Vox runs a piece repeating the old trope that credit card rewards benefit the rich at the expense of the poor, because credit card processing fees result in higher prices – including for people who don’t pay by credit card. There’s a unique twist to the piece though since they call for taxing card rewards.
“Rich people get a large subsidy on everything they buy,” Klein told Vox. “The fact that they’re tax-free is a big deal also, because wealthier people pay higher income taxes, so the tax-free advantage is higher the richer you are.”
In other words, the more you spend, the better the rewards, and the better the tax break.
Here’s a TikTok making the argument, which turns out to be highly misleading.
Here are 5 reasons, though, that this is misleading at best:
- Where interchange caps have been implemented, prices haven’t fallen Current prices are prices people are willing to pay at current volume of transactions (supply and demand). Capping interchange means lower costs to retailers but there’s no reason to expect those lower costs to be passed onto consumers. Prices didn’t fall in Europe or Australia when interchange caps were instituted.
- Accepting credit cards is cheaper than cash Depending on the business, accepting cash costs 5% to 15% which is far more than credit cards cost. That’s because, among other costs, employees pocket cash, they make incorrect change, having large amounts of cash drives up insurance costs and it attracts outside theft.
- People who pay by credit card spend more Even if credit cards were more expensive to accept, it’s well worth it because people paying by credit card spend more – they aren’t constrained by the cash in their wallet and may be less inclined to worry about smaller amounts of money. It’s one of the least expensive and most effective marketing expenses a business can incur.
- Higher prices for the poor (and everyone else) aren’t driven by credit card rewards if you’re concerned with pricing trends you should be focused on inflation, not interchange. And of course worry more directly about how you can increase access to the banking system. Encourage, rather than encumber, greater experimentation with financial tools that make electronic payments accessible to everyone. There’s no discussion of this at all in the Vox piece.
- The benefit of credit cards to merchants is proven by merchant behavior. Not only do merchants voluntarily accept credit cards, in most cases they don’t offer cash discounts or credit card surcharges even as those are increasingly permissible. That’s because they benefit from customers who prefer to pay by card, rather than being harmed by these payment methods.
“Concern for the poor” is being used as a stalking horse for retailer interests who would, of course prefer to pay less for card processing than they do today. At scale, interchange is a big cost for large businesses.
If you’re actually concerned for the poor in the financial system, you’d focus on things that push poorer people into shadow banking systems and deny them access to traditional bank accounts. The Durbin Amendment to Dodd Frank financial reform, for instance, capped interchange rates on debit cards and made offering checking accounts to poorer people unprofitable. Banks could no longer make money by issuing debit cards to their checking customers, and so we saw fee-free checking options decline precipitously. That pushes people into alternatives like check cashing stores and high fees.
In fact, the Vox piece argues for expanding the Durbin amendment to credit cards,
Another potential policy fix would be to lower interchange fees, which the Durbin Amendment, part of the 2010 Dodd-Frank bill, did for debit card transactions. If swipe fees for credit cards were capped, rewards would almost certainly diminish, too. But so would the regressive nature of credit card spending.
Of course discouraging credit card spend pushes more transactions into less transparent means of payment, which runs counter to other government interests as well.