That article is a bit of a stretch IMO… everyone pays those fees per transaction, rich or poor. The only difference is in who qualifies for the rewards programs, and presumably the credit card companies profit more from the richer set paying via credit card and receiving their rewards than the poor do, or else they wouldn’t do those rewards programs like that in the first place.
If I had to guess it’s that they make their money differently from the poor and rich. Rich people probably generate more money via the transaction fees, while the poor probably generate more money through interest, late fees, etc… So it would behoove the credit card companies to incentivize everyone to use their cards as much as possible, but in the case of the richer set, they’re competing with consumers simply paying cash/debit (as they have a cash surplus) up front, so they have to sweeten the pot a little via rewards programs.
They don’t have to do this with the poor, as they more or less have them over a barrel because many of them are buying stuff that they can’t afford in the moment and paying it off over time.
But this doesn’t amount to a “stealth tax” or some sort of reverse-Robin Hood sort of thing, just a way to differentiate and better incentivize customers.
This was my thought when I read the summary on the other thread. If the CC companies are making all their money on poor people, why are they working so hard to get rich people to use their cards?
Credit card companies are going to charge as much as they can get away with, and attempt to extract as much money as they can from their card holders and merchants. Paying rewards is just an expense necessary to compete with other credit card companies that pay rewards.
If reward cards were banned tomorrow, the extra charges to the poor wouldn’t go away; the credit card companies would just get to keep all of those airline miles for themselves.
So the argument seems to be that because some people can’t take advantage of rewards cards, that then nobody should have rewards cards.
If rewards are banned, then credit card companies have no incentive to lower prices. If prices are capped, then they do have an incentive to remove rewards. Probably the best option is to split up the monopolies so there is actual competition at both the consumer and merchant levels.
The more rich people use their cards, the more processing fees they can charge the merchants who accept credit card payments. And the more they charge merchants, the more merchants are going to have to charge their customers. And those higher prices affect all consumers, but the poor are least able to absorb those higher prices.
The money that the credit card companies give out in cash back and other rewards has to come from somewhere. If you buy something with a cash-back card, the credit card company is taking money from the seller and giving some of it to you, the buyer.
Right- but at no point is this somehow being extracted from the poor, unless the merchants count as poor.
I also think that a large part of rewards programs is to sweeten the card as an alternative to paying up front for things. I mean, if I want to buy something worth say… $200, it’s worth it to put it on the card and pay it off because I get points, versus just paying for it up front. There’s no utility to deferring the payments or paying later- it’s solely about the points for me.
So like you’re saying, it works out well for the credit card companies and myself- they get more transaction fees, and I get more rewards. And ideally it works out well for the merchant, as they made a sale.
About the only argument I can see being made for the poor footing the bill is that if you have say… 25 wealthy people and 100 poor people, and the 25 rich people qualify for the points programs, they can price the rewards programs and transaction fees such that the total amount of transaction fees and interest, etc… covers the points program and whatever profit they choose to earn across the whole 125 people. Which does mean in that case, that the transaction fees, etc… collected for the poor customers is going to pay for the richer ones’ points programs, but that’s not the same thing as forcing the poor to foot the bill. They’re being charged the exact same fees as everyone else- they’re just not getting the access to the points programs. Which is a different animal- it’s about their access to credit, credit ratings, income, etc… not about anything shady with the credit card companies and their points programs.
I agree with the premise that reward programs hurt poor people as well as small merchants. CC companies prohibit stores from applying a surcharge for CC purchases even though it costs them money. Smaller merchants also pay a higher rather than larger chains which can negotiate better deals. Rewards programs cost the CC companies money, which they then need to recover through higher APRs or higher merchant fees. In a perfect market competitive pressure would fix this, but in reality Visa and Mastercard are a near monopoly and it is hard for anyone else to enter the market.
So in the end, a richer person buying groceries at a Safeway is getting 1.5% (as an example) back at the end of the year, while a poor person buying groceries for cash at the local bodega is getting nothing back while also paying higher prices because the store needs to have higher prices to make up for the fees of the customers who do use CCs.
Just another of the many ways that it costs more to be poor.
They are saying that the CC rewards program is increasing the transaction fees, causing the merchant to increase the price of the products for everyone, even those who don’t use cards.
The article actually lays out the argument quite clearly.
[quote] The United States now has some of the highest credit card processing costs in the world, typically at 2 percent to 2.25 percent of every purchase. This is eight to nine times as much as the prevailing swipe fee in the European Union. The vast majority of merchants pass these costs on to consumers by charging more for their products — regardless of how one pays.
The result? Lower-income consumers are forced to pay higher prices on the goods they buy, but they rarely receive any benefit from rewards programs, according to the Federal Reserve, which has been tracking the distributional effects of card rewards. Its December 2022 report estimates an annual redistribution of $15 billion in rewards value from poorer people to richer people, from low-education people to highly educated people and from diverse communities to less diverse communities.
[/quote]
my bolding
The same goes for things like “free” parking. Anyone who walks, bikes, takes the bus, or a taxi, etc. is still paying for the parking spaces through higher costs built into the price of the store’s goods and services. Since people using those transportation modes tend to be lower income on average, they’re subsidizing car owners in the same way that those who pay cash are subsidizing credit card users. Parking fees/validation and cash discounts would fix this, but it makes those higher income customers cranky. Since they’re the ones the store wants to attract, the burden falls on the poor who have less choice and power to affect the situation.
Notably, our results are not driven by income, as they hold within the sub-samples
of low-, middle- and high-income individuals. In particular, high-FICO high-income
consumers benefit the most from reward credit cards, but they do so at the expense
of low-FICO high-income consumers. While credit card rewards are often framed as a
“reverse Robin Hood” mechanism in which the poor subsidize the rich, our results show
that this explanation is at best incomplete.
We rationalize our findings in terms of financial sophistication, meaning that reward
cards constitute a redistribution from naıve to sophisticated consumers.
So it’s NOT income-related, so much as it’s being financially ignorant that determines whether you’re getting fleeced or paid by the credit card companies. Granted, this financial ignorance tends to correlate with income, but none of this is anything new. Pretty much everything in the financial industry is geared to reward higher income, financially savvy people, and not to reward financially ignorant people of whatever income.
They don’t need to recover the reward costs. They raise APRs and merchant fees to make more money. If they can raise them with reward costs, then they could raise them without reward costs, too.
Like everything else in the capitalist system, it’s expensive to be poor.
Buy a good pair of shoes for a high price, and they last for many years. Buy a cheap pair that is all you can afford, and you’ll be replacing them frequently.
I agree with this. Credit cards themselves are the downfall of those who can’t manage their finances, it has nothing to do with what rewards may or may not be offered on a particular card. Of course it costs the CC issuer money to buy airline points, just as it costs them money to provide cash back or whatever other perks they may offer, but they still have to be competitive with cards that don’t offer anything. One other thing that helps them finance this, besides the merchant fees on which they have to be competitive, is that cards offering significant rewards are usually premium cards with annual fees. Besides the fees being money in their pocket, people who are willing to fork out an annual fee for a credit card are generally going to be significant spenders who value the various perks of a premium card.
Has that ever actually been substantiated? I know that here in our social democracy, there was government resistance to allowing grocery stores to accept credit cards because of the supposition that it would increase the cost of food for the poor, yet that all fell by the wayside in a few years as credit cards became absolutely ubiquitous. My view is that grocery stores, like any other business, benefit from accepting a variety of payment methods and accepting credit cards is historically associated with increased sales volume. Also, cash isn’t “free” when you consider the overhead of dealing with cash, like maintaining individual cashier balances and resolving discrepancies, and the security associated with dealing with large amounts of cash.
Boil it down to its essence, and what the article is saying is “it sucks to be poor”. Which is of course true, but I don’t think it’s news to anyone. It’s inherent that it sucks to be poor. That’s kind of what being poor means. If there were some other group of people who got all of the suck in society, then that’s the group we would call poor.
Right. But there are things that can be done that tilt the balance of suck either more, or less, in the favor of the poor. We have things like food stamps and need-based financial aid that try to give some advantage to the poor. It’s a worthwhile topic for discussion whether credit card rewards programs present a significant disadvantage to the poor and, if so, what we could and should do about it, if anything.
It is, but the only actual scholarly work that anyone has cited points out that the reward programs impact people based on their financial literacy, not their income. In fact, it points out that higher income/low financial literacy people effectively subsidize their higher income/high financial literacy peers.
The only correlation I see is that less financially literate people are more likely to pay more in fees, interest, penalties, etc… and that to some degree financial literacy correlates with income. That’s it. If someone is financially literate, they’re NOT getting screwed by financial institutions regardless of income, and the reverse is true as well.
And this all intersects with the question of “where does personal responsibility / accepting consequences intersect with government protecting people from themselves?”, which IMO is or was a core component of the right/left wing debate.
We estimate an aggregate annual redistribution of $15 billion from less to more educated, poorer to richer, and high to low minority areas, widening existing disparities.
Your quote appears to focus on credit card holders only: poorer consumers subsidize rewards card holders, just not as much as richer unsophisticated card holders do. They refer to another article to discuss what low income cash payers lose. If I understand them properly.
The term for this general effect is cross-subsidy. Rewards card holders, who tend to be richer, are subsidized by those who pay cash. Just like those who borrow money with their credit card cross-subsidize those who pay their cc bill every month.
Other countries don’t have these ridiculous reward card programs: in Australia for example credit card fees are capped so they max out at 1.5% rather than a little over 3%.
Using a Rewards card is the embodiment of evil, much like tying damsels to train tracks, threatening to detonate a nuclear bomb in a major city, or brainwashing young mutants to join a terrorist organization. Mine pays up to 6% at Amazon.