The Board of Governors of the Federal Reserve System recently released an economic analysis focused on credit card fees and reward programs. The paper, in part, confirms independent analysis done in an HLF report last year that found that lower income households effectively subsidize higher income households when it comes to the fees they carry and related credit card rewards.
The Fed economists wrote that “in aggregate terms, we find an annualized redistribution of $15.1 billion induced by credit card rewards.”
Credit card companies charge interchange or “swipe” fees to retailers. Because they are a business expense incurred by merchants, swipe fees are passed on to all consumers in the form of higher prices on goods and services. “Interchange fees get passed through to merchants, which potentially respond by increasing retail prices for all consumers. Thus, credit card rewards might to some extent be funded by cash and debit card users who pay higher prices without receiving any rewards to compensate,” the Fed paper confirms.
The cost of swipe fees to retailers can be significant, especially in highly competitive sectors such as gasoline and groceries. HLF’s study showed that interchange costs are typically about 17 to 19 percent of retailer profit.
While those costs contribute to higher prices and hurt all retail consumers, the reward programs they subsidize add another burden on the budgets of lower income consumers.
The Federal Reserve analysis concluded that “Credit card rewards thus transfer income from less to more educated, from poorer to richer, and from high- to low-minority areas, thereby widening existing spatial disparities.”
Read the full paper from the Federal Reserve, as well as last year’s HLF report.
