Or at least so says the Boston Fed (by way of Consumerist).
Here’s the abstract from a recent Fed paper:
Merchant fees and reward programs generate an implicit monetary transfer to credit card
users from non-card (or “cash”) users because merchants generally do not set differential
prices for card users to recoup the costs of fees and rewards. On average, each cash-using household pays $151 to card-using households and each card-using household receives $1,482 from cash users every year. Because credit card spending and rewards are positively correlated with household income, the payment instrument transfer also induces a regressive transfer from low-income to high-income households in general. On average, and after accounting for rewards paid to households by banks, the lowest-income household ($20,000 or less annually) pays $23 and the highest-income household ($150,000 or more annually) receives $756 every year. We build and calibrate a model of consumer payment choice to compute the effects of merchant fees and card rewards on consumer welfare. Reducing merchant fees and card rewards would likely increase consumer welfare.
In other words, merchants raise prices to cover the transaction costs of using credit cards. Credit cards with rewards such as my Chase Freedom (my card, that was not a paid endorsement) have higher transaction fees than other cards. People that pay with cash, essentially pay the same fee I pay using my card, but their “fee” subsidizes mine. That fee is collected by the bank which gives it back to the credit card user in the form of rewards (cash for me). Since poor people use cash more often, the scheme essentially moves money from the poor to the rich. Specifically, to the tune of a loss of $23 for the poorest and a gain of $756 for the richest, each year.
Am I surprised? No. Do I have a problem with this? No. It’s a one off example of how the free market favors those that take advantage of a situation. When I signed up for my credit card, it wasn’t because I knew where the cash back would come from, it’s because I knew someone was going to cover that cost one way or another and decided to take advantage as long as I could. A few years later and I can still take advantage. Someday these cards will be regulated away or canceled, but until then, I’m going to use it.
But to the point of the poor. First, you can be poor and still get a rewards credit card so long as your credit is in order. Second, cash has it’s own expenses too. You have to pay someone to take it to the bank and deposit it, and count it, and do that in a secure way. I don’t have time to read the whole paper but if they accounted for this it would have probably been mentioned in the abstract. Either way, since there is now a new consumer protection agency that will report to The Fed, I can only imagine we’ll see more studies, and regulation around this area. And if I lose my nice cash back, oh well. It’s good while it lasts.
Photo: Fox O’Rian
 By The Weakonomist |
The Weakonomist is the founder of Weakonomics. Clicking the picture of the puppy will tell you more about him. If you like what you're reading consider subscribing to the blog, following him on Twitter, and checking out the related posts below. Please consider a donation if you really enjoy Weakonomics. Also keep in mind that nothing I say can be construed as financial advice. |
