New EPC Study Shows LMI Households Rely on Credit Card Rewards
May 08 2024 - 10:00AM
Business Wire
LMI cardholders use cashback rewards to
supplement daily expenses, combat rising inflation
The Electronic Payments Coalition today released a new
report examining how American consumers, including lower-income
consumers, utilize reward credit cards and how proposals
restricting card issuers’ ability to offer reward credit cards
would adversely impact cardholders of all incomes. The study found
the share of credit cards offering rewards is nearly identical
across income and cardholders, regardless of income, earn rewards
at virtually equal rates.
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The main difference in rewards usage across incomes was in how
rewards are redeemed. While all accountholders prefer “cashback”
rewards, low- to moderate-income (LMI) accounts have a stronger
preference for cash, with spikes in November and December as well
as during late summer and back-to-school shopping season. Expressed
as a share of income, the boost represented through rewards is
three to four times larger for LMI cardholders than for the highest
income cardholders. For context, rewards earned by LMI cardholders
amounts to a 17 cent per gallon annual discount at the gas pump – a
tangible savings for these households.
“Americans of all incomes take advantage of credit card reward
programs but the most financially vulnerable households depend on
cashback rewards to help make ends meet,” EPC Executive Chairman
Richard Hunt said. “Saying credit card reward programs only
help the rich or are just about getting lounge access at the
airport is nothing more than willingly ignoring the full picture.
Hardworking Americans rely on their rewards to help make ends meet
and manage their daily finances. For many, these credit card
rewards served as a lifeline during the record inflation of the
last few years.”
The key findings from the report include:
- Rewards are for everyone. Since 2020, rewards card
ownership has grown the fastest among the low-to-moderate (LMI)
income segment. Currently more than two-thirds of LMI cardholders
own a rewards card. This result illustrates that rewards cards are
popular amongst low-income households, and that reward programs do
not exclusively serve upper-income customers.
- Rewards supplement consumer income. All cardholders
receive a boost to income from their rewards. Many cardholders save
up rewards over the course of months to supplement holiday and
back-to-school shopping. In fact, total rewards savings in 2023
accounted for 23%-32% of planned holiday purchasing. Consumers also
use their rewards to supplement everyday expenses, with some
studies suggesting consumers now rely on their rewards cards more
than ever in the face of rising inflation.
- There is no cross-subsidy or so-called “Reverse Robin
Hood.” Rewards redemption rates are similar across income
groups, suggesting that each income group is taking advantage of
their rewards at the same level. Moreover, rewards earned and
redeemed are nearly identical across income segments after
controlling for spending, directly countering the RRH argument that
low-income segments subsidize rewards for wealthier consumers.
- Rewards are especially important to lower-income
consumers. Low-income consumers deeply value credit card
rewards. LMI accounts are most likely to redeem rewards for cash,
implying that this income segment uses rewards for everyday
spending needs. Rewards have a significantly larger financial
impact on LMI cardholders than higher-income cardholders. Removing
or reducing reward programs would negatively impact low-income
households’ finances more than any other income group.
The study also found rewards earned from using credit cards can
help offset price increases, but cash and debit card users do not
benefit from rewards and thus lose out on potential savings
generated through cashback rewards. Some have argued merchants
simply pass through the cost of card acceptance to all consumers,
but the report cites the benefits of credit card acceptance, which
can lead to an uptick in purchases that ultimately results in a
5-6.4% net benefit to merchants, even after factoring in acceptance
cost.
While the increased profitability generated by accepting credit
cards means that there is little business rationale to raise
prices, for retailers who nonetheless choose to impose surcharges
on credit card users to recoup card acceptance costs, the so-called
Reverse Robin Hood effort still fails to hold up because the
cardholder alone bears the additional cost. Moreover, as the
experience of the Durbin amendment demonstrates and myriad research
studies have proven, large retailers have failed to pass through
savings from debit card interchange reductions to their customers
by lowering prices.
Finally, reward cardholders often carry a balance of unredeemed
rewards. This represents an important safety net for these
cardholders.
The EPC study was conducted during the first quarter of 2024
among EPC members and represents more than half of the credit card
market as measured by purchase volume. The study excluded
cobranded, small business, and international rewards cards. Income
segments were approximated using the Community Reinvestment Act
income bands.
The full study can be found HERE.
About The Electronic Payments Coalition
(EPC):
We are the credit unions, community banks,
payment card networks, and institutions that support the backbone
of our economic system: electronic payments.
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Nick Simpson Nick@electronicpaymentscoalition.org