Issues & Insights
Four credit cards in a wallet. Photo by Nick Youngson (, via Picserver. Licensed under Creative Commons 3 (CC BY-SA 3.0).

How A Flawed IMF Study Would Rob You Of Credit Card Benefits

It was click bait from the most unlikely of sources: Earlier this year, a group of academic and government researchers from the National University of Singapore and the International Monetary Fund (with support from an economist at the Federal Reserve Board), undertook a study of the U.S. credit card rewards market.

Provocatively titled, “Who Pays for Your Rewards? Redistribution of the Credit Card Market,” the report’s findings were so specious and flawed the banking industry barely gave it a glance.

Unfortunately this “academic” dirge has now been cited in numerous media outlets, including the Wall Street Journal. It is also cited by proponents of the deceptively titled Credit Card Competiton Act, a bill championed by Senator Dick Durbin, D-Ill., and Big Box retailers that would severely restrict the interchange that manages credit card transactions. Such restrictions would result in a windfall for retailers at the expense of consumers’ card benefits.

Recall that Durbin passed similar legislation on debit cards in 2010 as part of the massive Dodd-Frank regulation bill. Retailers promised lower prices, which study after study has shown never materialized. Instead, consumer saw the extinction of debit card rewards, the demise of free checking offering, or lost access to their accounts entirely.

Of course, retailers, eager to once again pad their bottom lines, cheer the report’s utter nonsense in a further threat to consumer benefits.

The report itself is dripping with academic elitism, dubbing consumers who carry a balance on their credit cards (“revolvers” in industry parlance) as “naïve” and “unsophisticated,” and claiming their “financial mistakes” are made out of “ignorance.”

The researchers correlate “sophistication” with more “educated, more urban” individuals. They even break down their analysis by geography, conveniently observing that people in Blue States are more financially savvy than people in Red States, who apparently are merely naïve, Southern rubes.

Astoundingly the researchers further correlate their findings to race, drawing similarly patronizing and offensive conclusions about the alleged lack of “sophistication” of Black consumers. The bulk of their conclusions expose a simplistic understanding of U.S. consumer behavior that assumes customer costs are born from ignorance and not deliberate choice.

For example, they accuse revolvers of being unaware that their interest charges may exceed their rewards earnings, and thus fail to grasp that they are “losing money” and subsidizing those who pay their balances in full every month (“transactors”). The researchers conclude that rewards cards harm the less affluent, who are “lured by banks via rewards to overspend.” 

As non-rewards cards typically have lower spending limits, the study suggests that they are better for revolvers. Similarly, they conclude that lower interest rates on rewards cards are “lures” employed by banks to encourage overspending.

The study thoroughly ignores consumers’ motivations in earning rewards, and stunningly fails to grasp that lower interest rates on rewards cards are based on market competition for customers with lower risk profiles, not an enticement to spend.

Big Box retailers tout the “reverse Robin Hood” argument to claim lower interchange rates will stop low-income card holders from subsidizing the rewards of the wealthy, but the report actually refutes this premise. It instead posits that high-income revolvers pay more in interest for carrying higher balances most likely because they can afford to.

Thus, this debate is not a matter of rich vs. poor, regardless of the researchers’ claims that the “sophisticated” are being subsidized by the “naïve.”

But here’s the kicker: Near its conclusion the paper acknowledges, without credible analysis, that any cross-subsidy among income groups is “implied” and assumes that all revenue (including interest and fees) funds card rewards. So after countless pages of speculative drivel, the authors back away from their main thesis as if it were a live grenade.

The fact is that rewards are not funded by “naive” consumers who carry a balance, as that would mean credit card issuers were offering products that are unprofitable. Each card issued is designed to generate a reasonable return, without the need for one cardholder to subsidize another.

Further, credit card issuers make money from rewards cards, even when the monthly balance is paid in full.

Rewards are funded by interchange fees that retailers pay to participate in the safest, most convenient and most competitive payment system on the planet, and also by annual fees paid by cardholders with higher-earning products. It is utter nonsense to claim rewards are funded by interest charges or late fees, as transactors who pay no interest can attest.

It’s time to stop pitting American consumers against one another with false — and offensive — narratives. The Federal Reserve should know better than to lend its name to such an erroneous study that cynically seeks to rob consumers of their credit card benefits merely to pad the profits of the Big Box retailers and their friends.

Gerard Scimeca is an attorney and serves as chairman and co-founder of CASE, Consumer Action for a Strong Economy, a free-market oriented consumer advocacy organization.

We Could Use Your Help

Issues & Insights was founded by seasoned journalists of the IBD Editorials page. Our mission is to provide timely, fact-based reporting and deeply informed analysis on the news of the day -- without fear or favor.

We’re doing this on a voluntary basis because we believe in a free press, and because we aren't afraid to tell the truth, even if it means being targeted by the left. Revenue from ads on the site help, but your support will truly make a difference in keeping our mission going. If you like what you see, feel free to visit our Donations Page by clicking here. And be sure to tell your friends!

You can also subscribe to I&I: It's free!

Just enter your email address below to get started.


1 comment

  • Money and Power are the name of the Democrat game. Durbin and the Dems are no doubt raking in Big Box retailer campaign $$ from varied lobbyists whose clients stand to profit. Money and Power to support the ruling party’s campaign to jail, deplatform and marginalize conservatives to win one-party absolute power. Put this in the same big box as buying off black voters with free money (reparations) and making wealthy donors wealthier with selective bank bailouts and Solyndra-style green energy “loans” that will never be paid back. Makes “10% to the Big Guy” seem like peanuts in comparison.

About Issues & Insights

Issues & Insights is run by the seasoned journalists behind the legendary IBD Editorials page. Our goal is to bring our decades of combined journalism experience to help readers understand the top issues of the day. We’re doing this on a voluntary basis, because we believe the nation needs the kind of cogent, rational, data-driven, fact-based commentary that we can provide. 

We Could Use Your Help

Help us fight for honesty in journalism and against the tyranny of the left. Issues & Insights is published by the editors of what once was Investor's Business Daily's award-winning opinion pages. If you like what you see, leave a donation by clicking on donate button above. You can also set up regular donations if you like. Ad revenue helps, but your support will truly make a difference. (Please note that we are not set up as a charitable organization, so donations aren't tax deductible.) Thank you!