Identify a payment processor that a small business making e.g. $60,000/year in $20 credit card transactions can use that would charge lower fees, if you can.

We can take this from the other end though. A merchant who accepts ACH via Stripe pays 0.8%, one who accepts $20 on a credit card through Stripe pays 4.4%, so the merchant pays 3.6% more with a credit card than ACH, and 4.4% more than accepting physical cash. It doesn't matter how much of each is Stripe's profit unless there is some competitor a small business could use to process credit cards for less. Is there?

> You're also making broad oversimplified assumptions about the what merchants do in response to transaction fees.

In a competitive market, increasing every competitor's costs would cause them to pass on most/all of the costs, because the competition is keeping margins thin and their alternative is to go out of business. This is not an oversimplification, it's what actually happens in real commodity markets.

> Multiple implausible things need to be true for high end card users to be losing out on this scheme.

All that's required to happen is that the merchants are passing on more of the credit card processing fees than the amount of the rewards. Since the fees are higher than the rewards, this is not that implausible.

2. Commodity markets literally are an oversimplification.

3. You are conflating unassociated fees! See 1.

The combined fees are the cost of accepting credit card payments. The entire collection of them is avoided by accepting cash.

> Commodity markets literally are an oversimplification.

Only in the sense that everything is an oversimplification.

If OPEC cuts oil production, the price of gas goes up all over, because it's a commodity and the gas stations can't just eat the price increase. If the DRAM companies were colluding to constrain production and they get caught and have to stop, the price of DRAM goes down all over, because it's a commodity and buyers will take the lowest price. But if the price of DRAM goes down, that doesn't mean the price of iPhones go down, because iPhones are not a commodity -- only Apple makes them -- and then they don't necessarily have to lower their prices just because their costs went down.

Real competitive markets can actually behave like idealized commodity markets, or as close as makes no difference under reasonable sets of assumptions.

> You are conflating unassociated fees

If they're unassociated then how does a small business pay only the interchange fee and not the rest of them? If the answer is that you can't, they're not unassociated.

Sure sometimes, but transaction processing markets are not that simple. They are 2 sided markets, i.e. both the merchant and the merchant's customer are customers of the credit card company, who charges the merchant and the merchant customer varying fees based on how valuable the customer is to them. Then you have a merchant services layer on top of that. Then you have the variety of markets and goods that use all these services, all of whom may have different terms and fee structures with the credit card company and/or merchant services company. Merchants will pass on or absorb fees based on many factors, and possibly even varied within its goods and services. It's really complicated, and commodity markets are a gross oversimplification of how it works. Trying to model it would be a nightmare.

> If they're unassociated then how does a small business pay only the interchange fee and not the rest of them?

If interchange fees were 0 then you would still pay the other fees, which do not go to the credit card company. The fees are related, but not associated.

But now your argument is "it's complicated and there's no way to know" which isn't a strong claim that the status quo is to the advantage of the customer.

Meanwhile the portion of the fee that doesn't go directly to the cardholder is a deadweight economic loss, which, in general, is only to the advantage of the parasite extracting it and to the disadvantage of everyone else.

Notice also that the most likely alternative to "it actually harms even the 2% cash back customer" is "it's barely better than breakeven to even the 2% cash back customer and harms everybody else." Which is hardly a reason to keep it.

> If interchange fees were 0 then you would still pay the other fees, which do not go to the credit card company.

Ah, but that's the issue. You wouldn't. Because the rewards programs are a monopolistic practice.

Suppose I want to start a competing payments network and my sales pitch is I charge low fees. I'm only charging 0.05%, and provide free code that does the basic thing Stripe does, and keep the costs down by using anti-fraud tech the existing networks don't care to invest in because they're shifting the cost of fraud to the merchants and payment processors. The merchants are immediately on board if I can get cardholders. But the cardholders won't use it because no rewards programs.

Take away the rewards programs and now the network with the lowest processing costs will be the most widely accepted, and then customers want those cards because they're more widely accepted and otherwise indistinguishable.

Yeah, Stripe is a bad example. Because Stripe is a payment service provider. They take all the various fees involved with managing payments and package it up, then put a pretty bow on top with some useful services, APIs, nice marketing. But this package deal is significantly marked up. Stripe absorbs the variable interchange fees and different rewards card markups because they are charging you 3% flat (more or less) and have a healthy margin in for themselves in the middle. Stripe makes a little less when you charge a Platinum AMEX, but they make a relative ton when you charge a secured mastercard. They know that less than 10% of the transactions are these higher cost cards, so they just absorb the lower profit on those transactions.

This is a wholly different game than lower level payment processors. For example at a company I worked for about a decade ago, we stuck a deal with WorldPay which is the largest payment provider in the world. We were paying interchange fees, a small fraud fee of a few cents, and then a worldpay fee of 20-40 basis points depending on the card. We were directly charged more on a premium rewards card, but the margin on WorldPay was a few basis points above cost. But they provided nothing really in terms of services. We had to find our own payment software, terminals, and everything else. They were just the raw service.

So imagine worldpay on one side, which is just brokering with the banks and requiring us to do everything else. On the other extreme, you have Stripe which is "turnkey" and you can sign up with zero sales volume on a pretty website. One is interchange + 30 basis points, the other extreme is a flat 3%+20¢.

Stripe is a great business. But not a good example here. They essentially abstract away all the complexity in this article by charging you more money (their raw negotiated cost with banks is probably 0.8-1.2% on 90% of their transactions), they are marking up 1-2% for themselves as a service provider. That is not to vilify Stripe. They serve a valuable role and the abstraction layers (SaaS subscriptions, free trials, etc) are well worth it for a lot of companies. But keep in mind, this is a service company on top of the credit card system. So its not a great example in this discussion.