Credit Card Rewards Benefiting Who, Really?
Credit Card Incentives Represent Unseen Financial Aid. Artificial Intelligence Alters This Pattern.
There are numerous individuals who express discontent with the procedure of utilizing payment cards. One of the critiques is that card issuers explicitly levy a charge on the overall economy for the task involved in drawing in and rewarding the most coveted clients. The Commerce Commission of New Zealand recently published a *discussion paper* on the expenses incurred by businesses and consumers due to card payments, which brings up this argument. They clarify the situation clearly: when there is no surcharge, customers who choose to pay through cheaper card payment options (like PIN debit or cash), financially support other card users through higher retail prices. In situations where there is a standard surcharge (typically around 2% in New Zealand), debit card users subsidize credit card users.
This subsidization is considerable. Sumit Agarwal of the National University of Singapore, Andrea Presbitero of the IMF, André Silva, and Carlo Wix of the Federal Reserve found that American credit card reward programs *transfer approximately $15bn annually* from less to more "sophisticated" consumers. It's important to note that financial sophistication (which the researchers estimate with credit ratings) also correlates with education, income, and race. As a result, high school graduates, the poor, and ethnic minorities are least likely to reap the benefits of credit card rewards.
As a supposedly sophisticated consumer, I question if I make any effort to gather rewards from the unsophisticated. It merely takes too much time and brainpower to evaluate, on a per-transaction basis, whether I should use the card that earns rewards points, the cashback card, or the card that earns frequent flyer miles. Access to real-time data and continuous monitoring of redemption is necessary to determine the "foreign exchange" rates between Points, Pounds, and Avios.
(I despise receiving those e-mails offering frequent flyer miles or hotel points for buying a case of wine or any other product. It can easily take thirty minutes to determine if a "special offer" to buy points for cash makes sense, and even an entire day to determine whether bank account A without miles is a better financial decision than bank B with miles.)
However, we are now shifting towards an era of "*agentic commerce*", where AI is appointed to make precisely these kinds of decisions on behalf of a consumer. Imagine the shopping experience in the age of AI agents, where they make decisions about the best way to pay to earn rewards. Payments are certainly tedious and boring work. This is a task that many people would be more than happy to delegate to a bot. Smart shopping assistants are nothing new, but they are being transformed by AI. What will happen to loyalty and rewards programs when consumers always make the optimal choice to maximize their rewards, and never miss out on using their points effectively?
If you think this is a minor issue, let me remind you that rewards schemes, particularly frequent flyer programs, are incredibly important. In 2022, the three major US schemes – American’s AAdvantage, Delta’s SkyMiles, and United’s MileagePlus – generated nearly $16 billion in revenue, equivalent to 11% of their parent companies' total revenue. These schemes are beneficial for airlines as points cost them nothing until they are redeemed, and often not at all because points are often never redeemed, forgotten, or expire. The Financial Times found that Wall Street lenders valued the major airlines' frequent flyer programs *more highly than the airlines themselves*.
Does the value of these schemes increase or decrease when agents always make the best decision on behalf of consumers? I honestly do not know, so if you have done the calculations, please share the results!
How Will Credit Card Rewards Evolve?
It's clear that new payment methods will introduce *new vulnerabilities for fraud*. There are several issues that must be resolved before consumers can effectively take advantage of the new technology to abandon the mundane and allow their minds to wander towards more value-adding distractions. Significant liability issues must also be addressed. If you didn't wish to pay for something, is that the agent's responsibility, the merchant’s, the bank's, or yours? There are also numerous security issues to overcome. Can someone trick your agent into making fraudulent purchases, and if they do, who is to blame? There are also authentication questions to answer: How can agents participate in authentication processes like liveness verification, two-factor authentication, and so on?
Indeed, I believe we currently possess all the cryptographic methods needed to tackle these issues. Consequently, we can commence pondering over the transformation the sector will undergo due to the emergence of these agents. These agents could potentially aid customers in optimizing their credit card benefits and lowering expenses. In turn, this might induce credit issuers to introduce more appealing reward schemes to stay competitive. Moreover, as consumers excel at utilizing these enhanced reward schemes, it could result in even more lucrative incentives, escalating costs for issuers.
If these agents empower customers to evade charges (and accrued interest) while reward costs continually climb, it'll inevitably necessitate a reevaluation of existing business models. Perhaps, the emphasis will shift towards transaction fees charged to merchants or fine-tuning tiered or premium services.
It appears that the majority of credit issuers fail to have a plan in place for consumers suddenly gaining substantially more intelligence. The upcoming year is bound to be intriguing.
The use of AI agents in shopping could potentially shift the balance of credit card rewards, with agents making decisions to maximize rewards and effectively use points. This could lead to increased costs for issuers as they compete to offer more attractive reward schemes.
Given that financial sophistication, often associated with education and income, tends to reap the most benefits from credit card rewards, the advent of AI agents could further skew these benefits, potentially leaving less sophisticated consumers behind.
