A myth has been sweeping Capitol Hill. It goes something like this: Credit card companies are behaving like Robin Hood in reverse — they steal from the poor and give to the rich.
Concocted by retail lobbyists, this myth aims to demonize credit card companies so they can skim a few extra pennies off customers with every purchase.
Retailers claim that interchange fees — the tiny percentage credit card companies charge for using their networks and assuming the risks associated with fraud and nonpayment — are passed on to all consumers in the form of higher prices, whether they pay with cards or not.
People who believe the reverse Robin Hood fiction also imagine that low-income customers are subsidizing the airline miles, hotel points and cash-back bonuses for wealthy rewards card users.
But a research paper released by the International Center for Law and Economics earlier this month investigated the reverse Robin Hood narrative and found it to be total malarkey.
First, the claim that credit card processing fees are passed to all consumers on all goods doesn’t hold water. In reality, cash customers and credit card users tend to make purchases at different stores and service providers.
Even when they shop at the same merchant, studies show they tend to buy either completely different products or, in the case of staple goods that most everyone purchases, they purchase different brands.
There is a reason almost all merchants accept Amex; it's because the costs of accepting Amex exceed the benefits. The average Amex transaction is $170, compared to about $20 for the average cash transaction. If anything, cardholders subsidize cash-only consumers.
Additionally, federal law encourages merchants to provide cash discounts along to their customers. But, as shoppers know, almost no retailers and few service providers do that. It turns out businesses are the ones most often playing the grinch, not credit card companies.
In fact, when Congress voted to restrict interchange fees on debit cards as part of the disastrous 2010 Dodd-Frank Act, more than three-quarters of retailers didn’t lower their prices. That’s pretty solid proof that prices wouldn’t magically drop on most items if Congress applied the same big government price control scheme on credit cards.
While there is unquestionably a small expense to sellers for accepting credit cards, there is a significant cost related to accepting cash. A 2018 study discovered the average retailer in the U.S. spends 9.1% of the cash they receive dealing with handling, counting, auditing, transporting and depositing cash.
These expensive and time-consuming tasks will only grow more expensive as retail wages continue to rise due to inflation and minimum wage laws.
Finally, people who spread the reverse Robin Hood myth argue that lower-income consumers somehow subsidize credit card reward benefits through paying interchange fee expenses on credit cards without such benefits.
For that claim to be true, cards that provide perks like travel rewards and cash-back benefits would have to be used largely by high-income households. But that isn’t the case.
Research by Verisk found that 86% of credit card-holders have active rewards cards. This includes 77% of cardholders with a household income of less than $50,000. Further, a consumer’s ability to obtain rewards cards has little to do with income. Instead, according to the International Center for Law and Economics research, “access to rewards cards (are) tied to credit score, not to income.”
If efforts to cap interchange fees are successful, however, credit card rewards programs actually will become the domain of the rich.
In Australia, where socialist fee caps were adopted, the value of rewards programs plummeted and the annual fee for a modest reward card has skyrocketed to about $420 a year. Here in the U.S., cardholders actually receive an average of $167 in rewards and bonuses beyond what they pay in fees. Banks actually pay Americans to carry credit cards.
While the reverse Robin Hood myth has been totally debunked, retail lobbyists and nanny state extremists continue to spread the lie. They hope their tall tale will encourage federal lawmakers to slap absurd caps on credit-card interchange fees. If such a scheme were to pass, it would do little, if anything, to lower prices for customers and it would take away benefits from lower-income credit card users and small businesses that rely on cards to help subsidize travel and help pay day-to-day expenses.
The reverse Robin Hood myth might make a compelling fairy tale, but the true story about capping credit card interchange fees is a much more troubling story. Consumers would be harmed and the federal government would have more power over individuals’ financial choices, all so big retailers can pocket a few more dollars from their customers.
Drew Johnson is a government watchdog and economic policy expert who serves as a senior fellow at the National Center for Public Policy Research.
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