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Rewards Programs Hurt Small Businesses - Including Yours.

Ask anybody who uses credit cards (which is practically everyone in America) for their advice about which credit card you should get. We’d be willing to wager that within five minutes of this conversation, the words “rewards” or “points” will come up. But no one ever asks – or thinks about – where those points even come from.

We’ve been trained, via decades-long and comprehensive marketing and ad campaigns that the best cards are not just the cards that offer the lowest rates, or the best policies; BUT the cards that have the best rewards program.

Every major credit card company boasts different perks that reward you for spending using their card. The savviest of spenders can end up netting free hotel stays, trips, and more. Sites like NerdWallet and The Points Guy offer suggestions on the best cards to get and the best ways to get bang your buck.

But...are those rewards actually free? Someone is paying for them, right? Is it just the credit card companies, out of the kindness of their hearts, earnestly trying to give you the best possible experience as a customer of theirs? No.

The answer is a bit of a long story, but, to paraphrase: the person who really pays for those credit card rewards - is you.

You pay for those rewards each and every time you shop, even when you pay with cash. And the culprit? Interchange fees.

If you’re a vendor, you’re probably well versed in the concept of these fees. Credit card companies charge merchants whenever a purchase is made using their credit card. If you accept Visa, and a customer pays with their Visa, you, the merchant, have to cough up an extra percentage of the sale. According to Big Commerce Essentials, merchants pay on average about two percent of the purchase amount to credit card companies.

Interchange fees go toward a wide variety of things - including creating the treasure chest of income that card issuers can use to fund rewards and perks to make their cards more desirable.

As a vendor, you can choose not to participate in this by simply not accepting credit or debit cards as a form of payment. If you want to go that route, we wish you the best of luck! The common knowledge up to this point is this:

The cost of interchange fees will never outweigh the potential new income earned by widening the types of payments you accept.

A TSYS survey in 2017 found that consumers overwhelmingly preferred to pay with cards, credit or debit, over cash. Most vendors end up taking their lumps and accepting credit and debit knowing that while it incurs an incontrovertible cost to their business, it’ll also increase their earning potential.

Now follow the logic here. If you’re a vendor, and you’d like to accept credit card, but want to minimize the impact interchange fees might have on your bottom-line, what do you do?

You end up raising your prices, to compensate for the hike in interchange fees.

Which means all those vendors and material suppliers you buy from are raising their prices, too, multiplying the cost small businesses pay for credit card rewards programs.

So, now, picture yourself as just a regular old-fashioned customer, trying to pick up a pack of gum with some cash. The price you pay, could, at least indirectly, go toward your neighbor’s trip to the Bahamas that they cashed in on rewards points to purchase.

It’s an interesting system, and consumers and governments alike are constantly trying to decide whether it’s fair or not. But it is important to realize that all rewards programs come at a cost, and small businesses bear the brunt of the hit.

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