6

If I understand cash back programs correctly, the Credit Card companies give you back a percentage of the money you spent on a purchase. 1% would give you back $1 on a $100 purchase.

If this is the case why can't two people (or more) just buy and sell to each other the same product back and forth to earn cash back?

  • The U.S. Mint used to allow you to buy coins using a credit card but had to change the transaction to not count as a regular purchase, because people were buying the coins, depositing them at the bank, and collecting the cash back. – Michael Sep 5 '14 at 18:49
16

Interchange fees. Every time a customer buys something on credit, the seller pays a fee. They're not allowed to itemize that fee and pass it on to the buyer, but they can offer a cash payment discount.

In short, rewards cards are a system of collective bargaining for buyers versus sellers. Some argue it drives prices up for everyone who isn't a cardholder, but I think the evidence is mixed.

  • 3
    Back in the go-go 90's, there were a few cards that let you earn rewards on no-fee balance transfers. My roommates and I paid for a road trip by doing this. – duffbeer703 Feb 22 '11 at 0:45
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    When PayPal first came on the scene, they ate the fee. A few coworkers and I kept selling a magic marble to each other for $2000 once a month. That's $20 a month. – Aaron D. Marasco Jan 20 '14 at 0:55
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    There are still arbitrage opportunities - some cards offer 5% cash back for certain merchant categories, which is well above interchange and other fees. But it might violate your card issuer's terms. – Daniel Lubarov Jan 20 '14 at 20:15
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    "Some argue it drives prices up for everyone who isn't a cardholder, but I think the evidence is mixed" Where else are the sellers going to get the cash to pay the credit card companies so they can pass it on to the rewards program? – DJohnM Aug 16 '14 at 0:18
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    Cash isn't free either. Next time you're in a bank, ask how much they charge to process night deposit bags. – jldugger Aug 16 '14 at 17:07
5

Q: Where do you think the money comes from for the cash-back reward?
A: The seller is charged a % transaction fee that is higher than the amount of the cash back reward.

So ultimately the seller is paying the cash back award and then some. This plan wouldn't work.

0

in theory, yes. in practice, no. largely because merchants pay a fee to process credit card transactions which normally exceeds the cash back you can get.

i tried this with square, since their vendor fee was 2.75%, and i got 5% back on restaurants. however, even though i registered with square as a restaurant, transactions were categorized as "other services" or something, so i only got 1% back and lost 1.75% net.

moreover, if you did find a card/processor combination that left you with a net gain, they would eventually catch on and charge you with some sort of fraud. i wasn't worried about it with the square experiment because it was only 1$, but if you tried to do this with large sums, a human would catch you. and if it was enough money to matter, there would be a lawsuit. if you were really unlucky, you might get charged with some terrorism crap like "structuring" deposits.

  • A few years back, my bank offered a card giving 10% back on drug store purchases. I bought $500 Visa gift cards. After $20K, the back stopped offering the deal, but still honored it for the 90 days they advertised. I bought 100 cards altogether. $5 fee per card, so I still netted $4500. No one from homeland knocked in my door. – JoeTaxpayer Jan 12 '16 at 3:03
  • well played sir! i do the same with the quarterly bonuses from various cards, but they are limited to 1.5k$ per quarter. – james turner Jan 12 '16 at 14:34
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    i imagine the line between nothing and lawsuit is probably around 10k$ profit. the line between lawsuit and gitmo is probably closer to a million. also, doing an expected activity excessively is less likely to get you in trouble than doing something that clearly has no purpose but to pump money out of another party. – james turner Jan 12 '16 at 14:36
  • that last line is great, quotable even. – JoeTaxpayer Jan 12 '16 at 14:49

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