Do America’s poor really foot the bill for credit card rewards?

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The ugly truth behind your fancy rewards credit card: America’s poor foot much of the bill for credit card points, miles, and cash back.” Friends, family members, and readers keep sending me links this article. People seem to want to know my opinion about it.  Okay then, here goes…

After reading the Vox article and (most of) the research paper that the article cites, I’ve developed the following opinion about it: The headline is probably true, but the details are not.  I think too that the article unfairly shames those of us who collect rewards.  If we were to stop collecting rewards, I seriously doubt that America’s poor would be better off in any way.

The basic idea behind the Vox article and the research paper it is based on is that rewards credit cards cost merchants more than basic credit cards or debit cards (true); and that leads merchants to raise prices overall (doubtful); and the rich are more likely to use high yielding rewards credit cards (probably true); and therefore the poor, who pay with cash, debit, or less-rewarding credit cards, pay more as a percentage of each purchase.  In simplified terms, the poor aren’t getting as much of a credit card rebate as the rich because they’re not using the most rewarding cards to make their purchases.  Think of it like this: If a merchant raises prices by 2.5% in order to account for credit card processing fees then those of us who earn 2% back with our credit card pay a net “fee” of around 0.5% (2.5% increased cost – 2% cash back), whereas those with a 1% back card (for example) pay a net “fee” of 1.5%, and those who pay with cash or debit pay the full 2.5% “fee” (which is really the increased price).  I’m simplifying a bit because the research article also tries to account for credit card fees, ATM transaction fees for those who pay cash, and other related factors.  Still, what I described is the gist of the argument.  This is what the Vox author meant with the following quote: “When you pay with a rewards card at the bodega, the guy paying in cash behind you is picking up the tab.”

Three ways card issuers make money

The Vox article points out that card issuers make money through fees (annual fees, late payment fees, etc.), interest on unpaid balances, and interchange fees:

Credit card issuers — think American Express, Chase, and Citi — make money in three main ways: fees, like annual ones to have the card or penalties on late payments; interest on unpaid credit card bills; and interchange fees, meaning the amount they charge every time you swipe plus a small fixed fee. Generally, issuers charge about 1 to 3 percent of the total transaction amount. These swipe fees can be big moneymakers for some companies: American Express clocked $24 billion in them in 2018 alone.

I have no doubt that the poor pay far more than their fair share towards late payment fees and interest payments.  It’s awful how many people fall into spiraling debt through credit cards and their crazy high fees and interest rates.  Like it or not, that’s why card issuers can afford to tempt us to sign up for new cards with huge welcome bonuses: they know that a percentage of new cardholders will, over time, pay significantly more in fees and interest than the value of the initial signup bonus.  People who pay outsized credit card fees indirectly fund the points & miles that many of us enjoy.  That doesn’t mean that we should stop signing up for these offers, though.  As long as card issuers continue to offer big bonuses, it just makes sense for those who do a good job of managing their credit to take advantage of those offers.  If we were to stop applying for these offers, I don’t believe that would help the poor at all.

Even though the Vox article pointed out the three ways card issuers make money, the article’s argument was really focused on the third way: interchange fees.  When a merchant accepts a credit card for payment, a percentage of the sale goes to the card issuer, the payment network, and the payment processor.  The most premium cards incur the highest swipe fees and offer their cardholders the biggest rewards.  The author writes:

With more credit cards and more rewards come more swipe fees. And merchants don’t want to pay those fees out of their own pockets — so they pass some of them on in prices that everybody pays, not just the credit card holders. People paying with cash or debit cards wind up footing the bill to pay for the rewards of people who pay with credit cards — people who tend to be more well-off.

Do merchants really increase prices due to swipe fees?  Would that $9.95 item really have cost $9.66 if swipe fees didn’t exist?  If the answer is no, then the article really should have concluded that merchants, rather than the poor, foot the bill for credit card rewards.

I suppose that if merchants have really increased prices due to swipe fees, and if everyone in the United States stopped carrying premium cards, then over time those merchants might reduce prices by as much as 1%.  And pigs might fly.  In the meantime, if some of us were to stop carrying premium rewards cards, the only thing that would change is that the merchants we shop with would pay slightly lower swipe fees for our specific purchases and so those particular merchants would pocket a bit more money.  Good for them, but that wouldn’t help poor consumers.

Even if the article was right and merchants do raise prices due to swipe fees, this particular imbalance between rich and poor seems to me to be almost insignificant compared to the many other ways the poor pay more than their fare share.  As the Vox article itself states:

There are all sorts of places where it’s more expensive to have less access to financial services…

It’s harder for the unbanked to build up savings, get traditional loans, or pay basic bills. And so they wind up losing money — they turn to expensive payday lenders that charge exorbitant interest rates and risk getting pulled into debt traps or resort to financial products that charge them more specifically because they have less.

In conclusion, yes, I agree with the Vox article’s title.  America’s poor really do foot the bill for (some) credit card rewards.  But, in my opinion it is mainly welcome bonuses rather than swipe fees which are indirectly paid for by those who mismanage their credit.  That said, I don’t feel bad about collecting those rewards.  No one except the card issuers themselves would be better off if I stopped signing up for new cards.

View from the Wing offers more arguments against the Vox article’s view that swipe fees are the problem.  Specifically, Gary Leff lists these counterarguments:

  • Where interchange caps have been implemented, prices haven’t fallen
  • Accepting credit cards is cheaper than cash (Gary cites this blog post that claims that cash handling costs between 4.7 and 15.3 percent)
  • People who pay by credit card spend more (i.e. credit cards are good for businesses despite the swipe fees)
  • Higher prices for the poor (and everyone else) aren’t driven by credit card rewards
  • The benefit of credit cards to merchants is proven by merchant behavior.

Check out Gary’s post for more details about each of his points.

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Raffles
  • Where interchange caps have been implemented, prices haven’t fallen

When anyone falls back on this argument, you know they are struggling. A business is faced with increasing or decreasing input costs literally every day. Are you meant to reprice your entire inventory?

Much of the world, and the bulk of the West, now has capped interchange fees of 0.3% vs 2-3% in the US. You can cap these and slash merchant costs without impacting any of the ‘cash vs card’ dynamics.

Earl B.

This is all baloney. Yes, the “wealthy” person is getting a slight discount/rebate that the “poor” person isn’t getting. But the reason the merchants are happy with this is because that “rich” customer paying with a premium credit card is probably, on average, spending more money at his establishment. The “rich” person is probably buying name brand, higher quality, higher margin items than the “poor” person is, on average. Thus, despite taking the hit on swipe fees, the merchant still makes significantly more money/profit on the “rich” customer than it does on the “poor” customer. The “rich” customer is using his or her card to fill their SUV with $60 of premium gas, while the “poor” cash customer at the next pump is taking $20 worth of mid-grade. Which customer is putting the gas station owner’s kids through college?

If swipe fees were too onerous, you would see more merchants dropping the card payment option and going cash only. But that isn’t happening, is it? The reality is that more and more businesses are dropping the cash payment option and going “card only” as accepted payment. Which means they would rather lose some of their “poor” cash-only customers than their “rich” card-paying customers. It should also be noted that the overhead costs of handling cash for a business is very high. Keeping cash & change on hand, counting out drawers. Trips back& forth to the bank making deposits and picking up change. Losses from employee mistakes and pilfering. Robberies. In reality, all things considered, the card-paying customers may actually be subsidizing the increased costs for the merchant of maintaining a cash payment system.

derek

The poor and the merchant pays, particularly the small merchant. It is possible that the employees of merchants pay for it because if expenses go up, that puts pressure on either prices or wages, or both.

I don’t use credit cards with small merchants, particularly the reward cards. The reward cards have a higher fee that covers all of the rewards. In other words, the small merchant is forced to pay the rewards. It’s easy for the credit card companies to give away someone else’s money. They might even try 8% cash back some day, trying to see if merchants will still pay a 10% commission/fees or drop cards entirely. Merchants cannot refuse only reward cards.

Buzz

Stopped reading at Vox.

Gerry

There are a number of merchants here in NYC that charge a 4% fee for allowing you to use a credit card. Takes this argument and throws it out the window (with swipe fees and such).

Anyone out there can learn how to do this. I did and didn’t come from some rich background. All I hear in this article are excuses.

Sea20003

I’ve been using point credit cards since I was a freshman in college (some 15+ years ago). I was poor for a long time. The difference was that I was financially literate. They are equating being “poor” with having bad credit, no credit, or not knowing better. Regardless, there are so many inequalities that Vox is really missing the mark here.

WR2

Enough with the guilt tripping. A fool and his money are soon parted. Fools of course usually are also poor, or become poor soon enough, but not always (look at most celebrities). Nobody is forced to run up credit card debt. Good decision making should be rewarded, and bad decisions should be punished. That is how reality works usually, unless government intervenes.

AlohaDaveKennedy

Since payday loans can have an interest rate as high as 391%, credit cards are not where you need to focus on where the poor are actually getting screwed.

Joanna Ng

Do you know who really foots the bill for the cc rewards? Each and every customer who doesn’t play the game we do, of course! It’s not a question of income (looking at the college kids among us), not one of race, age etc. But hey, that’s not what the readers of that publication want to hear, given their obsession with “equity”.

In my circle of friends and family, of various backgrounds, income levels and age I have just one person who entered the game. Everyone else didn’t have the patience, dedication, energy, motivation, courage, initiative, or interest for it. That’s exactly the same as with other things in this life, which result in very different outcomes for different people. And in certain other people demanding “equity” after that.

Vince

After someone fixes a tax code that allows a corporation to pay $0 (not hyperbole) in taxes, then come talk to me about my Alaska miles.

https://www.nytimes.com/2021/04/02/business/economy/zero-corporate-tax.html

That’s inequity. And that comes from someone who is not poor, and who pays much much more than $0 in taxes annually.
Until then, Vox, you are quite misguided.

Vince

Thank you.

david

There’s a correlation vs causation flaw here. It’s the financially illiterate that foot the bill, and unfortunately they also tend to be the poorest among us. But I also know decent earners who refuse to get credit cards because they expect deception and thievery around every corner, and those that have credit cards but carry balances for the dumbest reasons; they’re “footing the bill” too. There’s an implicit assumption here that once your income bracket gets above a certain level the system stops “preying” on you, and we all know that’s simply not true.

Brant

I know some old folks who don’t drive cars anymore. Yet, they’ve retired well and still pay plenty of federal income tax. I guess that means they are subsidizing those of us who continue to use the interstate highway system. It’s a ridiculous argument on its face. Nothing is free, yet those who get the goods are seen, somehow, as grifters. It’s hilariously preposterous!