While this focuses mainly on the consumer-credit card company relationship, I wanted to add this interesting study on the relationship between consumers across socioeconomic strata:
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Since retailers usually charge the same price regardless of payment method, payment card
rewards programs with different levels of rewards effectively cause some customers to subsidize
the consumption of others. The research presented confirms that households with income
less than $75,000 per year collectively transfer over $3.5 billion to those making more than
$75,000 per year.
Furthermore, the cost of interchange fees to retailers can be significant, especially in competitive
sectors such as gasoline and groceries. This study demonstrates that interchange costs are
typically about 17 to 19 percent of retailer profit. Variance in these costs may induce risk-averse
retailers to set higher prices, thus generating additional economic inefficiencies and hurting retail
consumers.
Negative impacts on low income and minority households and small businesses have become
“entrenched” and are likely to get worse as interchange fees continue to increase. This economic
inefficiency will not change unless there is a “sufficiently large shock” in the form of policy or
technology to change the dynamics of the monopolies holding sway over the credit card system.
```
A valid interpretation but not the only way to describe it. If a merchant offers a 10% discount for spending $1000 or more, are they making lower-spending customers subsidize the purchases of higher-spending ones? Are they transferring wealth from poor to rich?
Technically yes. But what would the impact be of outlawing the practice of volume discounts through a “policy change”?
``` Since retailers usually charge the same price regardless of payment method, payment card rewards programs with different levels of rewards effectively cause some customers to subsidize the consumption of others. The research presented confirms that households with income less than $75,000 per year collectively transfer over $3.5 billion to those making more than $75,000 per year. Furthermore, the cost of interchange fees to retailers can be significant, especially in competitive sectors such as gasoline and groceries. This study demonstrates that interchange costs are typically about 17 to 19 percent of retailer profit. Variance in these costs may induce risk-averse retailers to set higher prices, thus generating additional economic inefficiencies and hurting retail consumers. Negative impacts on low income and minority households and small businesses have become “entrenched” and are likely to get worse as interchange fees continue to increase. This economic inefficiency will not change unless there is a “sufficiently large shock” in the form of policy or technology to change the dynamics of the monopolies holding sway over the credit card system. ```
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