Loading
Democrats spentIMFEUYour browser does not support the element. much of the presidential-election campaign calling Donald Trump a fascist. Mr Trump is hardly known for his conciliatory nature. So few American politicos expect there to be much bipartisanship in his second term. Yet in one place there is already a flicker of cross-aisle agreement: a proposal to cap interest rates on credit-card repayments at 10% has won the support of both Mr Trump and Bernie Sanders, perhaps the most prominent left-wing Democrat.Sadly, the policy is unwise. Like most price controls, capping interest rates would distort the market and hurt ordinary punters. Card issuers would probably respond by locking out less reliable borrowers, not by offering cheaper rates. Worse still, Messrs Trump and Sanders are looking past genuine problems with American credit cards. That may be because the problems stem from something stupendously popular: ultra-generous rewards.Credit-card rewards are meagre in much of the rich world, especially Europe. But in America they are chunky, and many are hooked. The Points Guy, a website with the strapline “Maximise your travel”, which recommends strategies to accumulate and spend credit-card points, has garnered almost 30m visits in the past three months. More than 600,000 people subscribe to the r/churning forum on Reddit, a social-media site, where members construct elaborate strategies to “churn” through different cards, capitalising on introductory offers. A common piece of advice for would-be churners is to beware the “5/24 rule”. JPMorgan Chase, a bank, is thought to issue blanket denials to anyone who has signed up to five or more cards over the previous 24 months.Options run from relatively straightforward cashback cards, which might offer 1.5% back on each transaction, to jazzier, more expensive ones. Some charge hefty annual fees: $695 for the American Express Platinum card, for instance. Customers can, in theory, recoup these with points and benefits such as credits for flights, food delivery and subscriptions. In practice, clawing back fees can be tricky and distort spending. Your columnist, desperate to spend a $50 American Express voucher for Saks Fifth Avenue, a department store, before it expired, once found himself ordering an entirely unnecessary $49 geranium-scented-soap dispenser.To the sufficiently obsessed, optimising credit-card spending can be a lucrative hobby. However, beneath the bonanza is a problem: the rewards are funded by the least well-off. This happens in two ways. First, customers who do not use credit cards subsidise those who do. Half of all transactions by households earning more than $150,000 a year are done by card, compared with just one in ten for those earning less than $25,000. The subsidy occurs because every time a card is used, merchants are charged an interchange fee. In America that is usually around 2% of the value of the transaction, though it can easily be higher for premium cards. The fee then gets split three ways: between the credit-card company (most often Mastercard or Visa), the issuer (usually a bank) and the customer (via cashback or rewards). Each beneficiary, unsurprisingly, enjoys this arrangement: banks and credit-card companies make a tidy profit; shoppers get a little closer to funding that business-class flight to the Maldives. Merchants are rather less grateful, but they generally fold the fee into their prices—meaning those who do not use credit cards share the pain.Merchants could, in theory, demand higher prices from credit-card users. This happens occasionally; for instance, some stores offer discounts when payments are made by cash or else only accept card payments for larger transactions. Rent payments often cannot be done by credit card, or at least not without sizeable additional fees. But until recently adding surcharges for credit-card payments was banned, both in retailers’ agreements with credit-card companies and, in some states, by legislation. In 2013 a class-action lawsuit put an end to surcharge bans by Mastercard, Visa and the like. Most state-level laws are also getting pared back. In New York credit-card surcharges were outright illegal until 2018, when the state Court of Appeals ruled that surcharges were permitted as long as they were adequately disclosed. Still, a widespread shift in pricing norms looks unlikely. Americans are too used to the current way of doing things.A second issue is that rewards function as a tax on those with credit cards but without the ability or inclination to keep up with the panoply of options. Sumit Agarwal of the National University of Singapore, Andrea Presbitero of the , and André Silva and Carlo Wix of the Federal Reserve find that American credit-card-reward programmes redistribute around $15bn a year from “naive” to “sophisticated” consumers. In cash terms, the biggest losers are actually the unsophisticated well-off. Yet financial sophistication, which the researchers approximate with credit-rating scores, also correlates with education, income and race. High-school graduates, the poor and ethnic minorities are the least likely to earn credit-card rewards.What could Mr Trump do? One answer lies on the other side of the Atlantic. In 2015 the European Union capped credit-card interchange fees at 0.3%. Research by the European Commission estimates that 70% or so of the reduction has been passed on to consumers in the form of lower prices. At the time, was sceptical of the ’s move. Better, we thought, to let competition yank down fees than to do so by state diktat: startups could profit by undercutting incumbents. Although that is still the best solution, there is little sign of such disruption. If Mr Trump can stomach taking inspiration from Europe, and is willing to incur the ire of r/churning, he could support legislation to lower interchange fees—ideally by enough to scupper reward programmes.
