Payment card rewards programs have become increasingly popular in the United States. But do consumers really benefit from rewards? In the United States, rewards are paid for primarily by the fees charged to merchants, and merchants may pass on the fees to consumers as higher retail prices. Further, some regulators and analysts claim that rewards may send consumers distorted price signals, which in turn may lead consumers to choose payment methods that are less efficient to society. ; Card networks and merchants have taken opposing sides in the rewards debate. Card networks claim their fee structures, including rewards, are crucial to achieving the right balance between merchant acceptance and consumer usage of their cards. Rewards can also reduce the total costs to society by inducing more consumers to switch from costly payment methods, such as checks, to less costly payment cards. Merchants benefit as well, they claim, because rewards card users make higher-value transactions than other consumers. Finally, more generous rewards are even more beneficial to consumers because they receive more as they make more card transactions. ; Merchants, on the other hand, claim they pay for the rewards through their fees to card issuers. They argue that competitive pressures and customer expectations prevent them from rejecting cards even though the fees outweigh their benefits. They reject the idea that accepting rewards cards is profitable despite the higher fees. Instead, they argue that customers with rewards cards spend more than those without rewards cards simply because their incomes are higher—not because they receive more rewards. Finally, they argue that more generous rewards actually harm consumers, because higher fees to merchants lead to higher prices for goods and services. ; Hayashi seeks to provide insight into these issues by considering whether current rewards programs benefit consumers and society. While definitive answers await further data, the analysis in this article suggests that the currently provided payment card rewards programs, especially credit card rewards programs, are not likely to be efficient. Further, rewards may potentially be too generous, lowering overall consumer welfare.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
Publisher Info
Article provided by Federal Reserve Bank of Kansas City in its journal Economic Review.