A recent study released by the Boston Federal Reserve last July 26 shows that credit cards could widen the gap between the poor and the rich with its fees and rewards programs, in which it acts to implicitly transfer wealth from lower-income consumers to higher-income consumers.
The researchers involved in the study, called the "Who Gains and Who Loses from credit card Payments Theory and Calibrations", argue that consumer welfare would likely increase if card rewards and merchant fees would be reduced.
Merchants usually mark up prices for their consumers instead of charging different prices for credit cards users that would recover the costs of rewards and fees. And this would result in consumers, most likely those with lower incomes, subsidizing other consumers like them who pay with credit cards and end up paying more for buying everyday goods.
American consumer data shows that consumers with a low income are less likely to own and use a credit card, and even those that do have cards spend less than high earners per month on average. Meanwhile, high-income credit are more likely, about 20% more, to win credit card rewards such as cash back rebates, frequent flier miles, and other similar benefits.
According to the researchers of the study Scott Schuch, Oz Shy, and Joanna Stavins, that most consumers are not aware that their using of credit cards to make payments would involve a great number of processes such as retail prices increases, merchant fees, income transfer from cash to card users, and a transfer from lower-income consumers to higher-income consumers.
The researchers found that over 83% of revenues that banks get from credit card fees are taken from cash payers, and especially from lower-income cash payers whom they take disproportionately from.
They also found that, after they have accounted for the rewards paid by the banks, the households who earn an average of more than $150, 000 yearly receive a $756 subsidy on average annually. Meanwhile, those households who earn $20, 000 or less than that amount yearly pay around $23.
The financial regulatory reform that had been signed into law only last week grants the Federal Reserve the responsibility to regulate fees that are associated with debit cards, but unfortunately not for credit cards.
The researchers stated that this process of transferring fund from lower-income consumers to higher-income consumers that their study had pointed out might be something that American consumers, policy-makers, and businesses might be a concern that they wish to deal with.
The researchers also suggest policy-makers could consider ways to put different pricings on each payment method, fee transparency, and fee regulation, if ever banks and merchants would not take any action to reduce the transfer of wealth phenomenon.