The American Bankers Association’s new report on credit card rewards dispels a few interesting rumors about credit card rewards. Instead, the ABA highlights six key points:
- Merchants gain far more from credit card rewards programs than they pay in transaction fees.
- Households of all incomes benefit from rewards cards.
- Higher-income cardholders pay the most interest.
- Credit card rewards are not a wealth transfer.
- Income has little bearing on a cardholder’s credit score.
- Revolving balance and behavior are primarily a function of risk, not income.
The first issue is an old topic in payments.
- Some have argued that card acceptance costs (including interchange) cause merchants to raise prices on consumer goods and services, effectively “passing through” the cost of fees to consumers. In reality, merchants gain far more from accepting rewards cards than they pay in interchange.
- Indeed, the positive return-on-investment from accepting credit cards suggests that if merchants pass through any aspect of credit card acceptance to cash users, it could occur in the form of lower prices, not higher.
- And other evidence shows that merchants likely have not increased prices in response to interchange rates, at least in aggregate.
Debit cards lost their reward programs when the Durbin Amendment slashed interchange. But, who benefitted?
- About a decade ago, the Durbin amendment instituted a ceiling on debit card interchange, creating a natural experiment. If retailers were so price-sensitive to the cost of accepting electronic payments that they passed this cost through to consumers, then prices should have fallen after the debit card interchange cap was imposed.
- However, in a 2014 study, researchers at the Richmond Federal Reserve (Richmond Fed) found that more than three-fourths of merchants did not change their prices after the Durbin Amendment was implemented, and 22% of merchants actually increased prices.
- The Richmond Fed study was not alone in showing that consumers have not benefitted from merchant price reductions after interchange fees were capped; others have reached similar conclusions. For example, researchers from Georgetown University and the University of Pennsylvania found little evidence of lower prices across-the-board following the passage of the Durbin Amendment, and they concluded that the law made consumers worse off.
As for me, I have my favorite reward cards. The American Express Blue Preferred card can not be beaten for groceries, with its 6% bonus. It is always worth juggling a Chase Freedom card and a Discover iT card, based on which spend category revolves. And for the Citi American Airlines card, it will soon come out of the family safe as traveling gets back into vogue.
Overview provided by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group
