Are Credit Card Rewards Points Programs Harmful?

Over the course of the past ten years, credit card providers have ramped up their efforts to woo consumers with point-based loyalty programs.

Custom gift cards and loyalty cards are a great way to encourage repeat business and so many merchants have embraced the concept that the credit card providers have pushed. These redeemable Transaction Cards let customers make flexible decisions when purchasing goods or services from a merchant.

Early in the history of credit cards, most financial institutions were too dignified to offer game-like rewards systems involving point accumulation. As time went by, it became increasingly clear that nearly all types of credit card users were energized and excited by point systems. In the early part of the last decade, easy credit led to a dizzying proliferation of rewards programs. Although credit limits and eligibility requirements have tightened in recent years, credit card issuers maintain loyalty programs as integral parts of their marketing initiatives.

On an individual, case-by-case basis, rewards programs create very attractive incentives for customers. The public record abounds with stories of individuals who use reward points to gain earn free flights, hotel stays and other financial advantages. Collectively, some loyalty programs inspire widespread exploitation and abuse.

Since point-based reward programs are textbook examples of gamification, it is little surprise that many program members are gaming these systems irresponsibly. These individuals have perfected cunning “ghost transactions” that earn points without adding real value to the economy.

One popular technique is to purchase numerous gift cards with credit, only to use the gift balances to pay off credit card balances in a circular fashion. Though most of these schemes are technically legal, they consume manpower and resources in an exploitative manner. Point churning is a zero-sum game that leads to more expensive payments processing for retailers. Ultimately, many of these increased costs are passed on to the general public.

Point system abusers only account for a small percentage of loyalty program members. Even for ordinary users, rewards programs aren’t always as beneficial as they first appear. Individuals who use loyalty programs need to read and understand the fine print of program rules and regulations. In many cases, gains from cashing in points are fully offset by the costs of using additional credit. At their best, loyalty programs are engaging systems that spur responsible spending. However, economists argue that aggressive rewards programs can distort incentives and upset natural credit use patterns.

Here at Host Merchant Services, we are sensitive to how responsible credit card use contributes to the health of the broader economy. We provide our customers with tools to better understand and fulfill the needs of the public. Flexible, responsive payment processing encourages consumers to use credit with caution and care.

Credit Cards

Emerging Markets and Credit Cards [2023 Update]

The global economy is deeply affected by the rise of credit card use in emerging markets. As citizens of developing nations gain access to mainstream credit cards, they are empowered to participate more in their national economies and in the global marketplace. Since the world economy is increasingly connected, the growth of credit can produce benefits that are widely felt.

MasterCard’s recent story offers an interesting example of international development. Last May, MasterCard reported a net income gain of 12% over the previous year. While this number disappointed some analysts, it is clear that MasterCard is a healthy company with enormous potential. Critically, MasterCard’s May report showed that the company’s fate is indisputably linked with growth in emerging markets. According to the report, MasterCard’s transaction volume grew by 20% in the developing world. Meanwhile, US transactions only expanded by 4%.

In Asia, Africa and the Middle East, people are demonstrating a growing hunger for credit. Through development in these regions, major credit card companies will find relief from the regulatory and economic pressures that are driving down credit use in the United States. With more secure revenues, these companies should have fewer incentives to push new fees and restrictions on U.S customers.

After China, India is the world’s second most populous nation. While the Chinese government obstructs credit card companies fairly often, India is embracing credit cards with open arms. The Times of India reports that the nation’s average monthly spend-per-card number has risen 42% over the past two years. This growth is accelerated by an appreciable drop in Indian credit card defaults over the past few years. Credit consumers in developing nations are usually quick to learn the value of good credit ratings.

As credit card usage grows in India, issuing banks are doing a fine job of navigating a regulatory bureaucracy that is famously sluggish and problematic. With widely disparate regulatory systems, developing nations offer excellent case studies in the effects of financial regulations. In many cases, international merchant services are more competitive and responsive to marketplace demands. While proper oversight and consumer protection is important, international case studies emphasize the dangers of saddling financial companies and merchant services providers with stifling regulations.

Imposing Credit Card Minimums

Service Impact of Imposing Credit Card Minimums [2023 Update]

Throughout many industries, companies are feeling the effects of 2010’s Durbin Amendment. This much-vaunted amendment to Dodd-Frank was intended to protect consumers and businesses from unreasonably large interchange transaction fees. As finally implemented in 2011, the amendment protects one large class of businesses while doing measurable harm to firms specializing in smaller transactions. Though the Durbin Amendment has certainly produced positive benefits for a huge cross-section of America, the overall effects of Dodd-Frank show the limitations of using legislation to alter complex economic systems.

Even before Durbin Amendment enactment, companies often made little on very small transactions. Fortunately, new Mastercard and Visa regulations give companies greater flexibility in setting minimum transaction limits. Of course, adopting these limits can have adverse effects on public relations. Businesspeople must tread carefully when implementing such conspicuous limitations on customer choice.

For some types of business, minimum credit card transaction rules have long been standard practice. For example, independent coffee shops garner much of their revenue from two to five-dollar transactions. When visiting these establishments, consumers expect transaction limits and generally take them in stride. When consumers encounter unexpected new transaction limits, this can cause consternation and distress. At the same time, financial considerations may force companies to move forward with transaction limits and learn to deal with any consequences. During these critical transition periods, managers should do everything they can emphasize appreciation and respect for customers. Employees need adequate training and oversight to politely deal with questions about new transaction limits. Companies can also ease these transitions by offering samples, gifts and other thoughtful incentives. One doesn’t have to spend much to make customers feel appreciated and valued.

While most companies can adopt transaction limits without alienating customers, some commentators question if it is fair to saddle merchants with all responsibility for limiting credit transactions. Banks use reward point systems to aggressively push consumers into making ever more credit purchases. According to lead economist Fumiko Hayasha of the Federal Reserve Bank of Kansas City, point system users drive up transaction costs throughout the nation. Additionally, credit consumer advocate Joan Ulzheimer argues that reward point benefits are generally smaller than the costs of overusing credit.

Here at Host Merchant Services, we understand that the costs of doing business are shared by consumers and businesses. As part of our commitment to promote healthy merchant relationships, we help our customers create solutions to problems that complicate modern payments and commerce.

Payments And Customer Loyalty

Big Data, Payments And Customer Loyalty – Part One [2023 Update]

Businesses in many industries are contributing to the rise of Big Data, a confluence of modern data-gathering mechanisms. Larger hard drives and faster CPUs enable people to gather and analyze vast collections of commercial information. Though Google is the largest and most prominent data-gathering operation, retailers like Amazon and Walmart famously gather and analyze enormous amounts of customer data. On a smaller scale, companies of all sizes are utilizing similar procedures. The Big Data revolution is refining the consumer experience in ways that are mostly positive and promising, albeit with looming privacy concerns. For example, modern analytics enable better fraud detection in credit card processing and payments, as well as enhanced marketing and behaviorally targeted promotions to customers.

One successful recent IPO demonstrates the growing relevance of cutting-edge data analysis. Tableau Software has impressed investors with an online platform that turns various types of data into visualizations and charts. Doubling its initial stock price in less than two months, Tableau Software has amply demonstrated the importance of information analysis for diverse industries and organizations.

Throughout the merchant services industry, companies are using analytics to refine systems in ways that are appealing to businesses and consumers alike.

Advances bring greater access to customer information and more ways to analyze that information. This evolution is complemented and affected by the remarkable growth of mobile commerce. For example, consumers who use mobile wallet software increasingly insist on impeccably safe, secure credit card processing. Modern analytics make it far easier to identify suspicious patterns indicating fraudulent activity. Better fraud prevention inspires consumer confidence and leads to greater participation mobile commerce. Customer participation enables the proliferation of more effective, targeted, and individualized marketing and offers. In turn, more transactions lead to larger information sets and further refinements of payments technology. This type of feedback loop is merely one example of the game-changing effects of the Big Data revolution.

Stay tuned for part 2 of this series as we take a more in depth look at ways that big data is changing payments.

Can Durbin Debit Rates Go Even Lower

Can Durbin Debit Rates Go Even Lower? [2026Update]

A new U.S District Court ruling could lead to major changes in debit card processing fees. Will the Durbin debit rates go lower with this? Let us understand.

On July 31, U.S. District Judge Richard Leon swept aside the Federal Reserve‘s 2011 implementation of the Durbin Amendment. Passed in 2010, this amendment to the Dodd-Frank law was intended to limit the upward trajectory of debit processing rates. According to Leon, the Fed’s 2011 regulations directly counteracted the original intent of the Durbin Amendment. Though the Fed capped the base rate for debit processing fees at 21 cents, they raised debit rates for transactions under $12. Essentially, the Fed lowered the debit price for large transactions while raising them substantially on small transactions.

Can Durbin Debit Rates Go Lower?

Durbin Debit Rates

In general, debit card caps are highly advantageous for retail businesses. However, the current implementation of the Durbin debit amendment creates grave concerns for many retailers. It is sensible to lower debit card interchange fees at a time when many retail companies are struggling with low consumer demand. Months will pass before the nation sees new, concrete debit processing rules. In the meantime, the response to Judge Leon’s ruling starkly illustrates a growing conflict between the retail industry and major banks.

In this struggle to define the costs of merchant services, both sides claim to represent the best interests of the public. However, the banking industry is so politically influential and entrenched that it is hard to see this industry as truly vulnerable or consumer-focused. Retailers are achieving broader public support as they tout their intentions to lower costs for ordinary Americans.

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To be fair, it is demonstrably true that banks could lose enormous profits in the wake of Judge Leon’s ruling. Undoubtedly, the banking industry will pass some of these costs on to consumers in the form of higher fees and tighter restrictions. A strong, profitable American banking industry is vital for the United States and the global economy. 

At the same time, history has shown that the banking industry is far less volatile than the retail sector. When banks are in danger of failing, they can often use their political influence to gain unique concessions and loans from the government. In stark contrast, retailers must stand on their own during problematic times. In light of this power imbalance, the public may well benefit from retailer-friendly debit price controls.

The new ruling on Durbin debit rates represents a fascinating turn of events. However, only time will tell if Judge Leon will have the final word in Durbin implementation. The Federal Reserve and large banks have many more tools at their disposal in their quest to control the state of debit processing fees.

What Is the Durbin Amendment

The Durbin Amendment is a part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, a law enacted in 2010 in the United States. It was named after Senator Richard Durbin, who played a role in its development. This amendment primarily focuses on the fees that merchants pay to banks for processing debit card transactions, known as interchange fees.

What Is the Durbin Amendment

The key features of the Durbin Amendment are as follows

Regulation of Interchange Fees: The Durbin Amendment introduced regulations to limit the interchange fees charged by banks to merchants, for processing debit card transactions. The aim was to make these fees more reasonable and transparent.

Exemption for Smaller Financial Institutions: These regulations specifically apply to institutions that surpass a certain asset threshold. Smaller banks and credit unions generally do not have to follow the restrictions on interchange fees.

Choice of Network Routing for Merchants: Another objective of this amendment is to promote competition among payment card networks. It allows merchants to select which network they prefer for processing debit card transactions. This provision encourages competition. May potentially reduce costs, for merchants.

Prohibition of Exclusive Network Agreements: The Durbin Amendment prohibits card networks from imposing agreements that would restrict merchants from routing their transactions through networks.

Measures to Protect Consumers: The amendment included provisions that aimed to strengthen consumer protection. One of these provisions required issuers to offer consumers a choice, between two payment card networks that were not affiliated with each other for each debit card. This gave consumers options and flexibility.

Challenges in Implementation

The implementation of the Durbin Amendment faced some difficulties, which sparked debates about its effectiveness and potential unintended consequences. While some believed that it successfully achieved its goal of reducing interchange fees others had concerns about effects on smaller banks and financial institutions.

Impact on the Debit Card Industry

The Durbin Amendment had an impact on the debit card industry by changing the dynamics of interchange fees and fostering competition among payment networks. It continues to be a regulation in the United States influencing the relationships, between banks, merchants and consumers when it comes to debit card transactions.

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MCX, Paydiant, and the Battle Over Mobile Wallets [2023 Update]

The mobile Internet revolution is rapidly changing the longstanding status quo in the payment processing industry. As more people purchase items with their mobile devices, the public is demanding more options and greater security from transaction processing companies. For many long years, big banks and processing companies like Visa and Mastercard faced little competition and were free to change processing fees at will. Today, the upstart MCX network (Merchant Customer Exchange) is making a strong bid to compete in e-wallet services. This consortium of retailers recently added Kohl’s  to its roster of members. The cooperative already includes major players like Walmart, Target and Best Buy. Formed in August 2012, MCX has stated its intention to better protect consumer data, lower processing fees and otherwise improve conditions for mobile shoppers.

In many ways, MCX represents the most forward-looking hopes of the retail industry. Though the network is not fully operational, industry watchers are fascinated by the ways that MCX could change the e-commerce  landscape. In its bid to create a viable alternative payment network, MCX seeks to emulate the success of Paypal, the most successful independent online transaction processor. With its focus on mobile purchasing, MCX shows a feel for the developing trends of modern commerce. As the battle over mobile payment fees heats up, many consumers aren’t aware of how their payment choices effect the underlying struggle for lower fees in the mobile commerce sector.

Increasingly, large banks and financial companies are bringing enormous resources to bear in their efforts to woo mobile consumers and prolong their dominance. While these large institutions are currently making concessions to secure their position in mobile payments, one could persuasively argue that more choice will lead to greater satisfaction for participants in mobile commerce.

MCX Logo

Of course, MCX faces an uphill battle in its quest to change modern payments. Major banks and Interchange processors have rallied around Paydiant, the mainstream platform for e-wallet services. Though far from perfect, Paydiant has won broad acceptance for its widespread relevance and ease of use. Over the next few years, the competition between MCX and Paydiant will represent one front in the all-out war to control and define mobile payments. At the same time, Paypal will likely make every effort to extend its commanding position into the mobile commerce sector. While Google Wallet has yet to make major gains in mobile processing, it is never wise to underestimate the potential of this groundbreaking corporation.

Every month, dramatic numbers of people start using mobile payments to purchase goods and services. Familiar with brands like Visa and Mastercard, many of these consumers will gravitate towards Paydiant. At the same time, MCX has hired media-savvy personnel to potentially launch their brand into global prominence. If any group has a real chance of changing the status quo of modern transaction processing, it is MCX.

Paydiant

Compared to monolithic financial companies, retailers are arguably better poised to meet the changing needs of modern consumers. Only time will tell which mobile processing network will achieve the same kind of dominance that Paypal has realized in online payment processing. Though consumers are fairly loyal to major financial brands like Visa, the new decade tells a tale of increased public hunger for technological innovation and greater choice. Whoever succeeds in dominating mobile online payments, it is likely that consumers will experience a new era of speedy, secure transactions. As mobile devices continue to revolutionize modern culture, people from all walks of life will learn to appreciate the ease and convenience of doing business through cell phones and mobile devices. Experts can only guess at how many middle-class consumers will ultimately execute most of their daily payments online.

PIN vs. Signature

Visa, MasterCard weigh PIN vs. Signature [2023 Update]

Today the Official Merchant Services Blog takes us to Australian and covers a topic that the big card brands are pushing as a needed security measure in the credit card processing industry. A recent push by Visa and MasterCard  is aimed at increasing the percentage of transactions that are verified by PIN to 90 percent. This reduction in the amount of payments backed by a signature is an attempt to lower the amount of fraud by millions of dollars caused by stolen and otherwise compromised cards.

How Easy it Can be to Forge a Signature

Visa and MasterCard are pushing for this change because of how easy it can be to forge a signature and the lack of employees double-checking signatures against identification. The target date for banning signature based transactions is June 30, 2014. The bar is set at 90 percent as the other 10 percent of transactions do not require signatures. Currently, around 45 percent of transactions are signed for.

Some objections that small business owners have raised to eliminating signature verification is the need to install additional PIN pads or have the customer come to a POS terminal in order to pay as opposed to just leaving a slip at the table. These changes and upgrades would be an increased cost on the merchant and some are worried that smaller businesses might not be able to shoulder this extra expense.

The proponents of this change state that “it is much more difficult for a fraud perpetrator to ascertain a PIN than to forge a signature”. They also reference data from a similar measure taken in Great Britain in 2006 that saw fraud on stolen cards “decline substantially”.

Opponents of the measure say that the costs to businesses are not justified by the potential decrease in fraud through this avenue and efforts could be focused elsewhere to see more substantial gains against fraud. According to a report on 2012, forged signatures accounted to for around $23.5 million on Australian cards. Whereas skimming and card-not-present fraud accounted for ten times that amount or $235 million.

No matter what the outcome of this proposal is, I think that everyone can agree that reducing fraud in merchant services is a top priority for all parties involved in the process. And as we see different markets such as Britain and Australia adopting different methods to try and combat fraudulent transactions it may be a glimpse into the future of what could eventually make its way to the U.S.

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NSA PRISM Program Could be Expanded to Card Data [2023 Update]

It was recently revealed that the federal government has been monitoring private citizens’ phone records through the National Security Agency. The program is said to have collected over one trillion metadata records in total and nearly one billion cell phone calls every day. The NSA states that the program is authorized by the Patriot Act which was passed in the wake of the 9/11 attacks to help combat terrorism.

During a House Judiciary Committee meeting last week, representative s of the NSA did not rule out the possibility of expanding the data collection to include payment transactions, hotel records and Internet search queries. The point that stands out to us here at Host Merchant Services is the access to credit and debit card transaction history.

The NSA and federal government wants access to this rich flow of information because it can provide greater insight into actions of someone suspected of plotting a terrorist act, especially when combined with phone, email and Internet activity. The point being to proactively stop any domestic or offshore terrorist activity aimed at U.S. citizens or military personnel.

One pain point for merchants, especially those outside the United States, is that they are already wary of the federal government accessing sensitive data. These merchants come to credit card processing companies in the U.S. looking for payment processing services because there are limited solutions in their home country and sometimes no options at all.

There are no indications that credit card transaction data is currently being collected by the government and as stated in the congressional meeting last week, no plans to for the immediate future. Host Merchant Services offers great payment solutions for businesses of all sizes, both domestic and foreign. Call us at 877-517-4678 to explore what a new merchant account with one of our payment experts today. Companies that are located outside the United States that are looking for a merchant services account should fill out our quick sign up form.

Montana Minimum Wage

What Does The Future Hold For Interchange?

Now that card payments are a major force in the economy, a system had to be set up to move this “virtual” currency from customer to business. This system is the basis of interchange.

The evolution of how customers pay businesses has changed dramatically over the past half-century or so. Cash was king during the infancy of American Express, MasterCard, and Visa. But as their networks expanded and more and more consumers began to expect to be able to pay with plastic in stores, merchants felt the pressure of lost sales if they turned away customers with credit cards.

What Exactly Are Interchange Fees?

Interchange fees are payments for handling the transaction between a business bank account and the cardholder’s bank account. They cover the costs of converting the electronic transaction through a credit or debit card into funds in the merchant’s account. These fees also cover administrative services and fraud risk.

Why Do We Need Interchange?

The card networks (Visa, MasterCard, Discover, and American Express) have developed intricate pricing models based off of criteria like brand, geography, card type, business type, and even transaction type. With all these variables it is easy to understand why there are hundreds of different interchange rates.

Why Do We Need Interchange?

The original intent behind charging merchants interchange was to offset the risk that issuing banks took for any losses occurring from debt default by the cardholder. According to Visa “the primary role of interchange is to create the right balance of incentives between a cardholders’ financial institutions – which promote and issue Visa cards to consumers – and a merchants’ financial institutions – which enroll and process Visa transactions for merchants.” Or basically that it is a balance between what the businesses are willing to pay for the ability to accept cards and what the banks are willing to accept as far as risk of profit and loss.

Interchange In The Past

In the early 1970s interchange was just one rate. As more merchants in different industries began to accept credit cards and new card types and rewards were introduced new rates began to appear in the interchange charts. The goal of the card networks when determining what rates to establish has always been a balancing act between covering any losses banks may realize and keeping the cost to merchants low enough so that it is attractive from a financial standpoint to the business.

So What Is Next For Interchange?

So What Is Next For Interchange?

As interchange fees are set by individual card companies there is an ever-present need to adjust rates. These pressures include other card brands and new and emerging technology. Since banks have the freedom to choose what card type they issue to their customers, they will usually favor the choice that gives them the most profit, which keeps rates overall pretty competitive.

Legislation and legal costs can also factor into where rates are headed. Late in 2012, a judge ruled against Visa and MasterCard in a class action lawsuit brought against the card companies by retailers and other business associations. The retail merchants accused Visa and MasterCard of increasing swipe rates while there was no legislation to protect the businesses from high fees.

Previous to this litigation, the Federal government passed the Durbin Amendment that set a ceiling on what card brands could charge for certain debit transactions. This bill was designed to greatly lower the cost to merchants, and therefore consumers, when paying with a debit card. Lawmakers argued that the risk to banks was very low with this type of card and thus did not justify the high rate that businesses were paying.

While it seems that only banks and card companies love interchange rates, it is hard to envision the complex systems we have without some sort of cost associated. The truth of the matter is that if your business is going to accept credit cards, you are going to pay interchange rates no matter what merchant services company you decide to go with. The advantage that Host Merchant Services offers over others is the transparent, easy-to-understand pricing model that is interchange plus. Quite simply you just pay a small markup over published interchange rates for any given card. No tricks like tiered pricing or overpaying with a flat rate for every card.

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If you aren’t currently accepting credit cards at your business contact one of our payment experts today at 877-517-4678 or simply fill out our quick sign-up form. They will guide you through the process of setting up a merchant account and explain the benefits of taking this form of payment. And if you are already taking card payments let us provide a free, no strings attached statement analysis to see if you truly are getting as good of a deal as you think.