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Thank you to our friend, Alex Johnson at Fintech Takes, for mentioning last week’s deep dive into the economics of points. Welcome to our many new subscribers!

Aven’s Mortgage Points Move

Aven is an asset-backed credit card for home equity lines. They take the real estate value of your home and issue you a home equity line that you can borrow against with a credit card. This idea has been around for a while in the form of HELOC check cards, but Aven is taking it to the next level with high-speed underwriting (their claim: in as little as 15 minutes). If you’ve ever opened a home equity line, you know this process can take a long time, much longer than providing access to a credit card, in part because a traditional HELOC requires an appraisal, which is not the case with Aven. In addition, they offer variable interest rates between 7.99-15.49% for primary residences. We're at a time when this country's average credit card APR is closer to 21-23%, according to WalletHub. Aven also provides robust rewards in the form of 2% cashback, all without an annual fee. This week, news surfaced of a trial that appears to be underway for the Aven card to provide Bilt-esque rent rewards, except in the form of cashback on your mortgage payment (instead of rent).

There are some caps that really limit this: Aven customers can earn 1% cashback on their mortgage payment over the course of the year, up to $200 or a total of $20,000 in mortgage payments. If you live in a high-cost place like California, New York, or Florida, you may burn through that pretty quickly, but for many Americans, that could mean earning cashback on a whole year's worth of mortgage payments. In order to earn that, you do have to spend at least $4,000 on the card in the first 90 days. If you do the math, the cashback on the first year’s mortgage limit is equivalent to a $200 sign-up bonus after $4,000 in spending, which any points fanatic would tell you is not a great return at a time when a basic card like Chase Freedom provides that, and other cards might provide much much more. However, the combination of a mortgage bonus that you can’t earn points on otherwise, along with 2% cashback on all other spending, seems like a very good deal. Watching this over time will be very interesting as Aven rolls it out to more folks.

As far as I can tell right now, the card is by invitation only, and I'm not quite sure how you can get one. My take is that Aven is prequalifying borrowers and sending them invitations directly. I did ask the company for further information, and I'll update you when I have it.

Landmark $30B Visa & Mastercard Settlement with Merchants

When this week started, I wasn't even sure what I was going to write about for CardsFTW because it didn't seem like there had been a lot of news. This year has certainly seen fewer new credit card launches than we saw at the start of 2023. However, a bombshell dropped on Tuesday morning with the announcement of a settlement in a long-running Visa and Mastercard merchant dispute. Longtime readers of CardsFTW will know that we often talk about how merchants don't like paying the merchant discount rate that turns into interchange earnings for banks and other players of the card system. 

However, interchange is what makes the wheels go round: it pays for rewards and is a very valuable and built-in part of the ecosystem. Merchants have been attempting to get legislation passed, such as the Credit Card Competition Act, to limit the amount of interchange that credit card issuers can charge. They've also repeatedly filed lawsuits against Visa and Mastercard, alleging that they are monopolistic and that they should not be allowed to promulgate some of the rules they have. Merchants are concerned about both the amount of fees as well as key rules like the honor all cards rule, which says that if you accept one Visa, you need to accept them all, and that card acceptance costs have increased of late due to the rise of ultra-premium rewards cards.

The newly announced settlement allows merchants to earn some money back from Visa and Mastercard, which are parties to the settlement and changes some of the fundamental rules. As this just came out, I'm sure I'm missing some of the key items, and I hope to write more on this later, as well as get feedback from some attorneys because I don’t like reading court documents.

So what is in the settlement? First of all, Visa and Mastercard are committing to reducing the actual cost of interchange over the next few years, and over the next five years, the average interchange rate will come down by about seven basis points. That may not sound like a lot, but it is when you think about the grand scheme of the trillion-plus dollars in volume being transacted over these networks each year. The second big part of this is changes to the honor all card and surcharging roles.

Let’s dive in on the interchange. What do we think is gonna happen? If Visa and Mastercard charge five, six, or seven basis points less, who is that going to affect? I would say that the party that will feel the impact is consumers, in the form of rewards and other benefits. We all know that banks are very good at keeping the money that they want on hand: If you squeeze one part of the balloon, another part of the balloon will pop. The ability of banks to generate revenue in parts of their business is why when we limited interchange on debit cards under the Dodd-Frank Act Durbin Amendment, we saw the near disappearance of free checking. 

Those seven basis points are really going to come out of the issuers' pocket because many large issuers like Citibank, Chase, and others already have deals with the networks that give them very low fees on the network side. Network fees can be as high as 20 to 25 basis points for smaller issuers on a credit card but can come down dramatically with volume deals and incentives that cause these major banks to issue more cards on one network or the other. Despite the antitrust complaints, there is quite a lot of competition for card volume these days. If an issuer is already earning most of the network fees back, then they are going to take the hit on this as well. Visa and Mastercard are not going to take the direct hit. The savings to merchants have to come out of the card P&L somewhere.

Card P&Ls are pretty complex, and as I talked about in last week's deep dive into the economics of points, you have to look at the whole thing together in order to understand profitability. If you're losing some money on interchange revenue, you can make that money back on things like interest rates or reduced rewards. I think that's what we're going to see here. Merchants say that if they pay less on interchange, then they will return that to the consumer. However, there is no evidence that merchants have done that in the past or will do that in the future.

They're not going to bring prices down. This really isn't about fighting for the little guy or the consumer. It's about merchants and networks. Typically, the folks who are in these lawsuits are big merchants and are just having fights with each other over the corporate pot. 

The next component is the rule to honor all cards. Today, the honor all cards rule means that if you accept Visa cards, you have to accept all Visa cards, whether it is a consumer debit card, a consumer credit card, or a commercial card–each of which has very different rates that they carry for the merchant. The merchant also cannot charge more to accept different types of cards. For example, a debit card has regulated rates from a large bank due to the Durbin Amendment, which means that a total charge could be as little as 30 or 50 cents. However, on a commercial credit card, such as a purchasing card from a corporation, the rate could be in the range of 2.2%-2.4% to the merchant, which is then, of course, marked up by their acquirer, which is why you often hear about credit card acceptance costs being 3% or higher. With the honor all cards rule changes, it appears that merchants will be able to specifically not accept certain types of cards in a way they haven't been before or charge the consumer more based on the card type.

The last part of this is about surcharging. When it comes to surcharging, merchants can offer a cash discount for a credit card today. This doesn't always appear to be written in the exact legally correct form, but it means that the price you see is not necessarily the price you pay because a convenience fee is charged for using a credit card. For example, if you're buying a $100 item at a store, and you pay with cash, you pay $100, but if you pay with a credit card, they charge you a 3% surcharge, and you pay $103.

This drives me nuts. It’s not just because I like credit cards but because I think it's misleading and confusing. The changes in the surcharging rule so far, prior to this settlement, have meant more and more merchants are surcharging in ways that are very confusing, where they display the cash discount price first instead of the regular price. This may improve for consumers in one sense when the concept of surcharging is permitted, as opposed to only allowing discounting, because merchants will then be able to display the cash price.

Although it may seem like a nuance to change from a cash discount to a card surcharge, it is much clearer what the real price and the actual surcharge are. However, if more merchants increase their surcharging, I think that consumers will be upset, especially with larger purchases. 

One example: I recently made a very large purchase at an entertainment facility for go-karts. The cost was $400, and the fine print on the receipt showed that the real price was $412 since I had paid with my card. Who carries $400 in cash anymore? I don't think anybody does. Carrying large amounts of cash has a cost to consumers because it is dangerous. I think it's important that merchants bear in mind that they're making shopping with them in an offline world harder at a time when they really should be making it easier. 

I think merchants are ultimately shooting themselves in the foot here. Payments are the plumbing of commerce. People do not want to spend time thinking about them, except perhaps for those of you who are reading this newsletter, of course. When you think about it, I want to go into a store to have an experience, buy a service, or buy a physical good. When we start surcharging for easy-to-use payment options, we are increasing fiction and forcing people to think about payments and not the actual commerce itself. 

As a result, people are going to be more and more frustrated. We're in an era where more and more shopping is happening online, even for what we thought of as physical goods. Examples I'm thinking of are things like grocery delivery, restaurant delivery, and next-day or even same-day delivery from physical retailers like Amazon.

For those purchases, merchants are going to continue to accept credit cards. There is no other reasonable way to accept cash. Accepting that insured payment option, with clear dispute rules, fraud mechanisms, and real-time authorizations at 3%, is a very good deal for merchants. It's very expensive to handle cash, checks, and other forms of payment, and of course, you can't do that online.

So, merchants who are focused on these seven basis points, other savings, and other complications like surcharges are making us all feel that there is another reason not to go to a store. I am an anecdotal audience of one, who clearly very much loves credit cards, but the data show that many consumers love cards. They love the safety of them. They are clearly safer than cash. They love the ability to track their spending. They love knowing that they can file a dispute in the case of a purchase problem. Last but not least, they love their rewards. 

If those things go away, I don't think people are going to be happier. It seems very short-sighted. Why did the networks agree to this? Well, I think it's a pretty small cost to pay to put this major lawsuit behind them. It is a class action, and merchants will be included unless they opt out and choose to go up against the networks on their own.

Finally, I think it's another way to prevent possible impacts of a Credit Card Competition Act coming through Congress. Congress can't get anything done these days anyway, it seems, but this is another way to get some people off their backs by creating this settlement. In the end, I don't think it's a great idea for anyone, but that's what we have.

CardsWTF: Dubble

Let's talk about this week's CardsWTF: The Dubble Card. Hat tip to my Wallaby co-founder Todd for pointing this one out to me. The Dubble Card doesn't look like it's in the market yet, although they are using the Visa logo on their website. That doesn't necessarily mean anything, and they may shortly hear from Visa Legal about a trademark cease and desist. The concept behind the card is quite amazing. For every purchase you make on the card, you're entered into a randomized lottery about whether you will pay twice as much as that item costs or zero dollars. 

Is this a huge consumer winner because people love gambling, or is it a huge compliance risk?

I really can't imagine any banker or financial regulator stepping into this because of the uncertainty it creates. We have seen some success with sweepstakes-based products as opposed to rewards where every purchase enters you into a sweepstakes, and you can win something from that sweepstakes, such as all your monthly bills, your bill is free, or a pure cash reward like $500. 

Long ago, when I was the product manager for the NASCAR prepaid Visa, we ran a sweepstakes program. With every swipe, you earned an entry to win a trip for four to a NASCAR race. That's a good deal. It's something nice for using your card, and it doesn't create uncertainty about more cost. The Dubble Card would create more costs for some consumers and could do so dramatically. Imagine a consumer using the card for a thousand-dollar purchase and hoping to get it free but instead owes two thousand dollars. Yikes! This seems like a terrible idea, and I hope it does not make it to market.

It’s a GOLD card

Robinhood, the stock-trading app, launched its new Robinhood Gold card on Tuesday and released it in a limited release. The announcement follows last year’s acquisition of fintech credit card startup X1. The new Robinhood Gold Card earns 3% cashback on all transactions (which is an industry high) in exchange for a $5 per month Robinhood Gold fee. Robinhood Gold is a subscription service that already includes 5% interest on your uninvested brokerage cash with cash sweep (1.5% without Gold), larger instant deposits, research from Morningstar, Level II market data from Nasdaq, and reduced margin investing rates.

A $60 annual fee for 3% cashback is a darn good deal. It may be the best mass-market, non-credit union cashback card out there.

Plus, Robinhood is teasing a limited edition solid gold card if you refer 10 friends to Robinhood Gold. The card will weigh 36g. Folks have tried gold cards in the past, but they have had issues with shorting out terminals. Please help me add this card to my collection by signing up using my referral link!

I haven’t been much of a Robinhood user, but I am intrigued. Should I move my portfolio? Other features of the card include on-demand virtual cards with disposable numbers and an industry-standard 20.24% to 29.99% APR and no foreign transaction fees.

With Robinhood, you can now access banking, credit, and stock trading, putting them well on the path to a super financial app.

New Breeze Airways Card

Breeze Airways, a startup airline that flies between many secondary markets from Bangor, ME, to San Bernardino, CA, announced its first co-brand credit card issued by Barclays. I haven’t had a chance to fly Breeze Airways, so can’t opine on that, but the card is a pretty interesting entry to the market.

You can earn 50,000 miles (BreezePoints), plus up to 10x points on eligible Breeze purchases, 2x on grocery and restaurants, and 1x everywhere else. Cardholders also receive complimentary inflight WiFi and priority boarding. Card rates vary between 21.24% and 29.99%. The card has an $89 annual fee and no foreign transaction fee.

A very interesting feature in the rewards structure is that you can only earn the 10x points per dollar on certain upper-tier bundles and add-ons. You also don’t earn the 10x at purchase, as is normal; you earn 5X when the flight is purchased, plus 5X once the flight is completed, which I haven’t seen before. If you cheap out on fares and get the base one, you only earn 4x BreezePoints (again 2X when the flight is purchased, plus 2X once the flight is completed).

Cardmembers will also earn 7,500 Anniversary Bonus BreezePoints after spending $10,000 on purchases each card membership year.

Travel site UpgradedPoints rates Breeze Points as being worth 1.0 cents per dollar, so the card has some very strong earnings depending on how you use it.

CardsFTW

CardsFTW is a weekly newsletter, released most Wednesdays, that offers insights and analysis on new products in the credit and debit card industry for consumers and providers. CardsFTW is authored and published by Matthew Goldman and the team at Totavi. Totavi is a boutique consulting firm specializing in fintech. We bring real operational experience that varies from the earliest days of a startup to high-growth phases and public company leadership. Visit www.totavi.com to learn more.