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PaperclipPerfector  4d ago (text post)   2862 thread views

Friday Fun Thread for January 9, 2026

Be advised: this thread is not for serious in-depth discussion of weighty topics (we have a link for that), this thread is not for anything Culture War related. This thread is for Fun. You got jokes? Share 'em. You got silly questions? Ask 'em.

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This is not how it works.

I disagree with Patrick McKenzie. I think are disagreement is probably at a philosophical level that I don't want to go into, so instead I'll share a personal story:

I teach a data science practicum course for economic majors where financial institutions "hire" our students. One of the projects our students were contracted for was literally optimizing the advertisement of credit card rewards programs to attract low income consumers who would not default on the loans but would carry a high interest balance. Another project was optimizing the fee schedule to extract the most money as possible from overdue payments on these cards from low income consumers.

I've sat at the table with the men and women who run these programs. I've asked them how they justify it to themselves. They fully acknowledged that some people were ruining their lives, but they did not have any moral qualms and said "everything we do is legal and fully regulated". So I think the folk that run these programs are every bit as evil as the worst communist propaganda would have you believe.

(I refused to work with these companies, but other professors chose to work with them.)

I haven't read this one (and I intend to) but I noticed that when Trump called for 10% APR cap, the stocks of major credit card issuers dropped instantly and several of them that are heavily dependent on consumer credit cards pretty much said it is not a sustainable business in that way. From which I derive that substantial part of their income is in interest over balance, which means it is how it works, at least for many companies.

That credit cards earn revenue on interest does not imply that rewards are funded from interest payments.

Yes, you are correct that this a-priory does not imply so. But The Fed seems to think so: https://www.federalreserve.gov/econres/notes/feds-notes/credit-card-profitability-20220909.html

First, we find that, on average, the credit function makes up approximately 80 percent of the credit card profitability, whereas the contribution of the transaction function is slightly negative, as rewards and other expenses on credit card transactions outpace banks' interchange revenues. In addition, fees—in particular late fees—comprise approximately 15 percent of credit card profitability.

Of course, they are talking about profit and not revenue here, but I think one implies the other, and I think it is reasonable to say that if 80% of the profit comes from credit function, then the credit function is the one that "pays for" the enticement features - like rewards, is it not? It looks like if not for the interest, the rewards would outpace the transaction fees, and the whole business model would have been infeasible. The credit revenues, however, make it feasible. The original claim has been:

Except for all the people who get into massive credit card debt who these programs are actually trying to target and where the credit card companies make all their profit.

And according to the link I quoted, this sounds 95% correct at least. Of course, the link dates from 2022 so if you have more fresh data that amends the picture, please provide it.

I highly recommend reading the article I posted in order to refute this claim rather than demanding evidence without reading the evidence I already provided.

Here's one relevant excerpt.

We're looking at figure D, from the paper interchange income minus reward expenses, graphed against FICO score. And the upshot of this graph is that there is no part of the FICO score spectrum at which issuers continually rebate more rewards to customers than they earn in interchange.

I think I know what's going on here. This quote - and the data - comes from paper dating from 2013. And indeed, if you look at Figure 3b in my link, that was the case up to about 2017. When it changed, and rewards expenses started to exceed transaction income, and have exceeded it since. This also matches my own experience - a while ago, 2%+ no fee cashback cards either did not exist or were a rarity that required a lot of hoops to jump through. Now they are commonplace. As you can see in the graph, the rewards expenses went from ~3.4% in 2013 to about 4.5% in 2022, while the transaction margins decreased.

The article discusses (and refutes) the idea that rewards beneficiaries are "rich" and interest payers are "poor", but neither I nor thread-starter made such claim (it's not the fault of the article, obviously). In fact, both categories may be rich, or poor, it's irrelevant - the discussion about whether tx margins or interest is the main source of revenue does not require any specific income distribution among either category.

The article says:

I'll say, as an aside, this paper dates back to 2014, but it's the best available in field, in my personal humble opinion, and I don't believe the conclusions of it have materially changed.

Given what I have seen in my link, I must question this opinion and claim that while the conclusions of the article may have been warranted given the data from 2013-2014, the situation did materially change. At least a claim from the Fed to that effect strongly indicates it did, and one needs much more than an offhand "I believe" to counter that. Maybe the conclusions of the article - which differ from the initial claim - are still warranted, but I do not think that the old data in the article supports what you purport it to support anymore.

Your article opposes the claim that credit-card rewards are funded by poor people. PokerPirate made a different claim—credit-card companies are funded by people who pay interest on balances. I think your article agrees with PokerPirate's claim. This Supreme Court opinion does as well.

Amex competes with Visa and MasterCard by using a different business model. While Visa and MasterCard earn half of their revenue by collecting interest from their cardholders, Amex does not. Amex instead earns most of its revenue from merchant fees. Amex’s business model thus focuses on cardholder spending rather than cardholder lending. To encourage cardholder spending, Amex provides better rewards than other networks. Due to its superior rewards, Amex tends to attract cardholders who are wealthier and spend more money. Merchants place a higher value on these cardholders, and Amex uses this advantage to recruit merchants.

The article does not agree with PokerPirate's claim. It quite clearly explains that rewards are financed from interchange fees.

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