Who gains and who loses from credit card payments? According to a recent study by three researchers at the Boston Federal Reserve, it is the rich who gain and the poor who lose. The findings of the study created a slew of attention grabbing headlines, such as Credit Cards Take From Poor, Give to the Rich. And it may mark a move towards more regulation in the credit card industry that could lead to substantial changes in the credit card rewards market.
The numbers presented in the study are stark: those who pay with cash transfer $151 annually to credit card users while credit card users ultimately gain $1482 annually from cash users in what is depicted as a wealth transfer from the poor to the rich. Consequently, the study finds that, "reducing merchant fees and card rewards would likely increase consumer welfare."
The Federal Reserve could act on the study's salacious findings and set limits on credit card interchange fees, or the fee merchant's pay when customers use credit cards. A reduction in these fees could crimp yet another revenue stream for credit card companies, forcing them to reign in credit card rewards programs.
In the event this study leads to action, consumers who are enrolled in point based rewards programs will likely see the value of the points they have earned decreased. Cash back credit cards that offer more than 1% cash back may be cut down. And the number of miles it takes to earn frequent flyer rewards may be increased. In a nutshell, any new limits imposed on credit card interchange fees will likely have a negative impact on credit card rewards users.
Unfortunately, cutting interchange fees on credit cards may do nothing but pad the pockets of retailers, increase the cost of using credit cards and reduce the value of credit card rewards. In 2003, Australia enacted limitations on interchange fees. Seven years later, there is no conclusive research to indicate that these cuts have led to lower prices for consumers. However, it is clear that these cuts have increased the cost of using credit and severely limited credit card rewards programs.
Similar laws in the US would likely have a similar effect. Banks would make less money on credit card transactions and would pass on costs to credit card users, while merchants would pay less to accept credit cards and, in all likelihood, pocket the extra money. Thus, even if credit card fees are reduced, the only winners would be merchants.
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