Is Your Digital Wallet Stiffing You On Credit Card Rewards?

In mid-April credit card holders of major banks like Chase, Discover, American Express and Barclay started receiving newsletters and notifications warning them they may not earn their rewards.
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In mid-April credit card holders of major banks like Chase, Discover, American Express and Barclay started receiving newsletters and notifications warning them they may not earn their rewards. Though worded slightly differently, the notices state: "some purchases made through mobile carriers, online or digital wallets, 3rd party accounts or similar technology, will not qualify in a rewards category if the technology is not set up to process the purchase in that rewards category."

Since is dedicated to providing resources and timely information to consumers for the betterment of their financial health, we started to do some digging on this subject and this is what we found...

What is a Digital Wallet

As described by, a digital wallet can have many meanings and is often used as a blanket descriptor for many technologies that let you perform certain tasks, such as making purchases and storing your credit cards so you don't have to carry many of them at a time. It's usually seen as some form of app on your smartphone, tablet or desktop. The most popular digital wallets used in the U.S. are Apple Pay, Google Wallet, and PayPal App. Even the Starbucks app is considered a digital wallet. A CompareCards poll of 110 voters found that 13% of respondents use Apple Pay, 17% use Google Wallet, and 6% use LoopPay. The majority -64% -said they will stick with traditional credit cards.

Once the consumer has added their Apple Pay capable credit cards to the app and completed other various steps, they can start making purchases with this new technology. Digital wallets work with encryption software that masks your personal credit card information and provides convenience to the consumer for faster check-outs and less clutter in their wallet. Some can also store tickets to concerts or events, bus passes, debit cards, gift cards, and more.

Understanding Merchant Codes

We first assumed the issue had something to do with merchant codes not being applied to purchases correctly. Merchant category codes (MCC) are a four-digit number assigned to a business by credit card companies in order to classify the business by the types of goods or services they provide. This was originally created for tax purposes, but is now used by rewards programs to determine how many rewards can be earned with specific purchases. If you look into the terms and conditions of your rewards credit card, you should be able to find some language about how rewards are earned, which merchants you can earn rewards from, as well as how you can look up merchant codes. In fact, here's an article on how consumers can maximize their bonuses using MCC's.

What's Causing the Problem

The root of the problem has to do with the payment vehicle being used itself, such as your debit, credit, or prepaid card. Although Apple Pay has received some negative attention when one payment expert said Apple Pay had a 6% fraud rate (which Apple claims has to do with the banks, and not their digital wallet itself), consumers who use rewards cards won't have to worry about missing out on their rewards when using Apple Pay.

Apple Pay works by using tokenization for authorization. The token is routed through the same process that has been in place for years, making the transaction look very similar to any other transaction because virtually everything remains the same. Other digital wallets, like Google Wallet 2.0 for example, are using their own stored credit card on the back-end that consumers don't see or even know about. So when a purchase is made using these third-party payment services, the charge is actually coming from "Google," not the consumer with the card associated with their bonus rewards program. Once the transaction is made, the card originally used for the transaction is then reimbursed by the chosen card loaded onto the app by the consumer. Digital Wallets working in this way may be due to bank systems or processors not being programmed correctly, or it may be a matter of a right to ownership of transactional data (hard to say for sure in this complex ecosystem).

Why Should You Care?

This will not be of concern to consumers who are not using -or plan to use- digital wallets. But what about the techies and Millennials who perform most of their daily tasks digitally? Consider the following:

If consumers stop earning their rewards by swiping their favorite rewards credit card, that card no longer benefits the consumer. This is especially true because some rewards cards come with an annual fee or even higher interest rates since the main benefit of the card is on the rewards. By using certain digital wallets, consumers are essentially trading rewards for convenience.

What Can Consumers Do

Since Apple Pay uses tokenization, and we now know that consumers are earning all of their rewards with that specific digital wallet, one would think that consumers should just stick with a digital wallet that utilizes that technology. Not so fast... tokenization can be used in about a dozen different ways. It's actually up to the banks to have proper mapping in place to ensure the tokens are linked to the right card numbers. Furthermore, there could be other technology out there that digital wallets are using that are flawed (we did not perform research on this subject).

We suggest consumers monitor their credit card statements and double check their rewards earnings. If you notice that you haven't received rewards with a specific purchase, a Discover rep suggests calling the number on the back of your card to speak with a representative to get it corrected. They can easily look at your transactions and make adjustments.

The Bigger Picture

With more than 300 digital wallets available across the globe, early adopters of digital wallets need to seriously consider the following:

  • Where is their personal information being stored? Security, overall, is something consumers need to seriously consider.
  • Is the digital wallet or app using their real credit card, or using a card that's in the background?
  • If payments are being made with a temporary card in the background, what other issues are associated with digital wallet use?
  • Who should consumers call if they have an issue or a question about the product? How do they reach LoopPay or Google Wallet, for example?

Unless you've been living under a rock, it's obvious that credit card fraud is a major issue in the U.S. Behind security and rewards, the next biggest concern is on other issues that may be associated with digital wallet use. Almost all credit cards that require good-to-excellent credit come with added benefits and features. This includes things like lost luggage reimbursement, auto rental insurance, extended warranty, emergency travel assistance, travel insurance, and more. However, in order for the consumer to benefit from those features they must make their purchases using that specific credit card.

For example, all Visa Signature credit cards come with a number of benefits including Auto Rental Collision Damage Waiver. If you pay for the car rental using a digital wallet that shows up as Google Prepaid MasterCard for the transaction instead of your Chase Freedom card, are you still protected if you are in an accident? What systems are in place to validate which credit card was actually being used? How can the consumer be sure they are receiving all of their benefits? Looks like we have some more research to do...

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