Card Rewards and Cross-Subsidization in the Gasoline and Grocery Markets

Abstract Since many merchants charge consumers a single price regardless of payment method, payment card rewards programs may cause some consumers to indirectly subsidize others. From our consumer survey, we find that higher income consumers received a higher rewards rate, and from merchant operating statements, we find that card costs are likely passed on to consumers. We calculate that in 2009 about $1.4b to $1.9b was transferred in the U.S. due to rewards on groceries and gasoline. Because of the distribution of rewards in the population, under certain assumptions, card rewards programs may be a welfare transfer from poor to rich.