Fed/GFLEC Financial Literacy Seminar Series

March 23, 2023

3:30 PM - 4:30 PM ET

Seminar II: Who Pays For Your Rewards? Redistribution in the Credit Card Market

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Carlo Wix

Senior Economist, Board of Governors of the Federal Reserve System




Carlo Wix is a Senior Economist at the Federal Reserve Board in the Division of Supervision and Regulation (Policy Effectiveness and Assessment Section). His research interests are in banking regulation, financial intermediation, and consumer credit.


We study credit card rewards as an ideal laboratory to quantify redistribution between consumers in retail financial markets. Comparing cards with and without rewards, we find that, regardless of income, sophisticated individuals profit from reward credit cards at the expense of naive consumers. To probe the underlying mechanisms, we exploit bank-initiated account limit increases at the card level and show that reward cards induce more spending, leaving naive consumers with higher unpaid balances. Naive consumers also follow a sub-optimal balance-matching heuristic when repaying their credit cards, incurring higher costs. Banks incentivize the use of reward cards by offering lower interest rates than on comparable cards without rewards. We estimate an aggregate annual redistribution of $15 billion from less to more educated, poorer to richer, and high to low minority areas, widening existing disparities.