1. You're missing the very important detail that there are multiple combined fees, and you are trying to compare a rebate for one of those fees to the combined fees.
2. Commodity markets literally are an oversimplification.
> You're missing the very important detail that there are multiple combined fees, and you are trying to compare a rebate for one of those fees to the combined fees.
The combined fees are the cost of accepting credit card payments. The entire collection of them is avoided by accepting cash.
> Commodity markets literally are an oversimplification.
Only in the sense that everything is an oversimplification.
If OPEC cuts oil production, the price of gas goes up all over, because it's a commodity and the gas stations can't just eat the price increase. If the DRAM companies were colluding to constrain production and they get caught and have to stop, the price of DRAM goes down all over, because it's a commodity and buyers will take the lowest price. But if the price of DRAM goes down, that doesn't mean the price of iPhones go down, because iPhones are not a commodity -- only Apple makes them -- and then they don't necessarily have to lower their prices just because their costs went down.
Real competitive markets can actually behave like idealized commodity markets, or as close as makes no difference under reasonable sets of assumptions.
> You are conflating unassociated fees
If they're unassociated then how does a small business pay only the interchange fee and not the rest of them? If the answer is that you can't, they're not unassociated.
> Real competitive markets can actually behave like idealized commodity markets,
Sure sometimes, but transaction processing markets are not that simple. They are 2 sided markets, i.e. both the merchant and the merchant's customer are customers of the credit card company, who charges the merchant and the merchant customer varying fees based on how valuable the customer is to them. Then you have a merchant services layer on top of that. Then you have the variety of markets and goods that use all these services, all of whom may have different terms and fee structures with the credit card company and/or merchant services company. Merchants will pass on or absorb fees based on many factors, and possibly even varied within its goods and services. It's really complicated, and commodity markets are a gross oversimplification of how it works. Trying to model it would be a nightmare.
> If they're unassociated then how does a small business pay only the interchange fee and not the rest of them?
If interchange fees were 0 then you would still pay the other fees, which do not go to the credit card company. The fees are related, but not associated.
> It's really complicated, and commodity markets are a gross oversimplification of how it works. Trying to model it would be a nightmare.
But now your argument is "it's complicated and there's no way to know" which isn't a strong claim that the status quo is to the advantage of the customer.
Meanwhile the portion of the fee that doesn't go directly to the cardholder is a deadweight economic loss, which, in general, is only to the advantage of the parasite extracting it and to the disadvantage of everyone else.
Notice also that the most likely alternative to "it actually harms even the 2% cash back customer" is "it's barely better than breakeven to even the 2% cash back customer and harms everybody else." Which is hardly a reason to keep it.
> If interchange fees were 0 then you would still pay the other fees, which do not go to the credit card company.
Ah, but that's the issue. You wouldn't. Because the rewards programs are a monopolistic practice.
Suppose I want to start a competing payments network and my sales pitch is I charge low fees. I'm only charging 0.05%, and provide free code that does the basic thing Stripe does, and keep the costs down by using anti-fraud tech the existing networks don't care to invest in because they're shifting the cost of fraud to the merchants and payment processors. The merchants are immediately on board if I can get cardholders. But the cardholders won't use it because no rewards programs.
Take away the rewards programs and now the network with the lowest processing costs will be the most widely accepted, and then customers want those cards because they're more widely accepted and otherwise indistinguishable.
2. Commodity markets literally are an oversimplification.
3. You are conflating unassociated fees! See 1.