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Consumers who pay for purchases with cash or with credit and debit cards that offer no or modest rewards subsidize the prizes issuers offer cardholders who use premium rewards cards, according to Adam Levitin, associate professor of law at Georgetown University. Speaking on a panel during a conference on payment pricing hosted by the Federal Reserve Bank of Chicago last week, Levitin blamed card-network bans on surcharging or discounting some cards over others for unfair transfer of costs to consumers who use cheaper tenders. "Merchants have to either eat the costs of card transactions or pass them on to consumers," Levitin said. "Users of super-high-level rewards cards are subsidized by those with lower-rewards cards and unbanked cash users. So we have a very regressive subsidization system coming out of card networks." Levitin also argued that interchange income for card issuers has fed dysfunctional credit card use because interchange helps offset losses from card charge-offs. The higher interchange is, the more aggressively issuers can afford the risks of lending. "So transactors essentially are subsidizing revolvers and defaulters," Levitin said. "Riskier underwriting enables greater card penetration, and that enables greater interchange revenue. And at some point, the system starts to break down."
