Credit Cards: Unfair Subsidy to the Rich?

July 29th, 2010 by 

How about this title in the Wall Street Journal?  "Credit Cards Take From Poor, Give to the Rich" is the name, in reference to a Boston Federal Reserve Bank report on credit card reward programs.  The paper says just that: credit card rewards programs and merchant fees for credit card usage are increasing the overall cost of goods for check and cash customers.  So, are credit card rewards program an unfair subsidy to the rich?

Perverse System?

The summary of the report gives some nice scare numbers: cash paying customers are spending $151 a year to subsidize

Subsidy to the rich: should cash users pay less?

Should Cash Users Pay Less? (Lyza)

card-using customers, while card-using customers are getting a transfer of a whopping $1,482 from cash customers.  The report states that since credit card usage correlates nicely with household income, the credit card payment system unfairly rewards richer households at the expense of their poorer, cash-paying neighbors.  And all this right after Congress voted in the Credit CARD Act in 2009, which, as one of its perverse effects, decreased the availability of credit cards (in the case of adults under 21, it directly impacts their access to credit).

A Subsidy to the Rich, Enabled by Congress

Of course, the authors of the paper decide that it may require an act of Congress to fix the system which Congress had no small part in creating.  Note that credit cards create more incentive to spend, at some level helping the economy by creating more willing consumers.  Also note that many gas stations charge a different price to cash and credit card payers.

In fact I haven't seen a place which charged more for cash customers than credit customers.  Of course, the problem in this article is merchants which build credit card fees into everything they sell, thereby 'subsidizing' credit card users.

Is this entirely irrational? 

Credit cards, as stated earlier, are a simple way to purchase goods and services.  The represent a level of convenience - no need to carry cash (risk of theft, loss), liability limits in the case of theft (in many cases, none!), the take up a smaller volume than a wad of bills and coins, the cause consumers to spend more (as the article linked above states), and, yes, they have a higher income user.

But these are just the benefits to the consumer - the merchant can process more transactions in an equivalent time, and the kicker, doesn't have to leave cash on site when a credit card purchase is made.  Between theft, armored cars, bank trips, insurance, and in wall safes, cash isn't 'free' to process.  In fact, talking about this topic with merchants in the past, these costs seem to go a decent way to eating up that 2.5 - 3.0% margin built into credit card purchases.

Why Else is this Study Silly?

Glancing over the comments in the Journal summary, one can tell the reactions to the report come with a roll of the eyes.  As many commentators point out, there are lots of services which cost some customers at the detriment of others.  People who ask questions, people who only shop at sales, people who use the bathrooms, people who loiter, people who try out many things and buy elsewhere, people who stay after the front doors have been locked, and all sorts of other customer types impose a cost on a store which gets shifted to efficient shoppers who buy at a regular price and don't ask questions (and others who don't do all of these things!).

Should the government start regulating people's bathroom usage in stores as well?  Is this a reasonable usage of the Federal Reserve Bank of Boston's time?  Are credit card rewards a subsidy to the rich?



PK started DQYDJ in 2009 to research and discuss finance and investing and help answer financial questions. He's expanded DQYDJ to build visualizations, calculators, and interactive tools.

PK lives in New Hampshire with his wife, kids, and dog.

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