kyte

http://www.flyertalk.com/forum/manuf...who-loses.html

zenride

It's well known here that CVS has increased the limit from $1k/day to $5k/day, although not all stores allow it.

xoxx

Edit nvm

Lemma

I've been told by the manager of a CVS that they don't make any money on these cards (he didn't say they lose money, either) but that they offer them to get people into the store so that they buy other things that the store does make money on.

My guess is the prepaid card companies are the ones that are losing, which is why we see so many reports of shutdowns by them on this forum. But undoubtedly the exact terms that Incomm etc. have with CVS and other retailers are confidential and we will never know exactly who is losing and how much they are losing, though of course someone must be to pay for our CC rewards. They probably gain in aggregate because the average person who buys gift cards does not behave the way we do. I was in line behind someone who loaded the minimum amount on a variable load Visa GC and paid with debit, who told the cashier it was a birthday gift for her friend, recently and I silently thanked her for making the system work for the rest of us. Our arbitrage is possible because she did not just give her friend a $20 bill instead of paying $4.95 for a Visa GC and allowing someone to make money on float, breakage, and swipe fees when that card is used.

Agamemnon

Thank you "kyte" for the thread link. I apologize to fellow flyers for missing a recent and relevant thread. Thank you "Lemma" for your response. I have read several of your posts over the last few days and weeks as I perused older threads. Very insightful.

craz

Keep in mind CV or Incomm arent the ones issuing any pts or miles or CBs. Most folks Im positive dont buy a GC and then run to umload it, it probably sits with the $$ loaded for awhile and gets unloaded little by little thusly Incomm gets anice float and earns its fees.

When a person isnt a good customer(one where Incomm is making any $$) they get shut down, no different then Chase or Citi closing up those accts of those it felt ran amok and werent in their best interests of keeping as customers

Who is making and who is losing unless a person knows the agreemnets and contracts between all the parties, I dont think we will ever know

But I like the poster above who said the loasers are those not in the game from the customer side that is

Agamemnon

Follow-up: If you consider the actions of Office Depot/Staples and CVS, they are in complete contradiction. OD reduced the max. denomination of VC reloads to $200 per card (prob. at the urging of Chase, because of excessive use of Ink bonus category rewards, but also because they should have been bearing the IC fees). CVS maintains max. at $500, and is increasing daily limit to $5000 (per zenride's linked thread). If the merchant bears the IC fee, which it should under the electronic interchange system, than OD's actions make perfect sense. That would also mean that CVS is financially incompetent. CVS Caremark is an S&P component with a $78 Billion dollar market capitalization. Executive management didn't just fall off the back of the turnip truck. Also, most companies worth their salt not only vertically integrate, but they also "cross-categorize" their products on their internal systems, esp. their financial products. Chase knows exactly the average revenue/profit per user on its Chase Ink (classic) vs. Chase Inc. Bold, vs. Chase Freedom, etc. Similarly, I would think that the purveyors of Visa Vanilla et al. would know exactly average revenue/profit per $25 reload, vs. $100 reload, vs. $500 reload. Haven't they deduced that the $500 product category is causing them a financial hemorrhage. Lemma may be on to something. There is no way CVS is going to multiply its interchange fee liability five-fold with a $5000 daily limit. Their increase in limit shows they are aware of the high demand for higher-denomination VR/GC. However, we are not even close to understanding how the fee-sharing works. If Lemma is right, then the MS game may be nearing an end. (At least regarding VR/GC.) I don't care how many end-users purchase the $25, $50 increments. The MS arbitrageurs are leveraging the interchange system so much that the $500 card products are causing someone substantial losses. Chances are it is hitting Green Dot and the like much harder than CVS, Safeway, and the merchants.

Lemma

CVS or Incomm may not be directly paying for our miles/points/CB, but someone is paying for it indirectly. Unless you are getting a category bonus or just spending enough to get a signup bonus, the bank is making more money on swipe fees than they are spending on your miles, so the cost of those swipe fees is being paid by someone. The chance the banks are cutting CVS a break on swipe fees for transactions that are much riskier than the average CC purchase are approximately zero. We just don't know the details of the deal between Incomm and CVS.

Whenever an arbitrage opportunity exists that someone can profit from, someone else must be losing. And since there are costs that aren't part of our profits, such as fraud, the cost of producing and shipping the plastic cards, paying the call center employees in India, etc., their losses are greater than our gains. The only reason such losses would be possible would be if the average purchaser of these products generates enough profit to make up for us. I don't find that too hard to believe based on my observations of the people who use these products for their intended purpose, but the question remains of why they don't alter their offerings to reduce their appeal to us while still appealing to their intended audience.

I have wondered about the difference between OD and CVS as well. My guess is that OD didn't have the same deal with Incomm that CVS does, so they were losing money on the $500 cards in a way that CVS isn't. Who knows why, maybe the people who shop at CVS are more profitable to Incomm than the people who shop at OD. I don't know that pressure from Chase necessarily played a factor - after all, it's still profitable to buy the $200 cards so Chase still has the same liability from their 5x offer now as before. It's only the MSers who are now paying more in fees. The 5x is a loss leader for Chase and the typical Ink customer probably spends most of their money on 1x purchases so they are willing to tolerate the occasional person who doesn't. Chase does have a limit on the 5x, though it's a large one, and it seems like capping category bonuses, either with a limited amount of time the offer is available, or a limited amount per quarter/year is the usual way of handling this problem (US Bank Cash+, Amex BCP, etc.) In fact, both the Amex BCP and US Bank Cash+ originally did not have limits on the category bonuses, and limits were then introduced after the banks involved realized they were losing too much money. My belief is that Chase knows they are losing money on a 5x deal but thinks it is bringing in customers who will be profitable for them in the long run.

As far as why Incomm (or whoever is losing money) doesn't stop offering the products that are causing them a loss, whether by cutting the variable load limit to something lower than $500 or something else, I have no idea but I would also love to know. Maybe they are looking at the variable loads as a whole rather than by breaking them down by amount loaded, or maybe enough people are buying $500 cards as legitimate gifts so they make money on float/breakage overall, but that doesn't ring true. I think the advent of gift cards being able to be used as debit with PIN really threw a wrench in the works for these companies. With the cards being only usable as credit, they were making a lot more money on the swipe fees and we didn't have the same ability to arbitrage them. But that change happened in April and it hasn't killed the $500 cards, and the $500 VR thing has been going on longer than that. In general, I can only speculate that such arbitrage opportunities could only exist if they were making enough money off the typical consumer to pay for their losses from us. It's clear some arbitrage opportunities die quickly when they become public, e.g. the HIGC being usable as debit with PIN. The Mint held out for awhile because the government could fund our mileage longer than a private corporation would, but even that got too much publicity eventually and died. But there must be something going on here that keeps this going, because the $500 VR/GC have been pretty robust to becoming extremely well publicized. I'd believe your prediction that this game must be nearing an end, if it weren't for the fact that you could have said the same thing with the same analysis a year ago (absent the GC with PIN).

prasha11

Who exactly are the loosers in the MS arbitrage game?

Who designed the Game? They cannot be losers
Who sets the rules of the Game? They cannot be losers
Who writes the account TOC? They cannot be losers
Who is the strongest Player of the game? They cannot be losers
Strong wins the game -- Weak lose the game
Who is the weakest Player in the game?
The final answer makes sense? Is it acceptable?
Not until they are pushed out of the game!
Those in denial are the losers?

thewire76

True this. If they were losing that much money, they'd pack up their marbles and go home. I'd love to know the math too, but as I'm not friends with any execs that will spill the beans, I don't think much about it anymore. Free advice: You know a secret "loophole" that the public doesn't know about or doesn't have the liquidity and CL to take advantage of. Spend less time thinking about the math and more time figuring out how to squeeze more money out of this game. The big corps certainly have teams of people sitting around trying to think of more ways to squeeze money out of the public.

thewire76

Also spoke with my friendly manager at CVS and got the same info that Lemma shared. He said they don't make any money on the VRs (but he didn't say they lose either). Since my manager is so nice and orders as many as I want, I asked what could I buy that would help you hit your goals. I saw a case of DDP nearby for 88 cents/2liter so I picked one up and he said "we lose money on that. Pretty much if you want to help my store, buy stuff in the pharmacy area". This explains why he did get a little pissed at me when I told him I had accidentally filled a script at a different location. Won't be doing that again.

More free advice: When CVS lifted the daily limit to $5K/day, I bought some shares of their stock since my broker said it was a "buy" and I thought I'd throw some good karma out into the world. It's up almost 10% since I bought a few weeks ago.

Agamemnon

Of course, by "loosers" I mean those who are out-of-pocket, not people who are simply missing a uniquely accessible arbitrage opportunity to pull money out of thin air (thereby emulating fractional-reserve banking which lends money into existence and pulls "interest" out of thin air with a debt-based currency system, namely, the $USD). Just making sure we are on the same page.

The lack of compartmentalized/denominated increments on some VR/GCs may play a role. In cards with a range of reload value, it may be that VR and its cohorts lack the ability to monitor ARPU for $50-denomiated card issuance vs. $253.50-denominated issuance. Perhaps $0-50 is one group, likely the most common, and $51-500 is another group. If such is the case, then MS arbitrage merely dilutes an aggregate revenue/profit pool, lowering potential profits but perhaps not issuing a red flag to any issuer. This may allow the game to continue longer. The more specific value denominations are used, the more likely there is product category monitoring, and the game could falter much sooner.

As Lemma's comments seem to suggest, the fee/loss structure may be very specific to issuer, distributor and merchant. This makes it more difficult for savvy arbitrageurs to stay ahead of the loop, and poses the potential for illiquidity and default while churning if there are abrupt changes. Fractional-reserve and interchange banking are the kings of the jungle, however, and full IC fees are most certainly being collected by the banks. Otherwise, MS would have been foreclosed upon many moons ago.

BQatWSU

I thought the same thing. See it all the time and even googled as to why people don't understand this seemingly simple difference. I especially see it in sports comments which always leaves me scratching my head

craz

In all these so called drug stores, they make out like bandits on anything that isnt on sale, especially with the HBA items. Stuff that CV wanted for $3.79 was $1.24 on sale at my local supermkt and their reg price is $1.79.

Sometimes their sale prices are lower then a supermkts but not always. WG is just as bad. They are priced like a 7-11 knwoing they are gonna get the impluse buyer who needs an item or 2 and convience of being there already wins out over price.Isnt that what Incomm is all about, they know they can get away with their fees since its target customer is the person w/o a bank acct who has no choice. a CC issuer doesnt want to be paid in full every month,its want us to pay the min and no more that way they can hit us for the 15-25% interest, and many folks actually do carry a bal every month

I say I dont know which place I hate walking into more Wallys or CV. CVs are sort of worn down with the same cheap grey carpeting.It reminds me of a wholesale outlet except its prices are anything but.The WGs and RAs Ive gone into are alot nicer but they too are a killer when it comes to prices. I find the same kind of shoper in both Wallys as in CVs at least in the NY/NJ/LA areas

tech2011

OP, why do you need to worry abt it.