Who pays for the convenience of credit cards?



The use of credit cards in the US economy has grown inexorably over the past five decades. Almost eighty percent of American households have at least one credit card, which is ten percentage points more than just ten years ago. If we include debit cards, the proportion is over 85%.

People use credit cards for a variety of reasons: Besides the simple convenience of not having to carry cash, the ubiquity of internet shopping has increased the perceived need to have and use credit cards. Some stores avoid the use of cash altogether.

But another key reason for the increase in their use is that the credit card companies have made it worthwhile to use them, including returning us money on our purchases. Today, 80% of all credit cards are reward cards, and the average household receives $ 170 a year in points just for using them.

But not everyone is happy with the growing ubiquity of credit cards. Some fear that the cost to merchants of credit cards will force them to raise their prices, which can worsen income inequality: while those with credit cards may recoup some of this through their points, those who pay in cash – and it is especially the poor who do not have credit cards – get nothing in return.

The math has led some to suggest that we should eliminate cash back offers altogether in the name of fairness. To do such a thing would be a serious mistake, as it would do little to reduce inequalities or help those without access to credit.

For starters, the evidence is mixed as to the impact of credit card fees on prices. For example, the Federal Reserve Bank of Richmond studied which happened after Congress sharply reduced merchant fees charged by debit cards and saw no evidence that retailers passed on those savings.

And while merchant fees for using a credit card are not insignificant, they are currently on average. just over two percent– the ubiquity of credit cards also saves them money by leaving them less money to process. Besides the cost of carrying cash or hiring a security company to collect it on a regular basis, there is also a constant risk of theft or pilferage; for example, my father’s first job as a lawyer in the early 1960s was to sneak out into a hotel bar to see if bartenders were stealing from the cash register. Unfortunately, not much has changed.

There are huge societal gains in moving the economy away from cash: less illegal or unofficial (and untaxed) transactions, less crime, and lower transaction costs in society. If we were to complete points, we would undoubtedly see at least some of the gains in credit card use over the past decade reversed.

And while it was true that credit cards increase income inequality, the answer is not to reduce their use among the middle and wealthy classes but to take steps to help everyone have access to banking. and at least one credit card: lack of credit cuts off access to large parts of the formal economy for anyone.

Several industry players are taking steps to achieve this: For example, Wells Fargo

WFC
recently announced efforts expand transactional accounts to a large cohort of people currently excluded from the banking system due to their credit history and bad checks. Other banks have indicated that they will soon do the same.

Our financial architecture could and should do more to help low-income households access more services. Taking steps to reduce these services to others by limiting credit card offers would not help them at all.



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