Credit card rewards reportedly shift $9.2B annually from lower-income to high-income households

A working paper by Harvard and Stanford researchers quantifies how interchange fees, charged to merchants for card transactions, are passed on as higher prices for all customers. Because credit card users receive rewards funded by these fees, while cash and debit users do not, the system functions as a wealth transfer. The study estimates this redistribution totals $30 billion annually, with $9.2 billion flowing to high-income households earning over $150,000. For engineers building payment systems, this underscores how fee structures and policy decisions can have cascading economic effects beyond their immediate technical scope.

The research relies on transaction data from 1.8 million merchants, including cash payments, to model how interchange fees are distributed. Premium credit card users receive 43% of rewards but pay only 30% of the fees, while cash users pay 10% of the costs without receiving any benefits. Debit card users at large banks, subject to the Durbin Amendment’s fee caps, fare worse, receiving 13% of rewards but paying 23% of fees. This imbalance suggests that policy interventions aimed at reducing fees can have unintended consequences, particularly when they disrupt the equilibrium between different payment methods.

The Durbin Amendment, intended to lower costs for merchants and consumers, instead reduced rewards for debit card users while leaving credit card rewards untouched. This policy outcome highlights the complexity of regulating payment systems, where changes to one part of the ecosystem can shift incentives and costs elsewhere. For engineers, the findings emphasize the importance of considering secondary effects when designing or modifying payment infrastructure, as even well-intentioned interventions can exacerbate economic disparities.

The study also notes that the wealth transfer is partially mitigated by the fact that cash, debit, and credit card users often shop at different merchants. However, in sectors like groceries and gas stations, where payment methods overlap more, the regressive effects are more pronounced. This suggests that the impact of interchange fees varies by industry, which could inform how merchants and payment processors structure their pricing and fee models. For engineers, this variability underscores the need for flexible, data-driven approaches to payment system design.