If you look on places like YouTube, you will find dozens of bloggers telling you how they have amazing credit cards that give lots of points, crazy schemes to convert money ten different times between different formats to earn even more points, and how they can live their life entirely by points.
If you hear of all of this, you might get the impression that you are missing out. In reality, many people are sinking their valuable time and energy into trying to earn points while loopholes are being closed and temporary deals are ending. This means they not only have to spend time and effort to actually earn points, but they need to spend even more effort to research and discover new ways to earn points as the best old ways are blocked.
Point Card Types
In order to return to reality, let’s cover the main two types of point cards:
- Loyalty cards – These are cards issued by stores to encourage you to shop there. These include things like Mont-Bell club member’s card, Ozeki Cash back card, Summit point card, etc. This also includes the non credit-card versions of cards from places like Marui and Bic Camera. Sometimes they also function as a prepaid card (such as Donkihote’s Majica card), or don’t involve a card at all (such as Amazon’s point system). These cards are usually free, or have a very low nominal fee. As you purchase goods or services, you earn points that you can use towards future purchases. Then, there are more generic points such as v-Point and T-Point/V-Point. As a rule, these cards aren’t bad. Just beware that you are trading your data and privacy for points. The main point here is that you are if going to buy (for example) groceries at Ozeki anyway, you may as well earn some points on your purchase.
- Credit/Debit cards – These are points that are issues by a credit card company such as ePos, View, American Express, etc. These will be the main focus of our discussion today.
It’s best to always think about the position of others to fully understand situations.
The Retailer’s Point of View
When a retailer such as 7-11 offers goods for sale, they have two main costs:
- Fixed costs – such as the cost of renting the building they operate in, monthly labor costs, etc.
- Variable Costs – This mainly includes the cost of the items they are selling.
So, for example, they buy a bottle of green tea for 50 JPY and sell it for 120 JPY. This earns them a gross margin of 70 JPY. Since 7-11 operates in expensive locations and pays people to be there 24 hours per day, maybe they have to pay 50 JPY in fixes costs, leaving a net margin of only 20 JPY per bottle of green tea sold.
The above assumes you pay cash, and that handling cash is free. In reality, handling tons of coins is a bit bothersome and does cost come money to deal with at high volumes, but the cost is still relatively low.
Stores want to accept various forms of payment for several reasons – but one major reason is because there are solid statistics showing that people who pay with credit or debit will spend much more than people who spend with cash.
This is easy to understand. If you go to the local convenience store with, say, 150 JPY, intending to buy green tea, you are probably just going to buy green tea. If you have your credit card, though, and you see some bread for 100 JPY, you might be tempted to buy that as well. Your credit card is after all, effectively limitless.
The studies mentioned above also talk about the concept of mental pain when spending money. Spending cash causes people some amount of discomfort. Spending with things like debit cards causes less discomfort, and so they spend more. Spending with credit cards causes the least discomfort, and so people spend the most. Stores want you to spend, so of course they may be tempted to accept credit cards.
This all sounds great from the store’s perspective, but here’s the rub: Credit card companies charge transaction processing fees to merchants like 7-11. For reference, most processing companies (i.e. Visa, Amex, JCB, etc.) charge about 2% plus 5-10 JPY per transaction. That means your 120 JPY bottle of green tea cost perhaps 3+5 = 8 yen to process. It’s easy to understand how they might even lose money on very small purchases.
Convenience stores are a good example, because they often accept more forms of payments than many other types of shops. They can afford to do this since their margins are so high to start with.
Now, perhaps 7-11 has a special deal with the payment processors since they have a lot of bargaining power and have a large percentage of small purchases – but that isn’t really the point here. The point is that they do have to pay transaction fees whenever you use a credit card, debit card, or things like Suica or PayPay. Credit cards have among the highest fees.
This means that 7-11 is paying more and earning less when you use a credit card. If you buy more because you are using a credit card, then their profit margin suffers, but at least they earn more in total.
What do you suppose retailers like convenience stores and supermarkets do when faced with lower profit margins? Accept them? Of course not, they simply charge you more.
If they could, most retailers would add a 2% surcharge to all credit card purchases – but they don’t because that is typically prohibited by the contracts they sign with payment processors.
One work-around is they issue point cards, and raise their prices. For example, XYZ Camera charges more than some other retailers, but they issue 10% points on all purchases! Sure, but when you use a credit card, the points are lowered – so the item effectively costs you more. Now they aren’t breaking the rules, but they also aren’t eating the costs either.
The real point here is that there is a reason why the very cheapest places often only accept cash, and the places that only accept cash are the cheapest places to shop.
The Payment Processor’s Point of View
The processor companies such as Amex, JCB, Visa, and Mastercard have a different point of view, of course.
Their business model is simple. The processing company (Visa, JCB, etc), charges the retailer some percentage, f.e. 2%, and typically pays the credit card company or bank that issued the credit card some lower percentage (say 1%). They make a profit on this margin. 1% may not sound like much, but it’s 1% over a huge amount of money every year.
The Credit Card Company’s Point of View
The credit card companies issue cards to consumers like you and me, and whenever we spend money they pay the required amount to the processors. They then bill us for that amount later. As mentioned above, they typically receive payments from the payment networks, which they then share some portion of with us.
In Japan, the main points of profit for most customers are the yearly account fee and the money they receive from the payment processing networks. They give some portion of this profit back to us as “Cash Back”, “Points”, or “Miles” – but it’s important that this money originally came form the merchants – which means it came out of our wallet in the form of increased prices!
Often, credit card companies will give you more points if you pay a higher yearly fee, or a very low point ratio in exchange for a free yearly card fee. Think about it this way. If you pay a large annual fee, they will pass along all of the money they get to you since they already made their profit. If you pay no fee, they will keep most all of the money they make off your purchases. Either way, they win. Sure, if you pay a huge annual fee and then spend an enormous amount on your card in the year, maybe you can break even but it’s a difficult sell for most people.
Better yet for them, in the case of “Points” or “Miles”, they often make it look like yen or dollars, but it’s really a separate currency. A currency with limited use that they can manipulate at will. For example, “Points” can only be used in certain places, and the prices are often very high. Something you could normally cost 1,000 JPY might be 5,000 points on the American Express point marketplace. Miles are often even worse because of blackout dates, etc.
For customers that hold a balance, the credit card companies can of course make money from interest, and for those who don’t pay on time, late fees.
The Consumer’s Point of View
Finally, there is the point of view of us, the consumers. While most of the information above is freely available online, many people have never though about it and simply think “Free Points!”
If you stop and think about it, it should be obvious that large banks like SMBC and Mitsubishi aren’t going to give you money for free. They are giving you some of the money they get from the likes of JCB and Visa. Likewise, payment processors JCB and Visa aren’t giving out money for free either – they are giving a portion of what they collected from the shops.
Shops are owned by investors, and in general investors aren’t going to lower their expectations for profit – they are just going to charge consumers more or devise complex point systems.
Summary
7-11 has to charge more for Green Tea in general because they accept credit cards – so they are accounting for the fact that they will have to pay credit card processing fees on many purchases. They charge more, so of course we pay more. So, for example, we pay 2% more, visa takes that 2%, gives 1% to say, Mitsubishi Bank, and they give 0.5% to you in the form of points. So in reality, you paid 2% more (in cash, eventually) to get 0.5% in points which have limited use.
You can and should use loyalty cards where it makes sense. For example, you can save 10% or more with Matsumoto kiyoshi by using their mobile point card app. That’s a significant amount.
What you should absolutely avoid doing is making purchases you might not otherwise make on a credit card because you think “I’ll earn points!”
However, you can and should make larger or more frequent purchases at places that don’t even accept credit cards, PayPay, etc. – because they are very often the least expensive places.
Examples:
- Seafood, Fruit and Coffee beans at AmeYoko in Ueno
- Fish & Vegetables in the basement at Nakano Broadway
- Electronics from various places you can find on kakaku.com. Very often, the cheapest prices come from those who only accept furikomi (bank transfer) payments. This makes sense, because the credit card fees on a $1000 computer are substantial.
I personally think it’s also important to develop the mindset of thinking about the positions of other players in the game. If they are giving you money or points, you think think “Why? Where is this money coming from?” There is always a reason.
Since you are probably going to use a credit card or debit card to pay for things sometimes anyway, there is nothing wrong with getting a card that gives you points – but you should be well aware that people tend to spend more when they use cards than cash (and you probably aren’t as immune to this effect as you think you are).
Back to the YouTubers and other point fanatics – There are sometimes limited time offers where you can actually gain a “large” amount of points. For example, 1.5% or 2% instead of the usual 0.5%. These are usually a company willing to take a loss for a short period of time as an advertising measure. This was the case with PayPay, for example.
There are also sometimes cases where you can do something like buy an Amazon gift card with a prepaid card that you bought with another credit card, so you can “stack” the points. This is a case where one or more of the companies involved will lose money, so as soon as they become aware of this they will block it. Spending a lot of time and money to chase such trends is not nearly worth it in my opinion. If you are doing transactions in small amounts, then you will never make back the time and effort you spent. If you are doing such transfers in large amounts then you are taking a lot of risk and may be banned for fraud, money laundering, terms of service violation, or similar.
At the end of the day, if you get points automatically on purchases you would make anyway without paying more than you normally wound, then that’s fantastic.
Just be aware of the following two facts:
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