A report from the Federal Reserve Bank of Boston has quantified something that many payments executives have long suspected: that lower-income people subsidize the costs of rewards programs for wealthier consumers.
The report, released Monday, concluded that credit card interchange fees indirectly drive up the costs of products and services across the board, costing $23 per year for households that mainly use cash, checks or debit cards but that households using credit cards with rewards programs get benefits worth, on average, $756 annually.
The report called this effect an "implicit money transfer," to wealthier, rewards-card users (households earning $150,000 or more annually) from poorer consumers (those earning $20,000 or less annually).
The report concluded that reducing merchant interchange fees and card rewards programs "would likely increase consumer welfare."
Though some payments experts disputed the report's assumptions, some observers saw a good chance that the formula-laden, 57-page report could reignite discussions about legislation to regulate credit card interchange.
"The timing of this report is very interesting," said Red Gillen, a senior analyst at the Boston market research company Celent, given that the Dodd-Frank Act, which will take effect next year, includes provisions to regulate debit card interchange rates.
"This is the first time we're seeing real numbers on how much interchange costs certain types of households," Gillen said. "The formulas may be debated, but this is certainly the starting point for a new conversation on interchange's effects."
The Boston Fed's report "confirms what we've been saying, which is that credit card interchange fees drive up costs for everybody," said Mallory Duncan, a senior vice president of the National Retail Federation and its general counsel, "but it also brings out the fact that middle- and lower-class consumers who use credit cards the least are essentially subsidizing others."
Credit card interchange on average is about 2% of a sale. The federation said consumers pay about $50 billion annually in interchange. "So everybody is paying 2% more for everything at the point of sale to cover the cost of interchange, but rewards cardholders are getting some of that back," Duncan said.
But some experts dispute the report's findings.
"There are gaping holes in these economists' argument," said Megan Bramlette, a director at the New York research firm Auriemma Consulting Group. "Their underlying assumption is that, if interchange were reduced or eliminated, merchants would lower their prices across the board, and there is no evidence that such a thing would happen," she said.
The economists also ignore the fact that merchants derive many benefits from accepting cards, including selling more goods, she said, because "plastic is more convenient than cash." She also noted the unaccounted for costs of handling cash because merchants that deal in cash and checks are often subject to higher losses.
"From a purely academic standpoint, this report makes a point, but it ignores so many other elements of the payment system that in my view it is not complete," Bramlette said.
