Do Credit Cards Siphon Money From the Poor to Rich?
A revealing portrait of the "reverse Robin Hood" problem
A recent study published by the Federal Reserve Bank of Boston paints a revealing portrait of "reverse wealth distribution" perpetrated by credit card companies. Together, rewards programs (which encourage cardholders to buy frequently to rack up points to get cash back) and merchant fees (a 1-2 percent transaction fee imposed on credit card purchases) combine to create a consumer environment that favors the rich over the poor by penalizing those who use cash. "Cash-users lose an average of $151 per year to subsidize card users," notes The Atlantic's David Indiviglio. "The latter group gains an average of $1,482 each year thanks to the benefits of being a cardholder."
The findings come at a particularly important time, as Congress and the Obama administration have been particularly concerned about protecting consumers from "unfair" credit card companies. Journalists weigh in on the findings:
- Taking From the Poor, Giving to the Rich sums up The Wall Street Journal's Michael S. Derby. The credit cards, which unwittingly create "reverse Robin Hoods," have "simply raised prices for those who pay cash." The paper notes that while the percentage of households using credit cards has been relatively steady at around 75%, total consumer spending via cards has risen from 9% to 15% over the last two decades, increasing merchant fees."
- This Is Why I Don't Like Hidden Fees fumes Kevin Drum at Mother Jones. It's "the result of allowing an effective monopoly in the card business, thus giving network providers the power to force merchants to keep interchange fees hidden instead of charging them directly to card users." This "peachy" situation, as Drum terms it, only means that "[v]ast masses of poor and middle income families end up paying a few dollars into the system every year while a small number of upper income families reap the benefits."
- It's an Undesirable Situation and there appears little that can be done to right the disparity, concludes David Indiviglio at The Atlantic. The writer looks at several potential options for remedying the disparity and none appear to be to appealing or feasible. "A few of the more substantial ones include lowering merchant fees, differential pricing, and additional wealth redistribution. By considering each separately you'll see that they all result in a similar, undesirable outcome."
- The Reverse Robin Hood Problem was previously laid out in a convincing, but theoretical, argument by Ron Lieber called The Damage of Card Rewards, writes New York Times blogger Jennifer Saranow Schultz. The latest study only confirms Liebers theory and solidified the fact that when cards are used everywhere, "stores raise their prices for everyone to cover the cards' costs. As a result, the poor -- those least likely to have credit cards and earn rewards -- end up paying more without getting any of the benefits."