Credit Card Rewards May Fuel Debt: Study

Credit-card reward plans may fuel debt: study

Last Updated: Monday, July 20, 2009 | 4:21 PM ET

CBC News

An academic study suggests that people would rack up less credit-card debt if card companies were barred from offering rewards based on the value of their purchases.   The study, by a marketing specialist at the University of Toronto and an economist at the Federal Reserve Bank of Kansas City, sifts through the results of a 2005 American Bankers Association survey of credit- and debit-card users.  About 3,000 people were asked whether they got rewards on their purchases and about their perceptions of the transactions.

'As rewards programs have become increasingly popular and generous, interchange fees charged to merchants have also increased.'—Andrew Ching and Fumiko Hayashi

Many Canadians collect such rewards, typically travel points or cash rebates, and many merchants grumble about paying for them through transaction fees.

"As rewards programs have become increasingly popular and generous, interchange fees charged to merchants have also increased," said the study, which focused on U.S. data.

"A merchant pays different interchange fee rates for credit-card transactions: non-rewards cards have the lowest fee rates, while high-end rewards cards have the highest rates," it added.

The authors — Andrew Ching, an assistant professor of marketing at the U of T's Rotman School of Management, and Fumiko Hayashi, a senior economist at the Kansas City Fed — conclude that "removing rewards today would cause a small percentage of consumers to switch from electronic payment methods (credit/debit cards) to paper-based methods (cash/cheques) at five types of retail stores.

"The majority of consumers who currently receive rewards on credit/debit cards would continue to use credit/debit cards, even if rewards were no longer offered."

An example from Australian policy on card fees

This conclusion is "consistent with the experiences in Australia, where the three major credit-card networks, Bankcard, MasterCard and Visa, were mandated to reduce their interchange fees in 2003," the study says.

"Although the value of the rewards points for these three networks has been reduced dramatically since the reform, we observed that the usage pattern of credit cards has remained essentially unchanged."

Even so, they conclude that eliminating credit-card rewards would have a bigger effect than eliminating debit-card rewards.

"We also find that rewards encourage consumers to use credit cards even if they carry balances," the authors say.

"This suggests that removing credit-card rewards could have some effects in reducing consumers’ credit-card debts. This could increase consumers’ welfare, but reduce credit-card issuers’ revenue from interest charged on their balances."