How Can Banks Afford to Offer You Rewards?
Rewards have become an integral part of the credit card experience. Every time we use our credit cards to pay for something, most of us would instinctively expect to obtain some sort of rebate or reward points, which we can accumulate over time to redeem for vouchers, products or gifts. But how is it possible that banks can offer us all these rewards in the first place?
Read on to find out how it works.
Credit Card Transactions – Who is Involved?
Before going into details let’s have a look at the parties that are involved in a credit card transaction (apart from you, the card user). Typically, they are:
• The Merchant, meaning the outlet where you make the credit card transaction
• The Merchant Bank, providing the point-of-sale system and terminal and thus enabling the Merchant to accept purchases using credit cards
• The Card Network, which is an entity such as MasterCard, Visa etc. facilitating the credit card transactions and settlements
• The Issuing Bank, which is the bank you got your credit card from
So How Can Credit Cards Offer You Rewards?
The truth is: Every time you make a purchase using your credit card, the Merchant does not receive 100% of the payment.
Instead, the Merchant Bank, the Issuing Bank and the Card Network receive a small percentage that they divide amongst each other (i.e. the percentage depends on various factors, such as sales volume as well as specific arrangements with the banks, and can differ from merchant to merchant). The Issuing Bank then sets aside a part of this in order to finance its credit card reward program.
This means that the Merchants effectively bear the cost of your rewards, because they have a small fraction of each credit card transaction deducted for this purpose. So next time you’re out shopping, make sure to thank your favourite retailers for financing your credit card reward program.
What is it Like in the Philippines?
Normally, when you buy something from a merchant, this should be the amount that will be showing in your credit card statement. If you ever get asked to pay a surcharge for your credit card transaction – refuse to do so, because it means that the merchants are in fact passing on their own charges on to the customers.
Basically, rewards are given to credit card holders because it helps to drive business to the participating merchants and banks. Therefore, reward systems are used to encourage consumers to spend money. So as long as you don’t mind spending money on your favourite things and getting rewarded for it… it’s all good! But always be careful not to spend beyond your means!
Did you like the article? Then you should also check out our infographic explaining how credit cards work and what happens behind the scenes every time you make a purchase.