Who Pays for Your Rewards? Redistribution of the Credit Card Market

Who Pays for Your Rewards? Redistribution of the Credit Card Market
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Volume/Issue: Volume 2023 Issue 054
Publication date: March 2023
ISBN: 9798400232428
$20.00
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Topics covered in this book

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Exports and Imports , Economics- Macroeconomics , Money and Monetary Policy , Economics / General , household finance , credit cards , financial sophistication , rewards , credit card market , account limit , reward card , naïve consumer , credit card reward , Consumer credit , Income , Credit ceilings , Interest payments , Income distribution

Summary

We study credit card rewards as an ideal laboratory to quantify redistribution between consumers in retail financial markets. Comparing cards with and without rewards, we find that, regardless of income, sophisticated individuals profit from reward credit cards at the expense of naive consumers. To probe the underlying mechanisms, we exploit bank-initiated account limit increases at the card level and show that reward cards induce more spending, leaving naive consumers with higher unpaid balances. Naive consumers also follow a sub-optimal balance-matching heuristic when repaying their credit cards, incurring higher costs. Banks incentivize the use of reward cards by offering lower interest rates than on comparable cards without rewards. We estimate an aggregate annual redistribution of $15 billion from less to more educated, poorer to richer, and high to low minority areas, widening existing disparities.