from a new book written by a Nobel Laureate. The book examines the underlying forces that shape markets and the author uses credit card cashback programs as an example how those forces can lead to unforseen competitive dynamics:

“Many credit cards now compete on how much “cash back ” they offer to consumers. Those refunds come out of the fees that credit card companies charge to merchants and are reflected in the prices that merchants charge their customers. So when two customers stand in line at the cash register with identical purchases, and one pays with a credit card and one pays cash, the one who is paying cash is paying for the discount that the credit card customer is receiving.

To put it another way, we pay a cost for the convenience of using a middleman, and that is partly because the middlemen — in this case, the credit card companies — compete for our business in a way that mutes the price competition among merchants that might otherwise bring prices down. It’s something to remember: competition can take many forms, and it isn’t always easy to see who gains and who loses.”

Overview by Alex Johnson, Sr. Analyst, Credit Advisory Service at Mercator Advisory Group

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