Skip to content

We have quantified the madness of reward cards

Twelve years ago I wrote a screed about how banks charge high swipe fees on credit cards and then rebate a part of those fees to their richest customers:

This is fundamentally my problem with overdraft and interchange fees: they’re surreptitious ways for the poor to subsidize the rich. There’s no law against that, of course, but the practice is so grotesque that in this case I’m perfectly willing to make one.

....[One solution is to] get rid of reward cards, which are surely one of the most ridiculous and unjustifiable frauds ever invented. Seriously: banks deliberately overcharge their customers and then rebate a fraction of it in the most circuitous and confusing way possible? And to make it worse, they do it in a way deliberately designed to transfer wealth from the poor to the rich? Karl Marx probably wouldn’t have been cynical enough to predict that banks would ever operate like this.

This is pretty obvious stuff that hardly needs an academic study to "prove" it, but recently we got one anyway:

We assess interchange income at the card level to be 1.5 percent of the purchase volume for classic cards and 2.5 percent for reward cards.

....We find that high-FICO consumers benefit from reward programs at the expense of low-FICO consumers and estimate an annual redistribution of of $15.1 billion....We conclude by documenting that the costs and benefits of credit card rewards are unequally distributed across geographies in the United States. Credit card rewards transfer income from less to more educated, from poorer to richer, and from high- to low-minority areas, thereby widening existing spatial disparities

So there you have it. Banks charge higher swipe fees for reward cards—mostly paid by merchants—and then rebate that money in the form of rewards mostly paid to customers who are middle class and above. The net result is that richer, more sophisticated cardholders end up paying less than poorer, less sophisticated cardholders. And that's before we even get to the higher interest rates they're charged on unpaid balances, which is at least notionally justifiable.

But reward cards don't just redistribute billions of dollars from poor to rich. They also redistribute it from high school to college grads and from Black/Brown customers to white ones. Not just unfair, but racist too.

NOTE: This paper is fairly complicated, and not easy to excerpt. If you have questions about methodology and so forth, I'm afraid you'll have to click the link and dive in yourself.

31 thoughts on “We have quantified the madness of reward cards

  1. Amber

    "They also redistribute it from high school to college grads and from white to Black/Brown customers."

    Typo, the paper says the redistribution is from black/brown customers to white.

    1. middleoftheroaddem

      Correct on the typo, but I have a broader point.

      I do not see a racist intent in what is described: for example, wealthy people of color benefit and this process hurts poor whites. Rather, a see segmentation: this is a technique used by most profitable companies across the globe.

      Stated differently, I do not buy Abraham Kendi's concept of disparate impact always equals racism. Then again, I am a capitalist....

      1. Bobber

        It’s called structural racism. Not something specifically intended, but the outcome nevertheless favors a particular race, due to the way program is structured.

        1. middleoftheroaddem

          I understand the concept of structural racism and believe, for example, the data showing Doctor's are less likely to give black patients pain meds, to be heartbreaking.

          In contrast, segmentation that disfavors the poor (but favors wealthy of any race), absent further information that shows a racists intent, does not, in my opinion, represent racism.

          In contrast, if you can demonstrate that a VISA issuer givers different rewards based on race, or rejects similarly qualified applicates based on race, THEN I would agree with you.

          1. 7g6sd2fqz4

            Laid bare, this argument reads as such: Only the things I deem racist are actually so.

            Maybe you don’t know everything? Not sure.

  2. seymourbeardsmore

    If the merchants are the ones paying the interchange fees, how is that considered a redistribution? Wouldn’t it just be a distribution?

      1. Ken Rhodes

        And there's the rub! It isn't just the customers using the Rewards Cards who get charged more, it's ALL the customers. Then a portion of that overcharge gets rebated back, but only to the subset who use the Rewards Cards, who tend to be more educated, more affluent, etc.

  3. Salamander

    Besides the basic unfairness, there are the increased charges to the retailers who accept these cards and the nightmare of bookkeeping that's required. Not as bad as medical reimbursements to a thousand different financial groups -- oops, I mean "medical insurance companies" -- but still a parasitical drag on the economy and society in general.

  4. randomworker

    TC posted this at MR yesterday.

    Not all 800 credit score card users pay their balances off every month. And not all 680s pay interest and fees. But overall yes many wealthier people have financial habits that benefit them, and many poor people, the reverse.

    The cards with the most perks also have the highest fees. $695 for AmEx Platinum? You have to work to earn rewards that exceed the fee.

    One might argue active traders subsidize index fund investors? I think I can formulate that argument anyway.

    Alcoholics subsidize non alcoholics.

    People who order wine and other drinks in restaurants subsidize those who don't.

    Etc etc.

    1. Salamander

      What cards charge fees anymore? AmEx, sure. But does anybody actually take American Express? I've got three cards (one biz, one that I never use, and Costco) that charge zero annual fees, and they all give rebates.

      Why would I keep a card I haven't used in years? Because everyone says that canceling a credit card will make my credit score go down.

      1. KinersKorner

        Amex is taken just about everywhere here NYC. Yes you pay to use it and sometimes you come out ahead with Platinum, some times you don’t. If you travel a lot, get triple points, free use of Delta and Priority pass lounges. These are great perks for frequent flyers. Not sure how poor people subsidize it though. Amex makes a profit on Platinum. As do all the issuers of preferred cards.

  5. KJK

    Helping the wealthier and screwing the poor is just the American way, so no surprises here. Having merchants charge more for using a credit card is becoming more commonplace, at least in my neck of the woods (NYC suburbia). The day I am charged more for a rewards card use, than a regular credit card, is the day I dump that card, or start using Venmo, papal or other forms of payment, since a cc is just for my convenience.

    Back a decade or 2 ago, I used to work for a large finance company who had a portfolio of private label credit cards. Some of the folks who worked there would refer to customers who always payed off their cc balance each month as "dead beats", since they didn't make any money of of them.

  6. skeptonomist

    "a way deliberately designed to transfer wealth from the poor to the rich"

    This is unjustified. Banks design their operations to maximize their profits, not explicitly rob from the poor and give to the rich. They make the most money from the poor in one way, and from the rich in another way. Of course bank executives are themselves rich, so that is part of the transfer, but this is true of all business.

    But credit cards are something that might be advantageously socialized. Credit cards are money, so why should private banks have so much say in how they operate and make so much money from them? The money they make from credit cards is another thing that increases the economic and political power of big banks. People talk about having postal savings banks, and such things could also handle credit cards for low-income people. Or in principle the Fed could handle credit cards.

  7. Dana Decker

    "Not just unfair, but racist too."

    You might want to re-think the latter part. Are automobile manufacturers who build more safety features into their expensive cars racist? By Kevin's standard - anything that disadvantages lower income people is racist - they are.

    Calling virtually everything "racist" - which is easy to do if you have an expansive imagination - numbs people to the charge so that when a genuine *intentionally racist* issue pops up, lots of people will ignore it.

      1. middleoftheroaddem

        7g6sd2fqz4 - actually, to ensure that racism is taken seriously and acted upon, I think the point is to focus on clear and compelling instances versus calling anything that hurts the poor racist.

  8. golack

    The great thing about this is that merchants are not allowed to charge different prices or add surcharges to cards with higher swipe fees. It's almost impossible for a consumer to know what fees are charged to the merchant.

    The pandemic pushed everyone to use contactless payments, i.e. cards, apps, etc. And, in general those fees went up--so companies are making more money off swipe fees both because cards are used more and the fees are higher.

    So, what is the cheapest way to pay for items? What's the safest?

  9. Zephyr

    Isn't this just the business model of banking? Charge all sorts of Mickey Mouse fees that are individually small potatoes but add up to profit$ in aggregate. Plus every transaction gets a portion skimmed off for more profit$. Put money in the bank and they pay you a bit back in interest while they simultaneously lend your money to some poor slob who pays more interest.

  10. caryatis

    Okay, Kevin, I read the paper, and you're seriously misstating it. The paper actually says ""We find a redistribution from low- to high-FICO consumers regardless of income." And "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." Superprime low-income people benefit more than average from rewards, albeit less than superprime high-income people.

    In other words, credit card rewards redistribute money from people who are smart about money (and thus have high FICO scores) to the...less sophisticated. That might look like a poor to rich transfer, but it's actually about financial sophistication. The most lucrative customers are the stupid rich people who spend a lot but also pay interest and fees.

    The paper mentions but does not analyze the other possibility, that merchants charge higher prices because of credit card swipe fees, which functions to redistribute money from cash and debit card users to credit card users.

Comments are closed.