Springfield, IL is known for being the land of Lincoln, the birthplace of corn dogs on a stick, the state capitol and the launch point of the Donner Partys journey into cannibalism. But lately its been in the news for something else. City officials have devised a new way to create revenue this fiscal year by milking a credit card cash-back rewards program. Is it actually a good strategy or is it just another chance for credit card companies to profit? Might your city follow suit?
Springfields strategy is interesting. The city has partnered with PNC to issue the banks Visa Procard to 120 employees who use a credit card for work. Springfield will then collect the card’s cash-back rewards to generate revenue without raising taxes. On the surface, this seems like a pretty clever plan. If city employees would be using credit cards anyway, why not profit from it? But of course, when it comes to credit cards or politicians, theres always a catch.
The bank has entitled the city to .005% cash back on its purchases this year. That’s a rather low rate. It’s much lower than the typical rates private cards offer. According to Springfields budget director Bill McCarty, the city will put around $1.4 million on plastic this year and will earn back $7,000.
Seven stacks isnt exactly a ton of money, although its certainly better than none. But naturally, the bank is willing to sweeten the deal if the town is willing to spend more money. If Springfield ups its purchases to $2 million, the reward rate increases drastically to 0.95% which would bring $20,000 back to the city. So basically, in order to make a significant amount of money, Springfield will have to significantly increase its spending. Seems as though officials have fallen for the same scheme consumers often do.
What happens if other cities follow suit and implement a similar plan? If merchants want to keep doing business with these cities, theyre obviously going to have to accept more credit card payments, as the cities will want to earn their rewards. And remember that credit card companies charge businesses a fee for each credit card transaction, a percentage of the total bill. Does this mean that merchants, in time, will raise their prices to cover the cost of these fees? Or maybe tack an extra fee to the end of a municipal bill, thus negating at least part of the cash-back savings? If merchants do the former, then regular consumers may end up paying more for everyday items like paper products or driveway salt. If the latter, it’s not clear what these cash-back cities are actually getting in return for their efforts.
Whether or not this scheme is an effective way to generate a bit of extra revenue, it seems possible that other municipalities might jump on the bandwagon. Its a temporary way to keep from raising taxes overtly. On top of that, these days were going paperless in just about every way, from our tax returns to our cable company refunds. Can you even remember the last time you received a check that wasnt enclosed in a birthday card from your grandmother? It seems that plastic is inevitable, cash back or not.
What do you think about Springfields idea? Is there a way to make this type of plan work out in favor of consumers and small businesses? Let us know in the comment section.