Do Rewards Programs Penalize Cash-Only Spenders?

Credit card users love their rewards programs. After all, who doesn’t love a good interest rate and discounts on things like airfares and hotels? But now cash-only consumers have reason to hate these programs: they’re costing them serious money.

The evidence comes from a new report from the Federal Reserve, concluding that cash-only consumers tend to subsidize rewards credit card customers.

The report states that each cash-only U.S. household contributes $151 annually to rewards credit card households because their extra funds help pay for the discounted items. Thus households paying for goods and services primary with their rewards credit cards “earn” an additional $1,482 annually.

Cash-only users pay more at the point of sale than card users, who in turn add extra benefits from the rewards points and perks they get from their cards.

In the Fed paper, entitled “Who Gains and Who Loses from Credit Card Payments? Theory and Calibrations” by Scott Schuh, Oz Shy and Joanna Stavins, the authors explain the “cash/credit card gap” as follows:

“Merchant fees and reward programs generate an implicit monetary transfer to credit card users from non-card (or ‘cash’) users because merchants generally do not set differential prices for card users to recoup the costs of fees and rewards.”
Worse, from a demographic standpoint, low-income households, which tend to pay for goods and services with cash, appear to be subsidizing higher-income households, which are more likely to use rewards credit cards.

Says the Fed report:

“Because credit card spending and rewards are positively correlated with household income, the payment instrument transfer also induces a regressive transfer from low-income to high-income households in general. On average, and after accounting for rewards paid to households by banks, the lowest-income household ($20,000 or less annually) pays $23 and the highest-income household ($150,000 or more annually) receives $756 every year.”

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