IMF Working Papers

Who Pays for Your Rewards? Redistribution of the Credit Card Market

By Sumit Agarwal, Andrea F Presbitero, Andre Silva, Carlo Wix

March 10, 2023

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Sumit Agarwal, Andrea F Presbitero, Andre Silva, and Carlo Wix. Who Pays for Your Rewards? Redistribution of the Credit Card Market, (USA: International Monetary Fund, 2023) accessed November 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

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: Credit cards, Financial sophistication, Household finance, Rewards

Publication Details

  • Pages:

    73

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Working Paper No. 2023/054

  • Stock No:

    WPIEA2023054

  • ISBN:

    9798400232428

  • ISSN:

    1018-5941