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Credit card companies build reward programs from the pocketbooks of low-income, non-card holding minorities

Credit card companies build reward programs from the pocketbooks of low-income, non-card holding minorities

LatinaLista — A new report by the Hispanic Institute has uncovered an alarming practice by credit card and debit companies and banks that result in basically stealing money from the poor to reward the wealthy.


Trickle-Up Wealth Transfer: Cross-subsidization in the payment card market is a long and complicated name for a report that uncovers the extent of how low-income people are being taken advantage of at the cash register -- especially people of color.

We all know that merchants (grocery stores, gas stations, department stores, etc.) charge customers the same price. For example, people, from the same community, going to the local Wal-Mart all pay the same price for a loaf of bread.

If Wal-Mart charged college graduates a higher price than people who only have a high school education, all hell would break loose at such a discriminatory practice.

Yet, discrimination is happening in the checkout lanes and, until this report, no one had any idea that credit card companies were making these merchants force low-income Americans to pay more than their fair share for goods and services.

According to the report, every time someone uses a credit or debit card to pay for their purchases there is a "swipe fee" or by it's official name, an interchange fee, that retailers have to pay the banks for processing the transactions.

These fees can eat into retailers' profits, sometimes even exceeding their profits. So how do retailers offset the loss? They include the prices they have to pay for the fees into the prices they charge everybody for their goods and services.

People who pay with cash and debit cards are basically subsidizing the people paying with credit cards. In other words, giving them money.

If those credit cards "earn rewards" then it's worse news for those paying cash and with debit since reward cards normally have higher fees.

What the report uncovered was:

•The current structure of the credit card system requires lower income and disproportionate numbers of minority consumers to transfer billions of dollars to higher income and disproportionate numbers of non-minority consumers.

•Total money transferred in the United States due to swipe fees and rewards is about $1.4b to $1.9b on gas and groceries alone.

•The bottom 50 percent of income earners pay at least $669 million more than they should and the top 10 percent of earners receive at least a $354 million subsidy.

•Card rewards accrue disproportionately to wealthier households even after adjusting for spending.

•Consumers with high school diplomas paid more to subsidize people with advanced degrees.

•Minority households paid more to subsidize non-minority households.

The report's author, economist Efraim Berkovich of the University of Pennsylvania, offers some remedies for this inequality among consumers. The bulk of the suggestions have to do with either lowering interchange fees or letting merchants decide which cards and/or rewards programs they accept.

At any rate, making people who pay with cash or debit -- because they can't qualify for a credit card or paying with cash/debit is being a more responsible consumer to them -- have to compensate those who use credit cards is unfair.

If credit card companies want to reward their customers, they shouldn't be stealing from those whom they don't even do business with.

"This study demonstrates that credit card companies have secretly rigged the system so that everyday Americans lose out to those who enjoy top incomes; it also suggests that 'unbanked' Americans, including disproportionate numbers of Hispanics, who don't have cards are hurt the most by swipe fees," said Gus West, Chairman of The Hispanic Institute.


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