Card rewards

What is it about?

Card payment systems are sometimes accused of taking from the poor and giving to the rich. The argument is as follows: High card fees are leading to higher retail prices for both, card users and cash users. However, high-income card holders are receiving rewards when purchasing by card. The result may be a net transfer of, mostly low- income, cash users to, mostly high-income, card users. In this article, models with product differentiation are used to show that rich card-holders may actually be paying for their card rewards themselves. In this case, there is no perverse distribution effect.

Featured Image

Why is it important?

Payment cards have become an important means of payment. In recent times they have also been subject to an increasing amount of regulation, possibly over-regulation. So far, the focus of regulation has been efficiency. However, some economists have argued that there may also be an issue of equity. The results of this paper provide a cautionary tale for regulators. While it cannot be ruled out that poor cash-users are, to some extent, paying for the high costs of cards mainly used by well-off customers, it seems clear that the size of this effect is strongly limited by merchants’ abilities to use price discrimination and implicitly charge card-users.

Perspectives