New York Times Pushes False Narrative On Credit Card Rewards: Unpacking The Real Impact On Inequality

The New York Times runs an opinion video arguing that rewards credit cards drive inequality. But the Times doesn’t understand the issue beyond retail lobbyist talking points.

  • Retailers pay swipe fees. Credit card issuers rebate part of their revenue to customers to attract business.

  • Because of swipe fees, “store owners..raised their prices. That means that all of us are paying more. But only those who have special cards are getting rewards.”

  • Furthermore, wealthier Americans have better rewards cards. And poorer people are more likely to use cash, or debit cards.

  • The simplistic argument is that the poor are paying higher prices so that the wealthy can have rewards.

That is not how this works. It isn’t how any of this works. Leaving aside that ‘the poor’ here do in fact use credit cards, and rewards cards, and aren’t getting rewards for their debit card payments because of Dick Durbin’s limit on debit interchange that he now seeks to extend to credit cards, not because of the market, it is simply not true that non-credit card customers are paying higher prices than those using credit cards. The argument rests on two premises:

  1. That credit cards are more expensive for merchants to accept than cash
  2. That if merchants weren’t paying higher prices for credit cards, prices to the consumer would fall

Cash is actually more expensive for merchants to accept than credit cards. That means, if anything, cash customers are driving higher costs for retailers without paying a surcharge. The subsidy goes in the opposite direction!

  1. Retail clerks make incorrect change, losing money for their employers
  2. Retail clerks pocket some of the cash, losing money for their employers
  3. Heavy cash businesses often pay higher insurance rates because of risk of outside theft and loss
  4. Retailers that prefer or discount cash payments often do so because it makes tax fraud easier, or as a deceptive surcharge on credit card customers like when the Westin Fort Lauderdale Beach Resort was hitting everyone with a surprise fee at check out for paying by card, sure they wouldn’t charge it for cash but no one is carrying enough cash and they have to hurry to the airport.

Not only is cash more expensive to accept (often estimated at 4% – 9% or more), but where interchange limits have been imposed prices have not fallen (Europe, Australia). That means that prices aren’t higher than they otherwise would be (for the poor, or everyone) because of card interchange!

The best the retail lobby, who wants government to require card processing at lower prices, has been able to muster is that retail grocers pass on around 70% of the savings to customers when the price of grocery items (not card processing charges) fall. That is just a single vertical, and perhaps the single most competitive vertical.

Moreover, 60% of interchange on average goes back to the customer. If you eliminated interchange, you’d have to believe that retailers would pass through 60% of the savings just for consumers to break even.

According to the New York Times, “this rewards card, it’s really a screw-over-poor-people card. Every time you’re using it, you’re contributing to inequality.” But that is not true.

Now, there is a less-talked about cross-subsidy in credit cards. Products like Citi Costco and Sapphire Reserve may rebate 100% or more of swipe fees to the consumer. They’re doing this in search of cardmembers who revolve (pay interest). The subsidy is from those rewards customers who do not pay their bill off each month, to those who do. Of course, those who borrow on their cards are often getting better terms than their next-best alternative which might be payday lending. People still have to borrow, though I counsel against doing so if it’s at all for discretionary purchases.

Incidentally, they also mischaracterize a 2020 people as a “Federal Reserve Study” claiming consumers lose more to price hikes than they receive in rewards. It isn’t “by” the federal reserve, it’s by a professor at the National University of Singapore (with assistance from a Fed researcher, so the Fed released it as a working paper, but it was not a Federal Reserve study). And it actually makes the cross-subsidy point from borrowers to non-borrowers I make here as well.

In Australia credit card fees rose after interchange was limited, reducing access to cards precisely for those least able to afford them.

When debit card interchange was limited, prices didn’t fall, rewards were taken away including from poorer Americans, and those same worse-off customers saw banking fees rise. More people became unbanked, pushed to check cashing stores and elsewhere because banks no longer earned profit from debit which subsidized free checking.

That – as this – was a redistribution from consumers, including less well of consumers, to retailers. It’s couched as taking from banks because banks are supposed to be unpopular, but that isn’t what’s happening at all. The New York Times was just too naive and fell for it.

(HT: Jon D)

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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  1. Those who want cash: the federal government hates cash. Banks need to report cash transactions (or are all you bigshots depositing less that $10,000 at a crack). The G’s goal is to eliminate cash.

  2. The New York Times — as a point of pride — hates America, freedom, free market capitalism (which has lifted more people out of poverty than ANY SYSTEM ON THE PLANET!!!), and all things pure and decent, noble and virtuous.

    Liberals love disorder, filth and chaos. It’s who they are. Don’t believe me? Look at any U.S. city in America today run by the Dems. Case closed.

  3. @SMK
    By accepting CCs. You are opening the door to more customers willing to purchase $10,000 handbags from you….people would nah not have $10k or thisd unwilling to carry that much cash. In either event, you’ve just made $9650 instead of $0.

  4. @CHRIS
    No disagreement but what does that have to do with fees? If it’s half the fees it’s still the same credit card. Same for passing the fees to consumers.

  5. What about the fact that stopping all these insane cards will open HUNDREDS of seats on airlines for MONEY paying customers not hacks like YOU and prices will drop

  6. Jeff may be a pro with miles and points, but he is not very savvy about how credit cards actually work in the American economy.

  7. Thought experiment: if credit card merchant fees do nothing of the sort, then they should be doubled to 6%, correct? That would mean more perks, even if it would make our daily groceries and everything else 3% more expensive

    How about doubling them again to 12%? Even more credit card perks, who cares if groceries go up 9%!

    Obviously fees are important and the NYT is right (and you, the blogger paid by credit card companies, is wrong and biased)

  8. Cards also are often more efficient than cash. This is clear if you’ve ever been in a line waiting and waiting while a person ahead of you fumbles around for the correct change. More importantly, cards stimulate spending which stimulates the economy and creates jobs!

  9. Whoever said above you can dispute debit card transactions “just like credit card transactions” is dead wrong. I had both my debit card and credit card on my Paypal account which got hacked. Credit card detected the fraud and alerted me so I shut it down. Credit card fraud was one-click to dispute, the debit fraud took weeks and back and forth with the bank, Paypal to reverse, and I think in the end Paypal just ate the cost.

    Never use your debit card like a credit card! Now I only use it for ATM withdrawals and at merchants who give you a lower price for using debit, like ARCO.

    Another “cost” of cash is employee pilferage- no one wants receipts anymore!

  10. @George: My personal opinion — anyone who has a debit card is a fool. They’re just too dangerous if compromised.

  11. CC fees can range widely based on the size of the retailer. For example, ever notice that Costco only takes Visa? That’s because they have negotiated a low fee with Visa to keep all of the other guys out. I’m guessing, but that would have to be in the neighborhood of 1.5% or less. The bill would support a “cap” on credit card fees, not an elimination. In the case of Costco, they could save .5%, for example. Think about all of the implications of this. First, does anyone in their right minds think that everything price at $10 becomes $9.95? Second, the retailer would pocket the difference and that means more big business wipes out small business. Third, the consumer will see no benefit from this… the is the retail lobby working their magic. A .5% bottom line increase at Costco would mean a huge promotion and raise from someone… it would be millions of dollars.

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