Priceless? The Social Costs of Credit Card Merchant Restraints

Abstract

Who pays for credit card rewards? This Article demonstrates empirically that credit card rewards programs are funded in part by a highly regressive, sub rosa subsidization of affluent credit consumers by poor cash consumers. In its worst form, food stamp recipients are subsidizing frequent flier miles. The subsidization is created by a set of credit card network rules called "merchant restraints" that combines with a cognitive bias known as the framing effect to limit merchants' ability to price payments systems according to cost.

The Article also shows how the subsidization of credit card use increases the use of credit cards for transacting. A set of cognitive biases amplifies increased transacting usage into an increase in credit card debt. Credit card merchant restraints thus ultimately contribute to credit defaults, reduced consumer savings and purchasing power, inflation, and consumer bankruptcy filings.

There are profound policy implications to the social externalities caused by credit card merchant restraints, including whether private control of essential services like payment systems is appropriate. In light of the negative social externalities of credit card merchant restraints, the Article proposes legislative intervention to ban merchant restraint rules.

Keywords: credit cards, surcharge, interchange, discounts, no-surcharge rule, honor all cards, merchant restraints, debit cards, unbanked, subsidization,merchant discount, cognitive bias, framing effect, underestimation bias, spending restraint bias, inflation, bankruptcy, savings, payment

JEL Classification: D18, D23, G21, G33, G28, K21, K23, L42, L4, D40