Who Pays For The Convenience Of Credit Cards?
The use of credit cards in the U.S. economy has grown inexorably in the last five decades. Nearly eighty percent of U.S. households own at least one credit card, which is ten percentage points higher than just a decade ago. If we include debit cards the proportion is above 85 percent. People use credit cards for a variety of reasons: besides the sheer convenience of not having to carry cash, the ubiquity of shopping on the internet has increased the perceived need to have and use credit cards. Some stores eschew the use of cash altogether. But another key reason for the uptick in their usage is that the credit card companies have made it worth our while to use themnamely by giving us cash back from our purchases. These days 80 percent of all credit cards are reward cards, and the average household receives $170 a year from points just from using them. But not everyone is happy with the growing ubiquity of credit cards. Some worry that the cost to merchants of credit cards forces them to increase their prices, which may serve to worsen income inequality: While those with credit cards can get some of that back via their points, those who pay in cashand it is mostly the poor who dont own credit cardsget nothing in return. The calculus has led some to suggest that we should do away with cash back deals altogether in the name of fairness. Doing such a thing would be a large mistake, as it would do little either to lessen inequality or help those without access to credit. For starters, the evidence is mixed on the impact of credit card fees on prices. For instance, the Richmond Federal Reserve Bank studied what happened after Congress sharply reduced merchant fees charged by debit cards and saw no evidence that retailers passed along those savings. And while the merchant fees for using a credit card are not negligiblethey currently average a little above two percentthe ubiquity of credit cards also saves them money by leaving them with less cash to process. Besides the cost of transporting cash or hiring a security company to pick it up regularly there is also the constant risk of theft or pilfering; for instance, my fathers first job as a lawyer in the early 1960s entailed surreptitiously hanging out at a hotel bar to figure out whether the bartenders were stealing from the till. Sadly, not much has changed. There are tremendous societal gains in nudging the economy further away from cash: fewer illegal or off the books (and untaxed) transactions, reduced crime, and lower transaction costs in society. If we ended points we would undoubtedly see at least some of the gains in credit card usage in the last decade reverse. And even if it were true that credit cards increase income inequality, the answer isnt to reduce their use among the middle class and wealthy but to take steps to help everyone have access to banking and at least one credit card: the lack of credit cuts off access to wide swaths of the formal economy for anyone. Several players in the industry are taking steps to achieve this: For instance, Wells Fargo WFC recently announced efforts to extend transactional accounts to a large cohort of people currently shut out of the banking system because of their credit histories and bounced checks. Other banks have indicated they will soon do likewise. Our financial architecture could and should do more to help low-income households have access to more services. Taking steps to reduce those services to others by constraining credit card offerings would not help them at all.