Savvy online shoppers in the U.S. are very familiar with cashback portals, which let them earn a little money back on top of all their shopping. But many people wonder: why do different stores offer different cashback rates on these portals? And if cashback sites are always paying us, how do they make money themselves? Today, let’s talk about exactly how cashback portals make money.

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How Cashback Portals Work

In our “Introduction to Cashback Portals,” we explained how to use cashback sites and compared the pros and cons of different ones. If you do not really know what a cashback portal is, you may want to read that article first as a warm-up. Before getting into the mechanics, let’s quickly review how we use a cashback portal. In general, the process looks like this:

  • Go to the cashback portal
  • Click a merchant link from the portal
  • Shop through the merchant page that opens
  • The cashback portal tracks your purchase information
  • The cashback portal pays you cashback for that purchase

Those are the steps you take. But what are the merchant and the cashback portal doing behind the scenes? Let’s use Ebates.com as an example. In reality, most cashback portals work in basically the same way.

The portal on the cashback site side (merchant links)

When you enter a cashback portal and log into your account, it is almost like entering your own personal homepage. Why? First, you can see all of your account information there. More importantly, all of the merchant links shown on your page are unique to you. Let’s look at an example below:

  • Open the Ebates homepage, and you can see the cashback offers it lists for these merchants
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  • Right-click and copy the webpage addresses for these merchants, and you will notice that they are not the official store URLs. Instead, they look like this:
https://www.ebates.com/sephora_4548-xfas?navigation_id=22352&sourceName=Web-Desktop

https://www.ebates.com/amazon.htm?navigation_id=22352

As you can see, there is a navigation_id in the link. This ID is likely tied to your Ebates account, and of course the merchant name is also embedded in the URL. These links are essentially your gateway through the cashback portal. When you click one, the portal records which merchant you entered and when you entered it. For example, after I clicked several merchants on Ebates, Ebates logged each of those clicks:

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The portal on the merchant side

After clicking the merchant Amazon from the cashback portal, you will notice that the URL in the address bar is usually different from the store’s normal homepage URL. For example, when I went to Amazon, the link looked like this:

https://www.amazon.com/?ie=UTF8&ref_=gno_logo&_encoding=UTF8&tag=ebates08-20&linkCode=ur2&camp=1789&creative=390957&ascsubtag=ebs770775025sbe

Clearly, we were redirected to Amazon through this link, and Amazon also knows “through this link” (via cookies) that we came from the Ebates cashback portal. So whatever we buy next, and whatever the total purchase amount is, Amazon records it and attributes it to a specific Ebates user—in this case, me.

Why it is called a portal

There is a good reason cashback sites are called portals. The links on the cashback site are like the entrance on the portal’s side. Once you walk in, you go through a long hallway—the cashback site’s server records the information and passes you a unique merchant URL—and it leads you to the merchant’s door. At the same time, the cashback portal tells the merchant, “I brought this customer here, so don’t give someone else credit for it.” In other words, the cashback portal is acting as a middleman, sending customers to merchants and earning a referral commission in return.

The agreement between cashback portals and merchants

Now that we understand how cashback portals work, let’s look at how they generate revenue. When we click through a cashback portal and make a purchase with a merchant, the merchant naturally pays the portal a referral fee. In general, the cashback portal takes part of that referral fee and gives some of it back to users as cashback. Whatever remains, of course, becomes revenue for the cashback portal.

Why does each merchant offer a different cashback rate?

Anyone who has used cashback portals knows that every merchant offers a different cashback rate. Magazine subscriptions often have especially high cashback, beauty products can also be generous, electronics usually offer less, and stores like Amazon and eBay tend to offer even less. The most direct reason is that those merchants pay lower referral fees to cashback portals for sending them traffic.

If we think one level deeper, I believe the main reason is that different merchants have different profit margins. Take magazine subscriptions, for example. No matter how many subscribers a magazine has, each issue still has to be printed anyway. So every additional subscriber adds very little cost for the publisher. That means the profit from selling more subscriptions is relatively high. As a result, magazine publishers can pay more to cashback portals, which in turn can pass more of that money back to users and attract more subscribers. The same idea applies to beauty products: there is often more markup built into the price, so profit margins are generally higher than they are for electronics.

Here, “electronics” refers to retailers like Best Buy. Their profit margins are certainly lower than those of manufacturers such as HP or Dell. So cashback rates for Best Buy on most cashback sites are usually fairly low, generally within 5%. Then look at e-commerce companies like Amazon and eBay. On most cashback portals, Amazon only offers cashback on a few specific categories—basically the higher-margin ones—while the rest do not qualify. eBay usually offers only 1%-2% cashback, and it also excludes certain categories that could be abused, such as eBay gift cards and coins. Amazon’s first priority is maintaining its price advantage, so naturally it does not have much margin left to share with cashback portals. And eBay is mainly just a platform that collects seller fees, so it also does not have much money to give cashback portals.

Why are merchants willing to pay referral fees to cashback portals?

I have to admit this used to confuse me too. There are so many cashback portals on the market—why are merchants willing to pay them referral fees? Even without cashback portals, wouldn’t people still shop online anyway?

First, I think cashback portals may simply be a relatively cheap form of advertising. Once you register for a cashback portal, you start receiving promotions all the time—this store is having a sale, that store is offering double cashback, and so on. That shows cashback portals are not just static websites. They also use your data and preferences to tailor certain promotions and encourage you to spend more. For example, after I bought a certain handbag through TopCashback, the cashback portal kept sending me promotions from that same merchant. Advertising through cashback portals may help merchants gain some additional potential customers. For example, I originally planned to buy a beauty product from Nordstrom, but later noticed that Sephora was offering higher cashback, so with the same price, I chose Sephora instead.

Another possibility is that a good cashback site probably does more than just send users ads. Since everyone has their own account with a cashback portal, every time we click through to different merchants from our account and buy different things, the portal ends up holding all of that data. In general, individual merchants cannot access this data themselves; after all, they cannot install tracking software on your computer to see which pages you clicked. So this user data likely has some value.

For example, if a user frequently buys a certain beauty product from Nordstrom through a cashback portal, and Sephora wants to win over that customer segment, it might offer discounts or something like double cashback. Of course, that is just my own speculation. It is also possible that cashback sites simply sell this data to marketing companies and earn an “information fee.”

How do cashback sites make money?

No matter what, cashback sites are not losing money. Our clicks and purchases bring them referral commissions from merchants. Our shopping data can also potentially be sold for additional revenue. And once a cashback portal has built up a large registered user base, there are many things it can do. For example, it can make money from ads, get projects from survey companies, and offer paid questionnaires to users. Taking it a step further, if you are a start up, a growing user base may help you raise more money from venture capital firms and keep expanding.

Giving Assistant’s marketing strategy

The reason I suddenly wanted to write this article actually comes from this newer cashback site, Giving Assistant. As I said in "Introduction to the Giving Assistant Cashback Site," the biggest selling point of this site was, first and foremost, 5% cashback at Amazon.

However, many users received an email saying that this cashback site would end Amazon’s 5% cashback on November 1. My bold guess is that Amazon was not paying Giving Assistant more than 5% in referral commission, and that this 5% offer was really Giving Assistant’s best way to attract users. Earlier, we discussed why Amazon has very limited cashback categories on other cashback sites. My guess is that Giving Assistant was probably getting referral commissions similar to those of other cashback portals, but it passed all of that commission back to users and even subsidized part of it out of pocket to reach 5%.

The goal was very clear: attract cashback users. Many people who wanted 5% cashback at Amazon signed up for this site. Although some users would abandon the site once the 5% Amazon cashback was canceled, some would inevitably stick around out of habit and continue using it.

Of course, besides Amazon 5%, another major selling point of this cashback site was its payout system. The earliest payout version was one debit card payment per day, regardless of amount. Now it has become one debit card payment per day only if the amount is at least $5. And, rather strangely, debit card payouts have recently been delayed, and the site says it is working on fixing the issue.

I think the idea of paying out once every day was unrealistic from the start, for the following reasons:

  • The bank likely charges some kind of fee when sending payments to users
  • Merchants do not pay the referral commission to the cashback site immediately

Sending money to users is definitely not free for the bank; at minimum there has to be some processing cost, and the cashback site would have to absorb it. That is why quarterly payouts or payouts only after you reach a certain threshold are the best ways for cashback sites to reduce this cost. This is also why most cashback portals do not pay out daily with no minimum amount.

More importantly, merchants cannot possibly pay cashback sites at any time on demand. Merchants are not going to reconcile commissions with you every single day. Also, some purchases may later be returned, so merchants typically wait until some time after the purchase, once they are sure everything is final, before sending the money to the cashback site. Only after that does the cashback site pay us. Giving Assistant’s one-payment-per-day model was probably using its own cash reserves to pay users in advance.

In any case, they achieved their goal. They probably have quite a few registered users now, more bargaining power, and it may already be time for them to bring in another round of venture capital.

A famous case

In the history of cashback sites, there was one famous case that I call the “Nordstrom cashback fraud” case. Roughly speaking, two brothers discovered that every time they placed an order on Nordstrom’s website, the order would be automatically canceled, but the cashback site they used would still calculate cashback based on the order amount. So this something-for-nothing scheme kept growing larger and larger. Using Fatwallet, a cashback site, they collected a total of $650,000 in cashback from Nordstrom.

In reality, Nordstrom never actually sold them anything, so of course it could not have earned any profit from those transactions. Eventually the scheme was exposed, and they were caught, prosecuted, and sentenced. If you are interested, you can read the FBI document here: case link.

So yes, bugs between cashback sites and merchants definitely do exist. If you return something and still receive cashback, getting away with it a few times may not be a problem. But if you are deliberately trying to game the system for cashback, you should be careful.

Cashback site series