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> Credit card rewards are a regressive tax on the poor Maybe credit card loyalty systems are specifically, but if you want to make comments about the entire sy

> Credit card rewards are a regressive tax on the poor Maybe credit card loyalty systems are specifically, but if you want to make comments about the entire system of credit cards then you should look at the entire system of credit cards to figure out who’s subsidising who. On the other side of credit card rewards the fact that revenue from high spenders subsidises credit account defaults. If you chose to only focus on that single element of the system you could just as reasonably say that credit cards are a progressive tax on the rich.

jonhohle 3y ago
Do you mean high debtors? A good number of high spenders rinse all of their transactions through credit cards to collect the rewards and then pay them off every month. I haven’t paid a fee in at least 18 years, and typically collect several hundred dollars a year in rewards on spending I would do anyway. When local vendors give me a cash discount, it’s typically 3%, better than most rewards programs, and I take that. The few cards that offer 5% in other categories have to be getting that from interest payments or promotional retail agreements as opposed to transaction fees. Hitting one of those on a high spending category is like hitting the lottery!
- AmericanChopper 3y ago
  Well that too, but there’s plenty of money made off the transaction processing fees. My point is that if you want to make comments about a complex system, that you can’t just take one component of that system and ignore everything else. If you wanted to make claims about what income brackets contribute what revenue (and what liabilities), and to who by using credit cards, then create a model to show your work. Focusing only on one component that you might find objectionable isn’t enough to draw such a conclusion.
gostsamo 3y ago
Actually, what you say is that the middle class pays for the cashbacks of the top spenders and for the defaults of the most poor. Unless somehow you get the cashback and you are still the one paying for the credit risk of others?
anonymouskimmer 3y ago
I think you misread the point GP was making. The poor-poor don't have credit cards. They have cash and debit cards. They pay the same as we do at most[1] merchants, despite credit card transactions nominally costing the merchant more money than cash or debit transactions. Most merchants budget the cost of credit card fees into their regular prices that all people pay regardless of method of payment. [1] - https://www.thebalancemoney.com/credit-card-surcharges-315423 https://www.thebalancemoney.com/credit-card-surcharges-31542... TLDR: The existence of credit cards is basically an automatic 2-3% inflation on prices. As a fraction of income, this hurts the poor the worst. The better off get this 2% back as rewards. Cash payers get nothing back.
- AmericanChopper 3y ago
  > The existence of credit cards is basically an automatic 2-3% inflation on prices. If you want to draw this conclusion you’d have to calculate the cost of the alternative. What would the impact on prices be if there were no electronic payments? What would the impact on prices be if every bank had to implement its own electronic payment system with every merchant? The credit card system integrates a huge portion of the worlds merchants with nearly all of the worlds banks. It’s massively more efficient than the alternatives, apart from other conceptually similar systems that have exactly the same type of costs. Your claim that removing this efficiency would lower prices seems entirely implausible and to me.
  - arecurrence 3y ago
    Canada already has a national electronic system called Interac. It was established in 1984 and has a somewhat complicated fee schedule that generally maxes out around 35 cents per transaction. https://www.interac.ca/en/business/support/understanding-fees/ https://www.interac.ca/en/business/support/understanding-fee...
  - e63f67dd-065b 3y ago
    The world you described exists, and it’s called Alipay (in China), TNG (in Malaysia), Pix (Brazil), etc (that's why I listed them in my original comment). Alipay and Wechatpay is the standard in China, a country with a population triple that of the US, and only charges 55-60bps, a quarter that of the US. So yes, I do believe that we can gain efficiency by switching. Also note that interchange is capped in the EU at 30bps, and they seem to do just fine without 2% cashback on every purchase. One might start to think that we can do with something similar here in the US.
e63f67dd-065b 3y ago
Different CC brands target different parts of the demographic. Amex targets superprime, BoA/Chase is more prime-subprime, Discover leans subprime, etc. Different brands also have different business models. Amex relies very heavily on interchange, Chase is a balanced mix iirc, Citi is more interest, and different companies have everything in-between. This is a deliberate strategy -- issuers split people into transactors, who never carry balances and pay off their CC bills every month, and revolvers, who carry balances and pay interest. It's a core strategic decision to target how much of your customer base you want to be one vs the other. To a first order, defaults are subsidised by the high interest rate that they pay. Transactors primarily earn the banks interchange revenue, which is a more stable part of the business, and revolvers primary earn the banks interest, which obviously carries with it much greater credit risk. To a second order, some issuers securitise their portfolios into different tranches, and the default risk is thus pushed to the debt purchasers. It gets much more complicated from there, with different scoring models to determine spending patterns, default risk, bust-out risk, etc. (As an aside, there's a fascinating story around Synchrony switching from FICO to VantageScore a while back, thus making it much more complicated to securitise their CC portfolio) But, in general, credit card interchange is a cost built into everything you buy, and on which the prime-superprime consumer receives a rebate.
godelski 3y ago
For those not understanding this comment, think about microtransactions. Who "subsidizes"? The people that can spend a lot but are also addicted. Connection? People that spend a lot on credit cards and gather late fees but not enough to ruin their credit or lose their card. You know who banks love? That person who has 5 overdraft fees on their checking account per month while maintaining a healthy balance in their savings account. Know who banks hate? Poor people defaulting on their loans that won't get collected. Know who banks love the most? People who park large amounts of money in them. That money makes banks bank. Banks and credit card companies aren't just leeching off the poor. They have various sources of income. There's more nuance to the system than just "fuck the poor" and framing it that way just muddies the waters.
- e63f67dd-065b 3y ago
  Yes, of course there's more nuance than "fuck the poor". I almost never attribute malice to any actor -- the structural effects of systems are mostly organically evolved over time, nobody woke up one morning and designed the system to fuck over anybody in particular, just to make money. I'm basing my view on the classic Boston Fed paper https://www.bostonfed.org/publications/public-policy-discussion-paper/2010/who-gains-and-who-loses-from-credit-card-payments-theory-and-calibrations.aspx https://www.bostonfed.org/publications/public-policy-discuss... . I don't keep up much with the literature, so you can probably find rebuttals and more complex models in the last 13 years of economic research, but I think the big picture largely stands -- all prices are increased by 200bps, and super-prime customers get most of it back as a rebate on their credit cards.
  - BenjiWiebe 3y ago
    In my experience credit score isn't based on how much money you transact/owe, but how well you manage whatever debt you have. I.e. I have two 2% cashback credit cards even though I make <$30k/yr.

jonhohle 3y ago

Do you mean high debtors? A good number of high spenders rinse all of their transactions through credit cards to collect the rewards and then pay them off every month. I haven’t paid a fee in at least 18 years, and typically collect several hundred dollars a year in rewards on spending I would do anyway. When local vendors give me a cash discount, it’s typically 3%, better than most rewards programs, and I take that. The few cards that offer 5% in other categories have to be getting that from interest payments or promotional retail agreements as opposed to transaction fees. Hitting one of those on a high spending category is like hitting the lottery!

AmericanChopper 3y ago
Well that too, but there’s plenty of money made off the transaction processing fees. My point is that if you want to make comments about a complex system, that you can’t just take one component of that system and ignore everything else. If you wanted to make claims about what income brackets contribute what revenue (and what liabilities), and to who by using credit cards, then create a model to show your work. Focusing only on one component that you might find objectionable isn’t enough to draw such a conclusion.

gostsamo 3y ago

Actually, what you say is that the middle class pays for the cashbacks of the top spenders and for the defaults of the most poor. Unless somehow you get the cashback and you are still the one paying for the credit risk of others?

anonymouskimmer 3y ago

I think you misread the point GP was making. The poor-poor don't have credit cards. They have cash and debit cards. They pay the same as we do at most[1] merchants, despite credit card transactions nominally costing the merchant more money than cash or debit transactions. Most merchants budget the cost of credit card fees into their regular prices that all people pay regardless of method of payment. [1] - https://www.thebalancemoney.com/credit-card-surcharges-315423 https://www.thebalancemoney.com/credit-card-surcharges-31542... TLDR: The existence of credit cards is basically an automatic 2-3% inflation on prices. As a fraction of income, this hurts the poor the worst. The better off get this 2% back as rewards. Cash payers get nothing back.

AmericanChopper 3y ago
> The existence of credit cards is basically an automatic 2-3% inflation on prices. If you want to draw this conclusion you’d have to calculate the cost of the alternative. What would the impact on prices be if there were no electronic payments? What would the impact on prices be if every bank had to implement its own electronic payment system with every merchant? The credit card system integrates a huge portion of the worlds merchants with nearly all of the worlds banks. It’s massively more efficient than the alternatives, apart from other conceptually similar systems that have exactly the same type of costs. Your claim that removing this efficiency would lower prices seems entirely implausible and to me.
- arecurrence 3y ago
  Canada already has a national electronic system called Interac. It was established in 1984 and has a somewhat complicated fee schedule that generally maxes out around 35 cents per transaction. https://www.interac.ca/en/business/support/understanding-fees/ https://www.interac.ca/en/business/support/understanding-fee...
- e63f67dd-065b 3y ago
  The world you described exists, and it’s called Alipay (in China), TNG (in Malaysia), Pix (Brazil), etc (that's why I listed them in my original comment). Alipay and Wechatpay is the standard in China, a country with a population triple that of the US, and only charges 55-60bps, a quarter that of the US. So yes, I do believe that we can gain efficiency by switching. Also note that interchange is capped in the EU at 30bps, and they seem to do just fine without 2% cashback on every purchase. One might start to think that we can do with something similar here in the US.

e63f67dd-065b 3y ago

Different CC brands target different parts of the demographic. Amex targets superprime, BoA/Chase is more prime-subprime, Discover leans subprime, etc. Different brands also have different business models. Amex relies very heavily on interchange, Chase is a balanced mix iirc, Citi is more interest, and different companies have everything in-between. This is a deliberate strategy -- issuers split people into transactors, who never carry balances and pay off their CC bills every month, and revolvers, who carry balances and pay interest. It's a core strategic decision to target how much of your customer base you want to be one vs the other. To a first order, defaults are subsidised by the high interest rate that they pay. Transactors primarily earn the banks interchange revenue, which is a more stable part of the business, and revolvers primary earn the banks interest, which obviously carries with it much greater credit risk. To a second order, some issuers securitise their portfolios into different tranches, and the default risk is thus pushed to the debt purchasers. It gets much more complicated from there, with different scoring models to determine spending patterns, default risk, bust-out risk, etc. (As an aside, there's a fascinating story around Synchrony switching from FICO to VantageScore a while back, thus making it much more complicated to securitise their CC portfolio) But, in general, credit card interchange is a cost built into everything you buy, and on which the prime-superprime consumer receives a rebate.

godelski 3y ago

For those not understanding this comment, think about microtransactions. Who "subsidizes"? The people that can spend a lot but are also addicted. Connection? People that spend a lot on credit cards and gather late fees but not enough to ruin their credit or lose their card. You know who banks love? That person who has 5 overdraft fees on their checking account per month while maintaining a healthy balance in their savings account. Know who banks hate? Poor people defaulting on their loans that won't get collected. Know who banks love the most? People who park large amounts of money in them. That money makes banks bank. Banks and credit card companies aren't just leeching off the poor. They have various sources of income. There's more nuance to the system than just "fuck the poor" and framing it that way just muddies the waters.

e63f67dd-065b 3y ago
Yes, of course there's more nuance than "fuck the poor". I almost never attribute malice to any actor -- the structural effects of systems are mostly organically evolved over time, nobody woke up one morning and designed the system to fuck over anybody in particular, just to make money. I'm basing my view on the classic Boston Fed paper https://www.bostonfed.org/publications/public-policy-discussion-paper/2010/who-gains-and-who-loses-from-credit-card-payments-theory-and-calibrations.aspx https://www.bostonfed.org/publications/public-policy-discuss... . I don't keep up much with the literature, so you can probably find rebuttals and more complex models in the last 13 years of economic research, but I think the big picture largely stands -- all prices are increased by 200bps, and super-prime customers get most of it back as a rebate on their credit cards.
- BenjiWiebe 3y ago
  In my experience credit score isn't based on how much money you transact/owe, but how well you manage whatever debt you have. I.e. I have two 2% cashback credit cards even though I make <$30k/yr.