Cash-back shopping savings, but at what price?

Rachel del Valle May 24, 2019

Krystal Nelson, an administrative assistant from Gainesville, Florida, says she rarely visits stores anymore. For her, it’s easier to compare prices, save time, and avoid distractions by shopping online.

Nelson is a regular user of cash-back shopping services. Rather than letting a good deal sway her purchase, she starts by deciding what to buy, then researches which service has the highest rate of cashback for the store she’s planning to buy from. She has accounts with three different cashback sites.

“If it’s a product that’s consistently priced,” said Nelson, “like a manufacturer’s set a price, then I’ll go and look to see which retailer has the best cashback on which site. But usually only for a larger purchase.”

At their best, these cash-back services help consumers save on purchases they would have made anyway. But, say experts, at their worst, they can distort a consumer’s perception of money and turn shopping into a game that favors retailers in the long term.

The first major cashback rewards site, Ebates, launched in 1998. In 2014, Ebates was acquired by Rakuten, one of Japan’s largest e-commerce companies. The company is in the process of rebranding, but its business model — which has attracted more than 12 million members and more than 2,500 partner retailers — has remained the same.

Ebates provided credibility to a market that was initially met with too-good-to-be-true skepticism, and it set the model that many cashback websites follow.

Here’s how it works: a cash-back service links to retailers on its website, indicating the amount of cash members can earn on a purchase (usually somewhere between 1% and 10% of the cost price).

When a member buys something through this link, the cash-back service earns a commission (this is commonly referred to as affiliate marketing). A percentage of this commission is then shared with members via a service like PayPal, in the form of cashback.

Payments are made after a member hits a certain threshold, which can be anywhere from $5 to $25. Some services pay out on a fixed schedule every few months, while others pay as soon as a user earns the minimum.

The benefits

The cashback websites that emerged in the early days of e-commerce were pitched as a win-win-win for retailers, shoppers, and the middlemen who created them.

Say Nike sneakers are available at multiple stores for $90. For a customer like Nelson, the site offering the highest cashback will win her business.

Retailers who opt out of cashback websites altogether (say Nordstrom, or Zappos), may lose buyers. When retailers partner with a cashback site, they do it to attract and retain people like Nelson who know that there’s no need to pay full price.

Prasad Vana, assistant professor of business administration at the Tuck School of Business at Dartmouth, calls shoppers like these “price-sensitive.” Increasingly, this term can be used to describe a wide range of people at various income levels.

Vana says that comparison shopping among middle and upper classes is a relatively new phenomenon. The ease of using cash-back services through an apps or website makes them attractive to people who have never clipped a coupon.

Vana says that cashback gives consumers a simple way to “get a little something extra” out of every purchase.

By offering nominal savings, retailers can also get these shoppers to spend more — not just in their initial purchase, but also weeks, sometimes months later, when the cash is paid out.

Vana identified this double-spending effect in his paper, “Cashback is Cashforward: Delaying a Discount to Encourage Future Spending” co-authored with Anja Lambrecht and Marco Bertini and published last year in the Journal of Marketing Research. The authors analyzed 3.43 million transactions made between 2005 and 2013 at a major cashback company.

Let’s say you have a 10% cashback offer at Target, and you spend $100. A few months later, you get $10 back in your bank account. Vana’s research suggests that you’ll perceive that money differently from another kind of deposit, like a paycheck; that you’ll see the cashback as “free money,” and you’ll likely want to spend it — quickly. Vana’s analysis showed a bump in users’ online shopping activity the week after they received their earnings.

Unlike one-time promotions designed to move inventory or boost sales, Vana says that cash-back services are an “always-on mechanism.” They provide a constant stream of money that shoppers view as a gift to treat themselves.

Many platforms now offer browser extensions that notify users each time they visit a participating retailer’s website. Rakuten, the parent of Ebates, has an app which allows members to make purchases on mobile devices. The app also includes in-store cashback offers for select stores. To redeem, users need to link a credit card and manually add the offer to their account before paying with the card at the register.

Other mobile services include Ibotta, an app that allows users to add offers before shopping trips and redeem them by uploading an image of their receipt.

The trade-off

In the early days, concern around cash-back services was focused on the risk of fraud. In the past few years, name recognition among a handful of brands has helped build trust in the business model, even if its underlying structure has remained largely unexamined. Today, the question on most shopper’s minds isn’t, “Is it a scam?”, it’s more like, “Is it worth it?”

Cashback services collect a lot of data. This would be fine if it stayed within the company, says Jen King, director of consumer privacy at the Center for Internet and Society at Stanford Law School, but she suspects that isn’t the case.

Though major companies like Rakuten do not sell information to third parties, they do share it. And while the data these companies trade is anonymized, identifying users isn’t difficult, especially if you share your location with an app or website.

King says that for cashback users who would like to retain a semblance of privacy, the safest option would be to use a separate browser only for shopping.

The common perception that our information is just “one little point in a giant database,” King says, is misleading. While many of us feel more secure hiding in the crowd of aggregate information, the vast scale of data collection actually makes the problem worse.

The more information companies are able to collect, the more valuable they become — there’s a reason so many cashback sites have referral programs.

On an individual level, connecting all of your purchases to a single platform could make you more vulnerable to price discrimination. On a broader level, King compares the issue of privacy protection with the concept of recycling. In both cases, individual, seemingly insignificant choices can contribute to a larger problem — or solution.

“Privacy is not a just an individual thing, it’s a collective thing,” King said. “If we all keep continuing to let companies do this, one day we’ll all turn around and not have any.”

With more and more people shopping online globally each year, it seems unlikely that cash-back services will disappear anytime soon. In the past few years, other cashback platforms have emerged, like Giving Assistant, a Certified B Corp that gives members the option to donate earnings to nonprofits of their choosing, and Jewel, a service focused on luxury and direct to consumer brands that rarely offer discounts on their own websites.

Despite the issues cash-back services raise about information privacy and consumer psychology, it’s hard to convince someone not to use services that save them money. After all, large companies use our information all the time for their own gain. With cash-back services, people feel they can get paid for it.

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