Payments Watch

Here is a neat story: the City of Vaughn (just north of Toronto) has introduced the MuniCard Mastercard, a municipal credit card that allows residents to apply rewards to their municipal tax. I believe this is a first for North America, and when you think about it, is a logical next step in the evolving story of reward and affinity cards.

According to the press release:

The innovative card heralds a new era in consumer loyalty credit card programs, where residential property owners can translate their existing spending into savings on their municipal property tax bill.

Source: City of Vaughn

It works like your typical loyalty credit card: rewards are earned on purchases anywhere in the world MasterCard cards are accepted. Here is how it is different: the rewards are translated into cash and deposited once a year into the card holder’s residential property tax account. The reward points never go unused because they are deposited in the property owner’s municipal tax account.

This makes so much sense: With retailers co-branding consumer loyalty and reward credit cards, why not municipal governments? Consumer loyalty cards work roughly as follows: when you pay by credit card at a store, the merchant pays an “interchange” fee which is usually around 3-5% of the purchase price. This is the cost to the merchant of accepting this form of payment and is borne by the merchant. The card issuer (usually a bank) gets most of the interchange. These issuers then pay for the affinity/loyalty dollars (typically about 1%) out of this revenue. In essence, the issuer hopes to get more customers (i.e. cardholders) by paying out a part of the interchange to their partner who will redeem the rewards points. What I understand is that often the issuers will try to have the best of both worlds - they will pay out the 1% loyalty, but at the same time charge the merchants a higher interchange when they accept a loyalty based card vs. a vanilla card. Under the credit card network rules, the merchant cannot decline, nor charge a different price based on the type of card presented if they accept credit cards. Suffice it to say, some merchants are not thrilled about this at all. Larger merchants simply join the game by co-branding their own Visa/MasterCard credit cards or better yet become issuers themselves (e.g. Canadian Tire MasterCard is issued by the Canadian Tire Bank - they have about 4 million cardholders!).

What is interesting about the MuniCard is that the program is also designed to provide some value to the merchants via a merchant discount program. While residents benefit from point-of-sale discounts offered by local merchants enrolled in the MuniCard program, these local businesses benefit by attracting customers through the point-of- sale discounts and marketing support from the card issuer. The City of Vaughan benefits from increased business activity in the community.

What’s next, the IRS Card where your rewards are applied to one’s income taxes? If only the federal government owned a bank that could issue the cards…

Lastly, you could think about this at an even deeper economic level - property taxes are, in a sense, being paid via a consumption tax.