Credit card use may be reinforced or punished

[sue_frantz]

The New York Times published a freely-available 5-minute opinion piece on credit cards that offer rewards. They argue that the money rewards cards give back has to come from somewhere, and that somewhere is from the transaction fees the credit card companies—most notably Visa and Mastercard—charge business owners. They believe that using rewards cards ultimately hurts those in the lower economic strata who are less likely to use rewards cards and so don’t reap their benefits while still paying the higher prices the businesses have to charge to cover the transaction fees. The economists and public policy experts at the International Center for Law and Economics have a different opinion.

I am not an economist, but I understand enough to know that this is all more complicated than it may first appear. I am also not so naïve as to believe that if we all stopped using cash-back credit cards, Visa and Mastercard would reduce these transaction fees.

As a consumer, however, I have been encountering the reinforcement and punishment of credit card use.

I have a credit card that gives me 5% back on gas purchases. Our local gas stations will give me 10 cents off per gallon if I pay with cash. With gas at $3.00 a gallon, when I use this credit card, I get 15 cents off per gallon. I am reinforced with money for using the credit card. The price of gas would need to drop to $2.00 per gallon for the 10 cents for cash equals the 5% back on my credit card. Now let’s imagine a fantasy world where gas is less than $2.00 per gallon. Even if it would cost me less to pay cash, the hassle of walking into the gas station, standing in line, and waiting for the cashier to make change would make using the credit card at the pump or using the app on my phone a more desirable option. And that’s not even calculating the cost of the snacks I’m more likely to purchase if I walk in. In short, the use of this particular credit card at gas stations is reinforced.

I also have a credit card that give me 3% back on restaurant purchases. Because of the credit card transaction fees, our favorite local restaurant started adding a 3.5% credit card use fee to all credit card transactions. On a $30 bill (including tip), that’s $1.5, but we would only get 90 cents back from our credit card. Sixty cents isn’t much, but it doesn’t require any extra effort on our part to pay cash—it takes just as long to wait to for server to return with change as it does to wait for them to return with a credit card receipt to sign—so we pay cash and save the 60 cents, thank you very much. In other words, at this restaurant, our credit card use is punished with an extra cost, so we don’t use it.

I wonder, though, if customers at this restaurant would be even more likely to pay cash if what we were charged initially included the 3.5% credit card use fee and they framed it as a 3.5% discount for using cash. It’s an empirical question! If you’d like to give your students some experimental design practice, ask them how they would go about testing that hypothesis.

Last example. We have a rewards card that gives us 1.5% back on all purchases. We had to have the thermostat replaced on our car. Our mechanic recently started passing the 3.5% cost of the credit card transaction fee onto their clients. On a bill of a few hundred dollars, I would be punished in the form of having to pay many dollars for using my credit card. This was an easy decision. I kept the credit card in my wallet and paid by check. And, no, I don’t remember the last time I wrote a check. As more businesses adopt this strategy, I look forward to the development of the handheld printer that will print checks. It’ll connect via Bluetooth to an app on my phone. I enter the business name and amount, and it prints out the check for me to sign.

Ask students if they have a cashback rewards card and if they decide when to use it based on whether businesses explicitly pass the transaction fees solely onto credit card users. My examples may be specific to me—what I find reinforcing and punishing. I can see where some people choose to use the credit card regardless—either because they’ve decided that the convenience of using a card (or app) always outweighs the dollar cost or because they don’t have the cash available so need to put the purchase on credit.