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

WhoPaysforYourRewards? RedistributionintheCreditCardMarket SumitAgarwal,AndreaE.Presbitero,AndreF.Silva,CarloWix*WP/23/54 IMFWorkingPapersdescriberesearchinprogressbytheauthor(s)andarepublishedtoelicitcommentsandtoencouragedebate. TheviewsexpressedinIMFWorkingPapersarethoseoftheauthor(s)anddonotnecessarilyrepresenttheviewsoftheIMF,itsExecutiveBoard,orIMFmanagement. 2023 MAR ©2023InternationalMonetaryFundWP/23/54 IMFWorkingPaper ResearchDepartment WhoPaysforYourRewards?RedistributionoftheCreditCardMarketPreparedbySumitAgarwal,AndreaF.Presbitero,AndreF.Silva,andCarloWix AuthorizedfordistributionbyShekharAiyar March2023 IMFWorkingPapersdescriberesearchinprogressbytheauthor(s)andarepublishedtoelicitcommentsandtoencouragedebate.TheviewsexpressedinIMFWorkingPapersarethoseoftheauthor(s)anddonotnecessarilyrepresenttheviewsoftheIMF,itsExecutiveBoard,orIMFmanagement. ABSTRACT:Westudycreditcardrewardsasanideallaboratorytoquantifyredistributionbetweenconsumersinretailfinancialmarkets.Comparingcardswithandwithoutrewards,wefindthat,regardlessofincome,sophisticatedindividualsprofitfromrewardcreditcardsattheexpenseofnaiveconsumers.Toprobetheunderlyingmechanisms,weexploitbank-initiatedaccountlimitincreasesatthecardlevelandshowthatrewardcardsinducemorespending,leavingnaiveconsumerswithhigherunpaidbalances.Naiveconsumersalsofollowasub-optimalbalance-matchingheuristicwhenrepayingtheircreditcards,incurringhighercosts. Banksincentivizetheuseofrewardcardsbyofferinglowerinterestratesthanoncomparablecardswithoutrewards.Weestimateanaggregateannualredistributionof$15billionfromlesstomoreeducated,poorertoricher,andhightolowminorityareas,wideningexistingdisparities. JELClassificationNumbers: G21;G40;G51;G53 Keywords: householdfinance;creditcards;financialsophistication;rewards Author’sE-MailAddress: ushakri@yahoo.com;apresbiter@imf.org;andre.f.silva@frb.gov;carlo.e.wix@frb.gov IMFWORKINGPAPERSTitleofWP WORKINGPAPERS WhoPaysforYourRewards? RedistributionoftheCreditCardMarket PreparedbySumitAgarwal,AndreaF.Presbitero,AndreF.Silva,CarloWix1 1Authors’contacts:SumitAgarwal,NationalUniversityofSingapore;AndreaF.Presbitero,InternationalMonetaryFundandCEPR;AndreF.Silva,FederalReserveBoard;CarloWix,FederalReserveBoard.WethankourdiscussantsJaredDeLisle,YaronLevi,HugoMarin,PaolinaMedina,LucianaOrozco,StephenShore,andFrancescRodriguezTousforhelpfulcommentsandsuggestions.WearealsogratefultoAllenBerger,VitalyBord,HansDegryse,ChenLian,ThomasMosk,LakshmiNaaraayanan,DanielParavisini,MatthiasRodemeier,AnnetteVissing-Jørgensen,MichaelWeber,andparticipantsatseveralconferencesandseminarsfortheirvaluablesuggestions.TheviewsexpressedinthispapersolelyreflectthoseoftheauthorsandnotnecessarilythoseoftheFederalReserveBoardortheFederalReserveSystem,andneithershouldbeattributedtotheInternationalMonetaryFund,itsExecutiveBoard,oritsmanagement.Firstversion:June2022. INTERNATIONALMONETARYFUND3 WhoPaysForYourRewards? RedistributionintheCreditCardMarket SumitAgarwalAndreaF.PresbiteroAndre´F.SilvaCarloWix* December2022 Abstract Westudycreditcardrewardsasanideallaboratorytoquantifyredistributionbe-tweenconsumersinretailfinancialmarkets.Comparingcardswithandwithoutrewards,wefindthat,regardlessofincome,sophisticatedindividualsprofitfromrewardcreditcardsattheexpenseofna¨ıveconsumers.Toprobetheunderlyingmechanisms,weexploitbank-initiatedaccountlimitincreasesatthecardlevelandshowthatrewardcardsinducemorespending,leavingna¨ıveconsumerswithhigherunpaidbalances.Na¨ıveconsumersalsofollowasub-optimalbalance-matchingheuristicwhenrepayingtheircreditcards,incurringhighercosts.Banksincentivizetheuseofrewardcardsbyofferinglowerinterestratesthanoncomparablecardswithoutrewards.Weestimateanaggregateannualredistributionof$15billionfromlesstomoreeducated,poorertoricher,andhightolowminorityareas,wideningexistingdisparities. Keywords:householdfinance;creditcards;financialsophistication;rewards JELClassification:G21;G40;G51;G53 *Authors’contacts:SumitAgarwal,NationalUniversityofSingapore,e-mail:ushakri@yahoo.com;AndreaF.Presbitero,InternationalMonetaryFundandCEPR,e-mail:apresbitero@imf.org;Andre´F.Silva,FederalReserveBoard,e-mail:andre.f.silva@frb.gov;CarloWix,FederalReserveBoard,e-mail:carlo.e.wix@frb.gov.WethankourdiscussantsJaredDeLisle,YaronLevi,HugoMarin,PaolinaMedina,Lu-cianaOrozco,StephenShore,andFrancescRodriguezTousforhelpfulcommentsandsuggestions.WearealsogratefultoAllenBerger,VitalyBord,HansDegryse,ChenLian,ThomasMosk,LakshmiNaaraayanan,DanielParavisini,MatthiasRodemeier,AnnetteVissing-Jørgensen,MichaelWeber,andparticipantsatseveralconferencesandseminarsfortheirvaluablesuggestions.TheviewsexpressedinthispapersolelyreflectthoseoftheauthorsandnotnecessarilythoseoftheFederalReserveBoardortheFederalReserveSystem,andneithershouldbeattributedtotheInternationalMonetaryFund,itsExecutiveBoard,oritsmanagement.Firstversion:June2022. I.Introduction Consumerslackingfinancialsophisticationoftenmakecostlymistakes(e.g.,Campbell,2006;Gomes,Haliassos,andRamadorai,2021).Intheconsumercreditcardmark