In a glowing New York Times magazine profile of Brian Kelly, the founder of The Points Guy website, there are a number of unreasonable and poorly-argued claims. One in particular bothered me enough to address: that people earning credit card rewards do so at the expense of the poor.
The poor underwrite the fantasies of the middle class, who in turn underwrite the realities of the rich. When credit cards charge high interchange fees, they pass the cost of loyalty programs on to merchants, who in turn pass it back to customers by building the fees into their sticker prices. Those who pay with credit can earn it back in points. Those who pay with debit or cash wind up subsidizing someone else’s free vacation.
According to a 2010 policy paper by economists at the Federal Reserve Bank of Boston, the average cash-using household paid $149 over the course of a year to card-using households, while each card-using household received $1,133 from cash users, partially in the form of rewards. It remains a regressive transfer to this day.
Merchants pay fees to swipe credit cards, but the cost to accept credit cards is lower than other forms of payment. In the fight between businesses and credit card companies over fees, poor people are used as a fig leaf for corporate interests. Cutting interchange rates doesn’t lower prices, and doesn’t improve access to credit for the poor.
Credit Card Sales Are More Profitable To Businesses Than Cash
Credit card purchases have higher average sales, accepting credit cards means getting bigger more lucrative transactions that they make money on. Smaller cash transactions are less profitable overall, people are limited to their cash on hand and are more careful spending cash. Plus wealthier consumers spend more.
Cash is a lot more expensive to accept than credit cards. Focusing on credit card fees misses that other forms of payment aren’t free. It’s actually higher cost transaction methods that drive up average costs to merchants.
- Cash has to be physically transported to the bank. This takes employee time which businesses pay for.
- Cash gets lost. Change gets miscounted, with customers getting too much money back.
- Employees pocket cash.
- Businesses may face higher insurance costs when dealing extensively in cash.
- Checks are harder to pocket and don’t involve miscounting change (where businesses don’t allow customers to write checks for more than purchase amounts and get cash back) but also have costs. People write bad checks. Businesses can insure against bad checks, but that comes at a cost too.
A more nuanced argument might be that premium rewards cards have higher interchange rates than less premium cards, but those too have average higher transaction amounts than basic Visa or Mastercard products (and American Express interchange doesn’t vary in the same way).
Reducing Interchange Hurts Equality
However if you’re concerned about inequalities in the financial system, the problem isn’t that businesses pay interchange it’s that efforts to reduce interchange have shut out access to the banking system by the poor. Complaints about interchange are usually driven by large merchants, who would love the same service at lower prices, using the poor as a fig leaf.
But when the federal government adopted the Durbin Amendment to Dodd Frank financial reform legislation, capping interchange rates on debit cards, banks responded by adding fees to checking accounts. Banks offered checking accounts free (at a loss) to attract debit business, earning a return for their services on fees for these transactions. Without the ability to earn a profit on these fees, banks could no longer offer free checking. The poor – those without high bank balances or direct deposit – were shut out and forced into more expensive venues (like check cashing stores).
And when interchange caps were put into place in Australia, that drove up rewards credit card annual fees – putting these tools out of reach of less well off consumers.
In 2002 Reserve Bank of Australia introduced new credit card processing rules that went into effect a year later: capping interchange fees on four party card networks (i.e. Visa and MasterCard), and allowing merchants to pass these fees on to consumers. Here’s what happened to annual fees on rewards cards:
Retail prices didn’t fall, in fact when retailers were allowed to charge consumers for use of credit cards those fees generally exceeded the cost of credit card acceptance and Australia had to go through a new round of rulemaking to address higher prices.