We study credit card rewards as an ideal laboratory to quantify the cross-subsidy from naive to sophisticated consumers in retail financial markets. Using granular data on the near universe of credit card accounts in the United States, we find that sophisticated consumers profit from reward credit cards at the expense of naive consumers who lose money both in absolute terms and relative to classic cards. We estimate an aggregate annual cross-subsidy of $15.5 billion. Notably, our results are not driven by income—while sophisticated high-income consumers benefit the most, naive high-income consumers pay the most. Banks lure consumers into the use of reward cards by offering lower interest rates than on comparable classic cards and bank profits are highest for borrowers in the middle of the credit score distribution. We show that credit card rewards transfer wealth from less to more educated, from poorer to richer, from rural to urban, and from high to low minority areas, thereby widening existing spatial disparities.
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