Saturday, January 09, 2010

NY Times: Assessing the Damage Caused By Credit Card Rewards

I have a Visa rewards card that gives me 1.5% cash back. It's a really good deal. However, Ron Liber, writing for the New York Times, asks if perhaps rewards aren't such a good deal for the general public:

For several years, I’ve wondered whether my aggressive pursuit of credit card rewards made me a selfish consumer.

After all, the 1 to 3 percent or more of every transaction that merchants pay to accept the cards is a significant cost, and the small local retailers that make neighborhoods vibrant often pay a higher percentage.

Stores then build those fees into higher prices, so people who aren’t earning any rewards can end up subsidizing those who do. Many of these people have no credit cards because they’re financially troubled.

So the risk is that we perpetuate a sort of reverse Robin Hood problem, as Prof. Steven Semeraro of Thomas Jefferson School of Law in San Diego puts it. It’s possible that the poor pay subsidies to finance the rewards of the affluent.

Andrew Martin’s article in The Times earlier this week noted how quickly the fees that merchants pay to accept certain debit cards had risen, too. That suggests a related question: Wouldn’t we all be better off if those of us who use plastic to earn free travel or cash back laid down our cards en masse?

So this week, I tried to figure out what would happen if we did just pay cash, or if there’s a better course of action for people who spend in a self-interested fashion but still have a conscience.

Quantifying the damage the cards cause merchants and the poor turns out to be quite difficult. Each card in your wallet can bear a wide range of costs, and retailers may pay different amounts to accept the same card. You can get a rough sense of your cards’ costs by punching in the first six numbers at

Here’s one finding: Rewards-earning credit cards with the Visa and MasterCard logo often cost merchants more than plain-vanilla ones, which hints at the card companies’ laserlike focus on subsidizing rewards for the affluent customers who are still spending, even if they are paying their bills off each month and thus paying no interest.

But cards undoubtedly also benefit retailers. People can use credit to spend more than they have in the bank at the moment, and some may spend more on a card than they would if they had to lay out a pile of money. Merchants who handle less cash, meanwhile, bear fewer costs for counting it, calling the armored car, and theft by employees or armed bandits.

As for the cost to consumers of all the card use, the National Retail Federation figures that the so-called interchange fees that their members pay to accept Visa and MasterCard alone cost an average of $427 an American household in 2008. Add in other fees the stores pay, plus costs for American Express and Discover, and that number could approach $600.

Bringing that cost down to zero means that everyone would have to quit cards cold turkey. That’s a tall order, given that the campaign wouldn’t work unless all Americans were in on it, especially those who earn well over that $600 each year in rewards.

Besides, cards offer other benefits besides rewards, like ease of budgeting and record keeping, allowing you to avoid checks by paying monthly bills with a card, the ability to dispute charges and the time savings in not having to refill your wallet at an A.T.M. as often (and cost savings in not paying A.T.M. fees).

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