Cash Back

Cash back (also known as cashback) — a method of rewarding cardholders, which allows them to gain a certain sum of cash from each purchase under certain conditions. Those conditions typically are the use of a certain credit card (or a debit one since nowadays, debit cards allow cashback programs as well), a number of purchases above the given minimum, and, optionally, buying items of certain categories.

There are several ways a cardholder can receive money through cashback — it might be provided directly to a credit card statement reducing the outstanding balance, or in a form of check via mail, or as a bank account deposit.

Main principles

The key feature of a cashback is reflected in its name - it gives a cardholder a possibility to return some cash spent on the purchases, which distinguish it from other ways of rewarding the cardholder like bonus points or gift cards.

An amount of cashback differs depending on the credit card issuer, but typically it lies between 1% and 5% on each purchase. Not all purchases might qualify as acceptable for cashback, and it’s important to check out which of them qualifies before signing up for a cash back program. There are usually some spending requirements, which means that a cardholder has to spend a certain sum of money to have cashback rewards. So, the important things a cardholder should consider when using a cashback program are a percentage of cashback for a transaction, a type of purchases cashback is allowed for and a spending threshold it’s required to cross.

Cashback rewards are usually accumulated and after reaching a certain amount they are transferred to a cardholder in a chosen way —  through a bank account deposit, as a check, or to the credit card in a form of reducing the debt.

History of cashback

The first cashback program appeared in 1986 with the launching of Discover credit card. That was a logical result of improving and changing previously existing reward programs aimed to stimulate cardholders to use their cards more often and spend more each time. Later, credit card issuers raised the percentage of cashback to attract even more consumers, and since then cashback has become a world trend, with almost every major credit card company offering at least one cashback program to their clients.

Cashback from merchants’ point of view

Cashback programs quickly became popular among cardholders, but from merchants’ point of view the benefits weren’t particularly clear in the beginning, though gradually more and more companies started to get into cashback programs as merchants. So, how exactly does it work for a merchant? When a purchase is paid by credit card, a commission to a bank or a service provider is usually taken from a merchant for a transaction. Credit card companies and the merchants make deals to provide cashback programs, in which a part of this commission is shared with a cardholder, which stimulates a consumer to use this certain credit card and buy this certain merchant’s goods.

Types of cashback 

As there is a large variety of cashback programs, that would be convenient to divide them into groups to study the main differences.

Main types of cashback programs are:

• Flat-rate cashback, in which the percentage of cashback is the same for all kinds of purchases.
• Tiered cashback, in which the percentage of cashback is higher for certain group of purchases (for example, you get 3% cashback on gas and 1% cashback on groceries).
• Bonus categories cash back, which is similar to a tiered cash-back in a way that there is a constant percentage of cashback for the most part of purchases though for one group you get a larger cashback, and that group changes regularly.

There is also another way to classify cashback programs:

• Credit card cashback with all the standard features discussed above.
• Debit card cashback, which is similar to a credit card one, but the rewards are made directly from the bank to the cardholder.
• Website cashback, which is also similar to the credit card cashback programs, because it is also based on a deal between merchants and service providers. The most popular websites and apps with cashback programs are Rakuten, Ibotta, Sharekick and some others.

Pros and Cons of cashback

Cashback often seems to be an attractive perspective for a cardholder, not just because it offers to give back some money, but also because many credit card companies and merchants provide bonuses for signing up and discounts for those who use cashback programs. At the same time, there are also some disadvantages people might dismiss.

Firstly, annual percentage rate of a credit card with a cashback program might be significantly higher than usual.

Secondly, many credit card cashback programs have limits on how much you can get through cashback.

Other disadvantages also exist, for example, high foreign transaction fees, lack of the travel rewards, and impossibility to get cashback in case the card is canceled.