Who Pays For Your Rewards? Redistribution in the Credit Card Market

Sumit Agarwal, Andrea Presbitero, André Silva and Carlo Wix

No 2023-007, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: 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.

Keywords: Household finance; Credit cards; Financial sophistication; Rewards (search for similar items in EconPapers)
JEL-codes: G21 G40 G51 G53 (search for similar items in EconPapers)
Pages: 70 p.
Date: 2023-01-20
New Economics Papers: this item is included in nep-ban, nep-fmk, nep-pay and nep-reg
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https://www.federalreserve.gov/econres/feds/files/2023007pap.pdf (application/pdf)

Related works:
Working Paper: Who Pays for Your Rewards? Redistribution of the Credit Card Market (2023)
Working Paper: Who Pays For Your Rewards? Redistribution in the Credit Card Market (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2023-07

DOI: 10.17016/FEDS.2023.007

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