Credit card companies are the latest scapegoat for government fiscal malfeasance and inflation, and the consumer is about to pay for it in their reward points.

April 22, 2024

By: Bobby Casey, Managing Director

A common trope that circulates from time to time is the moaning and groaning about corporate profits.

The one currently making the rounds says something to the effect of: “If you don’t like the high costs of fuel, just remember Big Oil made $85 billion in profits.”

They make the same claims about price gouging at the large grocery stores.

When you see the dollar figure of their profits, it’s easy to assume there’s some sort of price gouging going on. But that’s not actually true, and it’s easy to prove. All these large corporations are publicly  traded, so you can google their profit margins.

Let’s take a look!

As for December 31, 2023, Exxon’s profit margin was 10.45%, Shell came in at 5.99%

As for January 31, 2024, Walmart’s profit margin was 2.39%, Kroger came in at 1.44%

I think it’s safe to assume that the other respective competitors come within these ranges. But let’s put this in perspective.

That means for every dollar of gas you buy, Shell made 6 cents, or Exxon made 10.5 cents. That’s their profit for bringing you fuel for your car.

For every dollar you spent at the grocery, Kroger made 1.5 cents, or Walmart made 2.4 cents.

Let’s take a car with a 14 gallon tank. Let’s say you put 10 gallons in a week for the sake of round numbers. And let’s use $4/gallon, which means $40/week in gas. That’s $4.20/week that goes to Exxon… less than $20/month in profit goes to Exxon.

The reality is, if Exxon just stopped profiting, they’d close their doors and prices would soar even higher. So that’s not a viable option. But let’s say they benevolently took a 50% cut in their profits. So now, you only pay $9/month in profits to Exxon. The stock market would respond in the same way as if Elon Musk or Jeff Bezos decided to liquidate all their stocks.

That sort of disruption would be bedlam on retirement funds and on any shareholders (which might include vested regular employees) to say the least.

But if that extra $9/month is really the difference between life and death in the household; or if the contention is that the $9/month is the difference between middle class and poverty, then we can go back to the finger-pointing of expensive coffee and avocado toast being the reason people can’t buy homes, right?

Either $9/month is a deal breaker or it’s not.

These profit margins are historically consistent too, with the exception of 2020 and 2021, where the oil companies operated at a loss and Walmart was seeing record revenues.

I understand the beef people have with large institutions and corporations. I am on board with the indignation toward subsidies and bailouts. But their profits aren’t the culprits when it comes to higher prices or higher costs of living.

Likewise, you have these allegations of “usury” when it comes to lending. People think it’s any interest paid. It’s not. It’s unreasonably HIGH interest rates, so think of loan sharking or payday loans. And while they also have their grim function in the market, they aren’t following Treasuries and propping up the currency as bank loans do.

If you eliminated interest rates on loans, you’d go through a similar dark period that Japan did when it decided not to charge interset on their loans. Japan is still trying to recuperate. Interest has to do with the value of the currency. So in reality, US interest rates have been unreasonably LOW for the past fifteen years.

All sorts of “creative” economics are coming out of the woodwork because people are frustrated. I get the frustration, and that is more than justified. But they overlook something incredibly obvious: what is the government’s take in all this?

Exxon’s effective tax rate is over 25%, which isn’t much different from Walmart’s.

We also pay fuel taxes at 18.4 cents per gallon. If we go back to the $4/gallon, that means they are also making 4.6 cents per dollar spent. You can argue that’s to service our beloved and remarkable infrastructure, but the Romans had better roads when they fell, if we’re being honest.

But we’re meant to be mad at the large corporations?

The latest in the crosshairs is credit card companies. There’s a bipartisan push to eliminate or cap rewards programs to bring down the transaction costs. Reward programs take a portion of those costs and kick them over to the users in the form of airline miles, or credit toward services, goods, or their next monthly payment on their card. The remainder of those fees, cover the general overhead of processing the transaction and fraud protection.

The transaction costs are built into the price consumers pay already, but proprietors never bothered to itemize it when people opted to use a card. So whether you pay cash or card, you pay the same price. Some proprietors will give the option of a lower cash price, and others won’t accept a card unless a certain purchase threshold is met.

The purported purpose of this bill, The Credit Card Competition Act, is to “mitigate inflation” by putting the Federal Reserve in charge of credit card reward programs, whereby they would decide where to cap those fees. Those fees are around 1%-3% on each transaction.

Much like grocery stores and gas stations, they are making their money on sheer volume. So the consumer isn’t going to see a load of savings, even if those savings were passed down (which isn’t likely). The price of goods aren’t going down that fraction of a percent. You will pay the same for goods and services and the businesses will see that relief. Essentially rather than giving the credit card user the kickback, it would give the businesses that kickback.

Let’s take the groceries and the gas station prices mentioned before. $40/week in gas, another $250/week in groceries, that’s $290. That’s $7.25 per week in fees. If the fees were so bad, why not just offer a lower price for cash and call it a day?

The thing is, those fees come to just over $30 per month, and a portion of that gets kicked back to you in rewards that you can accumulate. Points you could not otherwise buy for that same $30.

Reason Magazine reminds us of a not-so-distant case-study, and what happened as a result of the 2010 Dodd-Frank financial overhaul:

As part of that law, fees charged on debit card payments were capped. Within the first year, average fees fell from 44 cents to 24 cents per swipe. In response, banks largely did away with debit reward programs and other consumer benefits such as free checking accounts.

Ultimately, both consumers and merchants lost. A 2013 study by three economists at the University of Chicago found that merchants saved $7 billion annually from the elimination of fees, but those savings were not passed onto consumers. Instead, “consumers lost more on the bank side than they gained on the merchant side” and ended up losing more than $22 billion in potential benefits.

Ultimately, people moved away from debit cards in favor of credit cards. The same mastermind behind the debit card caps is spearheading the credit card caps: Senator Dick Durbin of Illinois.

The corporations are earning their money, and while people can get made at what they amass over the course of a year as a whole number, they actually provide a service people voluntarily choose. People choose the freedom of a car. People choose the lower prices at Walmart. People choose credit cards over cash or debit. The government makes much more and does much less to serve the same consumers, despite their take.

I once saw it put: people are being distracted with how billionaires are managing their money, to obscure how a trillionaire (i.e. the government) is mismanaging their (i.e. the taxpayers’) money.