The New York Times looks at some of the social and economic implications of the trend towards using credit cards with reward programs.

On the social implications:

After all, the 1 to 3 percent or more of every transaction that merchants pay to accept the cards is a significant cost, and the small local retailers that make neighborhoods vibrant often pay a higher percentage.

Stores then build those fees into higher prices, so people who aren’t earning any rewards can end up subsidizing those who do. Many of these people have no credit cards because they’re financially troubled.

So the risk is that we perpetuate a sort of reverse Robin Hood problem, as Prof. Steven Semeraro of Thomas Jefferson School of Law in San Diego puts it. It’s possible that the poor pay subsidies to finance the rewards of the affluent.

And of course, as many merchants know, while the simple act of accepting credit cards tends to lead to higher sales (both per-transaction and gross), the costs of accepting credit cards have been increasing dramatically over the past few years.

Here’s one finding: Rewards-earning credit cards with the Visa and MasterCard logo often cost merchants more than plain-vanilla ones, which hints at the card companies’ laserlike focus on subsidizing rewards for the affluent customers who are still spending, even if they are paying their bills off each month and thus paying no interest.

But cards undoubtedly also benefit retailers. People can use credit to spend more than they have in the bank at the moment, and some may spend more on a card than they would if they had to lay out a pile of money. Merchants who handle less cash, meanwhile, bear fewer costs for counting it, calling the armored car, and theft by employees or armed bandits.

As for the cost to consumers of all the card use, the National Retail Federation figures that the so-called interchange fees that their members pay to accept Visa and MasterCard alone cost an average of $427 an American household in 2008. Add in other fees the stores pay, plus costs for American Express and Discover, and that number could approach $600.

Head on over to the nytimes website and read the full article.

Tags: Credit Card Processing, Fees, Legislation, Psychology

This entry was posted on Saturday, January 9th, 2010 at 3:49 am and is filed under Credit Card Processing, Fees, Legislation, Psychology. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.