You are throwing away money (and paying for my credit card rewards) if you use cash

Glenn · September 7, 2019, 1:48pm

Credit card rewards - who actually pays for them?

Credit cards and the accompanying rewards (airline miles, cashback) are a huge business in Singapore. If you are currently a credit card user, you will no doubt be aware of the countless credit cards available out there offering all types of benefits and rewards, as well as aggressive signup promotions to constantly try to get you to sign up for new cards. Even if you are not a credit card user, there is no way to miss the countless credit card booths in shopping centres all around Singapore offering free travel suitcases/bags/other goodies in exchange for getting you to sign up for a card.

Example of a HSBC credit card booth

For WhatCard, we were founded by 3 Singaporeans with a common passion in getting the most out of our credit cards - 2 of us are miles chasers who have been able to experience multiple premium (Suite/Business) class flights to Japan, Australia, New Zealand and more redeemed using our credit card miles, while our third co-founder is a cashback card user who has gotten thousands of dollars of cashback from his cards.

In addition, we incur no additional costs (over others who use cash/debit card) from using our credit cards as we always pay off our balances in full each month and get all annual fees waived or have the cards cancelled before annual fees are charged. If we and many other credit card users out there are not paying anything more to use our cards and get rewards, then who is paying for these rewards that we are getting??

Once you go Suites you never go back… until your miles run out

Credit cards are run as a business by the big banks in Singapore, and they have to make enough money to pay for all the rewards they are giving out and still have some (or lots of) profit leftover. Credit card issuers make money in different ways, most visibly to us through the annual fees, interest charges, and late payment/admin/other charges. In addition to these visible charges, one major source of profit you may be unaware of are the credit card interchange fees.

What are Interchange Fees and how do they work?

Interchange fee are basically the fees that merchants/stores are charged for accepting credit card payments, and are typically charged as a percentage of the total sale amount. For instance, if you spend $100 buying groceries at NTUC and pay using your DBS credit card, DBS will charge you $100 in your credit card bill, but NTUC will only receive $96, with the remaining $4 being kept by the bank as the credit card interchange fee.

These interchange fees are used to pay the various parties that make the whole credit card system work, including the bank that issued the card to you (e.g. DBS/OCBC/UOB) and the card network (Visa/Mastercard/Amex).

The full details of how exactly the credit card ecosystem works is complex and beyond the scope of this article, but those who are interested to read more can check out this very informative series of articles

Interchange fees vary significantly, and this difference in fees can actually help to explain many of the different reward rates that credit cards offer, with higher fees allowing the banks to afford giving bigger rewards. Some factors that influence interchange fees:

Merchant Category Code (MCC) of the merchant which describes the business they are in (e.g. F&B, groceries, digital goods). Learn more about MCC codes in this Dollars & Sense article featuring WhatCard
Online vs Offline transactions - online transactions are charged higher fees and hence usually better rewards (e.g. up to 4 miles per dollar for online spend)
Tier level of the card - MasterCard/Visa both have different tiers of cards, with higher tiers having larger interchange fees. The higher tiers are usually used with premium cards that are hence able to give better rewards. Example of tier levels: Mastercard -> MasterCard World -> MasterCard World Elite

Having said all that, the most important thing to know about interchange fees is that stores usually have to set a single price that everyone pays, regardless of whether payment is made using cash, credit card, debit card, GrabPay, FavePay, or other accepted payment methods. Hence, stores will have to set prices that take into account the fact a portion of their sales will be made via credit cards, with interchange fees that can cost them anywhere from 2-5% of the item price - the cost of which will have to be charged back to their customers in the form of higher prices set.

There are some examples of merchants that will charge you an extra “admin fee” if you paying using a credit card to make up for this interchange fee, for example most budget airlines do this, but in general the majority of merchants maintain the same price regardless of payment method

This is not an issue for credit card users because effective optimization of credit card rewards can give you back up to 3-4% of the total value of spending in the form of miles, cashback, or other rewards that will more than making up for any price increase due to stores accepting credit cards.

However for non-credit card users and those who use credit cards ineffectively, what is happening is that you are basically unwittingly paying higher prices to fund the rewards that credit card users get

Why do you want to pay for other peoples rewards?

According to the MAS, Singapore currently has 6.8 million main credit cards and 1.3 million supplementary cards, all owned by 1.6 million Singaporeans for an average of almost 5 credit cards per user! While these numbers seem really big, if you look at the whole Singapore’s population and even after excluding children, elderly, and others with no or low income that do not qualify for credit cards, there are still a really substantial number of Singaporeans who can but do not make use credit cards.

If you are one of these, we would strongly encourage you to get into the credit card game and stop leaving money on the table that others (like ourselves) have been happily taking from you! Which credit cards to get and what rewards to optimize for are very much a combination of personal choice and individual spending patterns, and there are many resources available online which can help guide you. For WhatCard, we are in the process of developing a Credit Card Recommendation Engine that you can sign up for the waitlist today and we will let you know once we are done building it.

Note: At WhatCard we believe that credit card rewards are a way for every person to get more out of their daily spending. However, we would like to reiterate that we only endorse the responsible use of credits cards that makes you better instead of worse off - by paying off your balances in full each month, avoiding any fees and charges, and not overspending just because you have a ‘credit limit’. If you are unable or unwilling to do so, we would encourage you to stay far, far away from credit cards as any rewards you get will be more than offset by the damaging costs of credit cards interest and fees

Your WhatCard Team

If you would like to get the maximum rewards from your credit cards, do consider subscribing to our upcoming newsletter and follow us on Facebook to stay updated on the latest tips, tricks, and hacks to get the most out of your credit cards.

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