Who Pays For Your Rewards? Redistribution in the Credit Card Market

69 Pages Posted: 7 Jun 2022 Last revised: 6 Dec 2022

See all articles by Sumit Agarwal

Sumit Agarwal

National University of Singapore

Andrea Presbitero

International Monetary Fund (IMF); Centre for Macroeconomics & Finance Research (CeMaFiR)

André F. Silva

Board of Governors of the Federal Reserve System

Carlo Wix

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: December 5, 2022

Abstract

We study credit card rewards as an ideal laboratory to quantify redistribution between consumers in retail financial markets. Comparing cards with and without rewards, we find that, regardless of income, sophisticated individuals profit from reward credit cards at the expense of naive consumers. To probe the underlying mechanisms, we exploit bank-initiated account limit increases at the card level and show that reward cards induce more spending, leaving naive consumers with higher unpaid balances. Naive consumers also 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. We estimate an aggregate annual redistribution of $15 billion from less to more educated, poorer to richer, and high to low minority areas, widening existing disparities.

Keywords: household finance; credit cards; financial sophistication; rewards

JEL Classification: D12, D14, G21, G40, G51, G53

Suggested Citation

Agarwal, Sumit and Presbitero, Andrea and Silva, André F. and Wix, Carlo, Who Pays For Your Rewards? Redistribution in the Credit Card Market (December 5, 2022). Available at SSRN: https://ssrn.com/abstract=4126641 or http://dx.doi.org/10.2139/ssrn.4126641

Sumit Agarwal

National University of Singapore ( email )

15 Kent Ridge Drive
Singapore, 117592
Singapore
8118 9025 (Phone)

HOME PAGE: http://www.ushakrisna.com

Andrea Presbitero

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Centre for Macroeconomics & Finance Research (CeMaFiR) ( email )

Piazza Mirabello 2
Milan, 20100
Italy

André F. Silva

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Carlo Wix (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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