The Poor Transfer Wealth to The Rich Via Credit Cards

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Reuters has a story about the poor getting bamboozled with yet another scam.  No it's not three card monte or state run lotto tickets.  It's via credit cards, and the rich are getting, well… rich off of them.  According to the Boston Federal Reserve report, with its pretzel logic, only poor people pay by cash, and the rich elite pay via credit cards.  Who better to perform the study than the Federal Reserve.  With their multi-generation devaluation of the dollar, the Federal Reserve is an expert about wealth transfer.  The report though, is class warfare at its finest.

To the common folk it's not common knowledge that merchants must pay the credit card processor for every credit card a consumer uses at their store.  How much is the fee?  The range is anywhere from 1% – 4% of the total amount of the purchase price.  Because of this additional fee, businesses must increase their prices approximately the same amount to recoup the difference.  Makes sense so far.  The report then assumes poor people always pay in cash and they are in fact paying a premium for the goods purchased.  Nowhere is it mentioned that a wealthy person can pay all in cash, because they have it already.  The report is obviously flawed, as it's really not another class warfare between the rich and the poor, but between cash and credit card users.  The cash users are getting discriminated against, and should demand our government make things equal. Cash users unite!

It also assumes many poor people don't pay their credit cards monthly. They subsidize the rich via reward points (somehow via osmosis). Why is it not the fee the merchant pays for every transaction? Isn't it ironic that credit card reward points are no more than 2%? Hmm, that's odd considering merchant fees are around the same amount. After all, most sub prime credit card rates are in the 15% APR and higher. The credit card companies surely can't be that stingy to pay me more rewards towards a Best Buy gift card.

There is, of course, no direct transfer from the poor to the rich via credit card points. The credit card companies are simply rewarding the good customers and punishing the ones who pay late or don't pay in full.

In the end, I can see where this report is going. Probably do-good senators like Chuck Schumer, protector of the consumer, is hot on the case after his open letter to Apple about Antennagate. We'll have a Congressional debate raking the coals over the evil credit card companies and the businesses themselves who accept credit cards.  Our government will then “level the playing field” so the responsible individuals who can manage their credit won't stand to make anything from credit card rewards.  Congress will make us all share the misery with no rewards and high interest rates. I'm all for paying things in all cash; it's just the way our system is setup, so why should I not take advantage of it? Why shouldn't responsible individuals get “rewarded”, while the “poor” customers get penalized?

I have a better suggestion, if Congress is listening. I propose if Congress makes it harder for the responsible credit users, that they allow us to cut out the middleman. I have a PayPal account, and anyone who makes under $20,000, please send me $1. I want to get my annual $1,000 cash back with my Fidelity Visa Card. I only need 1,000 people. It should be easy to find that many individuals with credit card balances.

Otherwise, Congress, let's assume everyone has the ability to be responsible and grown up enough to make their own choices. I suspect, though, there are people, no matter how much the government intervenes, who will do everything possible to cause self-inflected pain on themselves.

I'm glad I'm paying for these insightful research reports, since the rich are subsidizing the government with their taxes.

Larry Ludwig

Larry Ludwig was the founder and editor in chief of Investor Junkie. He graduated from Clemson University with a bachelor of science in computers and a minor in business. Back in the ’90s, I helped create some of the first financial websites for firms like Chase, T. Rowe Price, and ING Bank, and later went on to work for Nomura Securities. He’s had a passion for investing since he was 20 years old and has owned multiple businesses for over 20 years. He currently resides in Long Island, New York, with his wife and three children.

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9 Comments

  1. Good point on how merchant fees are roughly aligned with rewards. You're right, it is class warfare, but that's something that's very popular in the US these days. Wouldn't be surprised if we actually see the administration move on this.

    I'll be sure to steal your next post LOL :>

  2. I saw this same story. It is definitely one of those things in life that isn't fair. That being said, there are a lot of things in life that aren't fair and you just have to suck it up. At the risk of sounding heartless – many of the people that are negatively affected by this are also positively affected by those same people's taxes. (food stamps, unemployment, etc)

    Im not saying its right, but taxing the middle class 30% isn't right either.

  3. Doesn't the 1-4% on each transaction go to the issuing bank while the credit card provider makes profit on the interest, fees, etc.?

    1. Good point, but I think you have it reversed. Visa, Mastercard and AMEX get a cut of the merchant fee. Meaning companies like Visa, Mastercard and AMEX profit is based upon the transactions through their network. So going back to your implied question, I'm not sure if Visa, Mastercard and AMEX subsidize reward points then or are the banks paying out the reward points themselves.

      1. Yeah, Visa and Mastercard get a cut of the merchant fee, but a good chunk of it goes to the issuing bank. In addition to this, the bank is also making money off of fees, interest, etc (the issuer, not the network). So the assumption that merchant fees alone are subsidizing rewards is false, because many rewards card users roll their balances over each month and sub-optimally pay huge amounts of interest in order to keep their meager rewards.

        Amex and Discover are a bit different, because they function as both networks and issuers (except for the occasional co-branded Amex card), so the whole merchant fee goes to them. But the rest of the argument is the same.

  4. At a much more basic level, this is a truism. Almost all consumer credit and borrowing is the poor transferring credit to the rich. People borrow, because they need money now, usually the poor. Who lends it to them? People who have extra money now, usually the rich. Any interest and fees are a transfer.

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