Who Pays for Your Rewards? Redistribution of the Credit Card Market
IMF Working Papers, March 10, 2023
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- Who Pays for Your Rewards? Redistribution of the Credit Card Market
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Bibliographic details
- Authors: Sumit Agarwal, Andrea F Presbitero, Andre Silva, Carlo Wix
- Published: March 10, 2023
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798400232428.001
Summary findings
- Comparing cards with and without rewards, sophisticated individuals profit from reward credit cards at the expense of naive consumers.
- Reward cards induce more spending, leaving naive consumers with higher unpaid balances.
- Naive consumers 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.
- Aggregate annual redistribution is estimated at $15 billion from less to more educated, poorer to richer, and high to low minority areas, widening existing disparities.
Mechanisms and empirical strategy
- Use of credit card rewards as a laboratory to quantify redistribution between consumers in retail financial markets.
- Exploit bank-initiated account limit increases at the card level to probe causal mechanisms:
- Reward cards respond to limit increases with greater induced spending.
- Increased spending on reward cards translates into higher unpaid balances for naive consumers.
Behavioral patterns and costs
- Sophisticated versus naive consumers:
- Sophisticated individuals capture net gains from reward programs across income levels.
- Naive consumers incur higher costs due to:
- Larger unpaid balances on reward cards.
- A sub-optimal balance-matching heuristic when repaying multiple cards.
- Pricing incentives:
- Banks set lower interest rates on reward cards relative to comparable non-reward cards to encourage usage, despite resulting redistribution effects.
Distributional impacts
- Estimated aggregate annual redistribution: $15 billion.
- Direction of redistribution:
- From less to more educated areas.
- From poorer to richer areas.
- From high to low minority areas.
- Net effect: widening of existing disparities in financial outcomes across education, income, and minority-status dimensions.
Keywords and subject focus
- Subjects: Consumer credit, Credit ceilings, External debt, Income, Income distribution, Interest payments, Money, National accounts.
- Keywords: account limit, Consumer credit, credit card market, credit card reward, credit cards, Credit ceilings, financial sophistication, household finance, Income, Income distribution, Interest payments, naïve consumer, reward card, rewards.
IMF Working Paper — "Who Pays for Your Rewards? Redistribution of the Credit Card Market", By Sumit Agarwal, Andrea F Presbitero, Andre Silva, Carlo Wix, March 10, 2023.
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