A Harvard Business School study reveals how the U.S. credit card system has created a massive wealth transfer favoring affluent consumers at the expense of lower-income households.
According to research by Harvard Business School Professor Mark L. Egan and colleagues, premium credit card users receive $9.2 billion annually in rewards that are effectively subsidized by middle- and lower-income households paying with cash or debit cards. The mechanism works through interchange fees—charges merchants pay to accept cards—which are built into prices for all shoppers regardless of payment method.
“Because merchants charge everyone the same price regardless of how they pay, those fee costs are factored into prices for all shoppers,” the research explains. “However, credit card users get that money back and then some through rewards, while cash and debit users get little or nothing.”
The disparity is stark. Cash users effectively face a 26% higher sales tax than premium credit card users shopping at the same store. Collectively, interchange fees shift an estimated $30 billion annually from cash and debit users to credit card users at similar merchants.
Egan’s team analyzed payment data from roughly 1.8 million merchants, including about 1 million merchants representing one-fifth of all U.S. card volume, partnering with financial transaction firm Fiserv. Their findings showed premium card users receive 43% of rewards while paying only 30% of interchange fees. In contrast, cash users receive no rewards but pay about 10% of fee-related costs.
The annual transfer amounts to approximately $390 gained per high-income household (earning over $150,000) while lower-income households lose about $88 yearly. This redistribution rivals major government support programs in economic significance, comparable to the Earned Income Tax Credit and unemployment insurance.
A key driver of this system stems from the 2010 Durbin Amendment to the Dodd-Frank Act, which capped debit card interchange rates for large banks starting in 2011. The policy intended to protect consumers but had unintended consequences. Banks recouped lost debit fee revenue by shifting focus to premium credit cards, which have higher fees. While debit card users lost rewards and perks, credit card users benefited from lower merchant prices while maintaining their rewards.
“It’s just the way the market was set up,” Egan said. “It turns out to be unfavorable to people who use cash and debit, and those who happen to be people with low incomes.”
The regressive outcome wasn’t intentional. “No one wanted this outcome from the Durbin Amendment,” Egan noted. However, two factors somewhat mitigate the transfer: different payment methods tend to be used at different merchants, and large retailers like Walmart and Target negotiate lower interchange fees, reducing cross-subsidization by approximately 25%.
Key facts
- Credit card rewards total $9.2 billion annually, primarily benefiting households earning over $150,000
- Cash users effectively pay 26% higher sales tax than premium credit card users at the same stores
- Interchange fees shift an estimated $30 billion annually from cash and debit users to credit card users
- Premium card users receive 43% of rewards while paying only 30% of interchange fees
- The 2010 Durbin Amendment capped debit card fees but inadvertently boosted premium credit card usage and fees
- High-income households gain about $390 yearly while lower-income households lose about $88 annually from this system
- The study analyzed payment data from approximately 1.8 million merchants