In this episode, Patrick McKenzie (patio11) challenges a recent Atlantic article claiming that low-income cardholders subsidize credit card rewards through high interest payments. Drawing from his Bits About Money essay Anatomy of a credit card rewards program, Patrick explains that rewards are primarily funded by interchange fees paid by merchants, not by interest charges.

To the extent those interchange is passed along to customers, it falls mostly on rich customers, because rich customers spend more. They spend more in interchange than they earn in rewards. Issuing banks and researchers who have looked at the data mostly agree here.

Patrick also breaks down the credit card rewards game, showing how banks strategically design card offerings for different market segments and explains the portfolio mathematics that disprove the cross-subsidization narrative.

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Full transcript available here:
www.complexsystemspodcast.com/credit-card-rewards-interchange/

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Sponsor: Vanta

Vanta automates security compliance and builds trust, helping companies streamline ISO, SOC 2, and AI framework certifications. Learn more at https://vanta.com/complex
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Recommended in this episode:

Bits about money: Anatomy of credit card rewards programs https://www.bitsaboutmoney.com/archive/anatomy-of-credit-card-rewards-programs/
The Atlantic: There Are Two Kinds of Credit Cards by Annie Lowrey https://www.theatlantic.com/ideas/archive/2025/03/credit-card-racket/682075/
Complex Systems episode with Gary Leff https://open.spotify.com/episode/1QqFw5hlHKRrjRUTVLfKRV?si=hNwbnyrmQiqHe9ziAnGCpQ
Complex Systems episode with Dave Guarino https://open.spotify.com/episode/0UlTIRosmjtvpcdHQ7t2tK?si=i8LYGS-iSfOoGsVmMFYWjA

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Timestamps:

(00:31) A recent Atlantic article's false thesis

(09:35) Rebating interchange to earn share of wallet

(14:48) Sponsor: Vanta

(16:56) Why isn’t every card a rewards card?

(27:56) The complexity spectrum of rewards products

(29:55) A fun rabbit hole about credit card acceptance

(33:53) Back to more complicated cases

(45:45) Further refinements in cat and mouse games

(51:24) Giving the customer more choices more frequently

(58:10) More directions to go in

(01:01:54) Patrick’s counterproposal

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