Do Credit Cards ‘Take a Swipe’ at Low Income Households?

The Boston-based Consumer Payments Research Center, which is a part of the Federal Reserve Bank of Boston, released a study late last week that is sure to generate a lot of debate among credit card holders, issuers, networks and consumer activists. The paper finds that those who don’t have or use cards subsidize those who do, thus creating a sort of “regressive transfer” of benefit from low-income to higher income households, who have and use cards liberally. It goes on to say that creating equilibrium is a function of reducing merchant fees, which would have the effect of reducing card rewards, since that is how these programs are subsidized, which would ultimately increase consumer welfare.

I’ve just started to dig into the paper, which I have to say, takes the notion of beach reading to a whole new level! Hanging around economists for the last decade or so still hasn’t gotten me over my fear of seeing equations and Greek figures interspersed between lines of text – and there are a bunch of such fear-mongerers in this piece. That aside, the authors, Scott Schuh, Oz Shy and Joanna Stavins—all extremely well- respected card gurus – conclude that those who don’t have or use cards are paying about $23 a year more in goods and services because merchants have to increase prices in order to pay the merchant discount that creates a $770+ benefit to those who use cards, that are by and large, higher income households. They suggest a few policy remedies that include reducing (eliminating?)and/or regulating the merchant discount fee, disclosing fees so that consumers might choose alternative payment types, redistributing income from higher income households to lower incomes ones, creating more competitors and offering lower cost networks to them. And there was none of the usual “on the one hand, on the other hand” economist-speak. They seemed pretty emphatic about this.

When Scott sent me this piece, he hinted that it would start a lot of conversations and boy, is he right! Here is one that was in yesterday’s New York Times. He agreed to do an interview for, which we’re scheduling now and  I am really looking forward to having a conversation around a few key questions that were prompted by his research. Here are a few of the things that are on my mind.


1. Is there anything good to be said about bank loyalty programs–are they really this wasteful? What about the notion that they really drive incremental sales for merchants?

2. If the banks eliminated loyalty programs, wouldn’t the merchants just spend the money they used to pay in interchange on their own programs? Then aren’t we kind of back in the same boat?

3. Banks are reporting that the recently enacted debit card regulations will cost them big-time. If revenue from interchange is also reduced or regulated away, aren’t you worried about the unintended consequences of having banks raise fees on other bank products and services that provide a benefit to lower income households?

4. You suggest that one approach would be to have merchants charge different fees for different payment types, thus possibly discouraging people from using cards in favor of less expensive payment options. Doesn’t this create a big accounting headache for the merchants and would they really, really want to run the risk of getting a customer ticked off at having to pay more for the convenience of using “their favorite” card?

5. And finally, why do economists like to use Greek symbols? Isn’t it a real pain in the butt to do those in Word?


Anyway, these are my thoughts, and you might have some questions too. Take a peek at the paper, breeze right by those pesky equations and then send me your thoughts and questions. I’ll do my best to include them in my cyber-side chat with Scott.

Stay tuned!!

Karen Webster is the President of Market Platform Dynamics (MPD), a management consulting firm that helps companies find, develop and monetize innovation. She serves as an advisor and member of the board for a number of companies operating in the payment, technology and digital media industries. 

MPD works with both incumbents and new entrants, offering a unique lens into the dynamics that shape the competitive playing field. In addition to traditional consulting-based services, MPD’s Catalyst Ventures provides intellectual and human capital to new firms. MPD’s experts include economists, econometricians, product development specialists, and strategic marketers who apply cutting-edge business theory and statistical methods to the practical problems of building and growing a profitable catalyst business.

Email Karen Webster