Are credit cards robbing those who are less privileged?

A new report shows that you could feel slightly guilty when you next use your credit card. According to the report, payments through credit cards initiates a transfer of income from cash payers to those who pay by card. It could also be a transfer from the poor to the wealthy, the reason being that retailers don`t set different prices depending on the payment mode. Credit card issuers prevent the retailers from imposing the fees associated with payments made on credit cards, onto the customers. On the other hand, merchants mark up prices so that the merchant fee is being recouped from the credit card sales. The fee on credit card payments is about 2%.

In a way, the fees helps to fund the rewards offered on credit cards. Cash users are indirectly paying for this fee by paying higher retail prices. Therefore, cash users are sponsoring the rewards that others are enjoying. Spending on the credit cards are correlated in a positive way with income, which means wealthier customers are getting discounts out of the money of poorer customers. Each household using cash pays an average of 151 dollars to households that use credit cards. This means that every credit card using household receives an average of 1482 dollars from cash users every year. It is also suggested that customer welfare could be encouraged by lowering merchant fees and also rewards on credit cards.

The new reforms in the financial industry have recommended setting up standards for interchange fees that is reasonable and proportional, for transactions on debit cards. They also recommend permitting a minimum of 10 dollars or less for credit cards and allowing merchants to provide discounts to encourage preferred methods of payment, whether it is credit or debit cards or even cash. It is still uncertain as to whether customers will find real benefits through the reforms in the interchange fee that is bound to favour merchants. Merchants don`t need to lower their prices or offer rebates to encourage customers to use cheaper methods of payment. On the other hand, credit card issuers have cut down on the rewards on credit cards and increased the annual fees. The question is whether credit card costs through hiked prices is justified. The other question of course, is whether cash payers, or those with lower income are being penalized.

Doug Nicholas

Doug Nicholas, a financial consultant by profession with a Masters degree in International Business from Brown University, is also an ardent writer. Though he has a full time job at one of the companies listed on Wall Street, he does manage to squeeze in time to follow his passion. He puts his ideas to words in his articles related to finance and business.