WASHINGTON — When leaders at the nonprofit Hispanic Institute started getting charged fees by credit card companies for online donations, they decided it was time to find out who else was hurt by the fees.
A study released last week by the institute found that grocery stores and gas stations often raise their prices to adjust for fees they are charged on purchases by card companies with reward programs, and that ultimately it is lower-income consumers who ends up paying the most.
“The total transfer of wealth from lower-income Americans to higher-income Americans through rewards programs ranges from about $1.4 to about $1.9 billion each year,” said Gus West, chairman of The Hispanic Institute’s board.
Here’s how the interchange fees work: If two consumers, one with a 1 percent rewards card and one with a plain credit card, spend $100 in gas, the gas station will simply raise prices to cover the $1 fee it is charged by the reward card company.
“The credit card industry claims publicly that merchants would keep the money and consumers would not see lower prices if interchange fees were lower,” West said. “This study shows they are wrong.”
“Merchant profits were the same with lower interchange as they were with higher interchange, and the cost of interchange simply made the consumer prices higher or lower, much like a sales tax,” he said.
But Trish Wexler from the Electronic Payments Coalition says there is another way that merchants can help consumers out.
“I think that the credit card bashing thing is popular to do right now, but there seems like a more direct solution there,” Wexler said. “That the merchants should offer them a discount, because there’s nothing that is preventing a merchant from offering a cash discount.”
The institute conducted the study with Dr. Efraim Berkovich, a University of Pennsylvania visiting scholar and economist, through analysis of transaction data and telephone interviews with consumers. The study controlled for spending but focused on rewards programs and their costs alone.
“We know the (interchange fee) money has to be coming from somewhere,” Berkovich said. “We have no alternative at this point but to say it looks like it’s coming from higher prices.”
West said the top earners receive $355 million per year more in rewards programs than they pay for those programs. On the purchase of groceries and gasoline, people who earn more than $200,000 per year receive about $50 per year in rewards, whereas people who earn $25,000 or less per year receive only $5 in rewards.
“All of these consumers, rich and poor, pay the same hidden interchange fees that the credit card companies imbed in [prices],” West said.
Berkovich found that people who pay for everything in cash are most affected by fees and are ultimately subsidizing people with reward cards. Although reward holders have higher interest rates, they also tend not to carry balances.
“We notice the spending doesn’t change in response to the rewards,” Berkovich said. “So really the only thing that’s happening here is money is moving around and the banks are taking a small cut.”
West said that similarly troubling wealth transfers can be seen when looking at the population based on education.
“People with graduate degrees earn far more than double the rate of rewards than people with high school diplomas earn,” West said. “Here again, these figures correlate with race, and we find that minority households are secretly subsidizing non-minority households.”
West said his group is considering advocating for such policy changes as prohibiting card companies from charging higher interchange fees for reward cards.
“The credit card system is rigged against low-income and minority Americans,” he said.
“Minority households pay hundreds of millions of dollars each year for people with higher incomes to get frequent flier miles and reward points. This is fundamentally unfair.”
But the credit card system is not to blame, Wexler said, because interchange fees pay for a service, indiscriminate of race or economic background.
“They pay for the float on funds,” Wexler said. “The grocery store or the gas station gets their funds right away, whereas the card issuer gets paid 30 days later when the customer pays them.”
“There’s a point to that fee; it’s not just a fee,” she said.