Credit card fees transfer wealth to rich, study finds

Mon Jul 26, 2010 3:03pm EDT
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By Kristina Cooke

NEW YORK (Reuters Life!) - Credit card fees and rewards programs exacerbate income inequality by acting as a transfer of wealth from poor to rich, according to a Federal Reserve Bank of Boston study released Monday.

The researchers argue that reducing card rewards and merchant fees "would likely increase consumer welfare."

Merchants usually don't charge different prices for card users to recover the costs of fees and rewards, but instead, mark up the prices for all consumers.

As a result, people who pay cash -- and who are more likely to be lower income -- end up subsidizing those who pay by credit card.

U.S. consumer finance data shows that people on a low income are less likely to have a credit card, and those who do, spend less a month on average, than higher earners. High-income consumers are also 20 percentage points more likely to receive credit card rewards -- be they frequent flier miles, cash back or other enticements.

"What most consumers do not know is that their decision to pay by credit card involves merchant fees, retail price increases, a nontrivial transfer of income from cash to card payers, and consequently a transfer from low-income to high-income consumers," Scott Schuh, Oz Shy and Joanna Stavins wrote.

They found that about 83 percent of banks' revenue from credit card fees is obtained from cash payers "and disproportionately from low-income cash payers."

After accounting for rewards paid by banks, households who earn more than $150,000 annually receive a subsidy of $756 on average every year, while the households earning $20,000 or less pay $23.   Continued...

<p>A credit card user displays her cards in Washington February 22, 2010. REUTERS/Kevin Lamarque</p>