Robin Hood (Russell Crowe)In Michael S. Derby’s Wall Street Journal article titled “Credit Cards Take from the Poor, Give to the Rich” a ridiculous study is highlighted that claims a number of very interesting things, chief of which is that credit cards serve as a form of “Reverse Robin Hood” to take money from the pockets of the poor to give to the rich.

The title of the study is, “Who Gains and Who Loses from Credit Card Payments? – Theory and Calibrations” by Scott Schuh, Oz Shy, and Joanna Stavins. Here is the abstract:

“Merchant fees and reward programs generate an implicit monetary transfer to credit card users from non-card (or “cash”) users because merchants generally do not set differential prices for card users to recoup the costs of fees and rewards. On average, each cash-using household pays $151 to card-using households and each card-using household receives $1,482 from cash users every year. Because credit card spending and rewards are positively correlated with household income, the payment instrument transfer also induces a regressive transfer from low-income to high-income households in general. On average, and after accounting for rewards paid to households by banks, the lowest-income household ($20,000 or less annually) pays $23 and the highest-income household ($150,000 or more annually) receives $756 every year. We build and calibrate a model of consumer payment choice to compute the effects of merchant fees and card rewards on consumer welfare. Reducing merchant fees and card rewards would likely increase consumer welfare.”

Should We Believe the Study’s Conclusions Blindly?

Much has been said about this study but it seems that most writers are blindly accepting the conclusions of this study simply because, well, it’s called a “study” and Schuh, Shy, and Stavins must know what they are talking about, right? Well, not so much.

What the Study Gets Right

The study is right on the mark when they point out that credit card users typically end up paying less for a given item (after credit card rewards are taken into account) than someone who is paying cash. The study is also right on the mark when it points out the fact that most merchants (aside from gas stations) do not set different prices for items based on the payment method (meaning that the credit card processing fee is already built into the cost of the item).

What the Study Gets Horribly Wrong

There are a number of different issues that I take with the study and it’s conclusions but here are two major things that the study gets horribly wrong: the “Give and Take” issue and the “Rich vs Poor” issue. Let’s take a look at each in turn.

“Give and Take”

Is it even proper to frame the issue like “give and take”? Every different type of cost that a store has is priced into the purchase price of the products it sells. Why should the convenience of credit cards be treated any differently?

What about bathrooms? Bathrooms are convenient yet some people choose (probably wisely) to never ever use a gas station bathroom. However, whether they use the bathroom or not then the cost of having a bathroom available to customers of the gas station is a part of the price of every single item in the gas station convenience store. Does this mean that gas station bathroom users “take” from those who choose to not use the gas station bathroom? Of course not. The convenience of using the gas station bathroom is available to all and the cost borne by all just like the convenience of using credit cards is available to all and the cost borne by all.

Pretty simple stuff right? We could go on and on with all kinds of other examples of things that are available for everyone to use at a given store but only used by some and yet still not free because they are baked into the price of every item but I hope that the bathroom example gets this simple point across clearly enough. Let’s take a look at the second major error with the study’s conclusions.

“Rich vs Poor”

The second area where the study goes horribly wrong is when they insinuate a poor to rich transfer via credit cards. Let’s take a look at the thought process used:

The price of an item is the same for both cash buyers and credit card buyers.
For cash buyers the price of the item is likely higher than it would be if there were no credit card processing costs built into the item’s price.
Credit card use is highly correlated with being rich.
Therefore, credit cards take from the poor and give to the rich.

See anything wrong with the above reasoning process used in the study?

If you guessed “Lurking Variable/Confounding/Correlation Does Not Imply Causation” then you are right! The higher someone’s income is then the more likely that they are to use their credit cards more BUT that does not mean that credit cards take from the poor and give to the rich it simply means that credit cards “take” (see the above “Give and Take” section to see why I chose to use quotation marks) from the cash users and give to the credit card users (and in fact – credit cards also GIVE even to cash users via economies of scale through easy efficient payment processing, especially online, that lets more stuff get sold at an overall cheaper price to everyone but that is a discussion for another day).

If someone makes $6 an hour or $600 an hour then the price that they pay for an item is exactly the same AND if they have the same rewards credit card then the credit card rewards that they receive are exactly the same too. Income is not a causal factor in the equation. Choosing to use or not use a credit card is the causal factor. Those who use credit cards are rewarded via credit card rewards and those who use cash are “penalized” (in a sense) because of the passing up – the foregone benefit of credit card rewards that they are neglecting to receive by virtue of them paying with cash instead BUT-


It’s very important to understand that the people who are choosing to pay with cash rather than a credit card are presumably paying with cash because of some other real or perceived benefit to them (i.e. they are a hard line believer of the Dave Ramsey view of credit cards and are able to be more responsible with their money by only using cash or some other reason that makes sense to them). Assuming that pretty much everyone can get a decent credit card (and yes, there are even student credit cards and bad credit credit cards that offer rewards of some kind) then isn’t it just as ridiculous to demand separate pricing for cash payers as it would be to demand separate pricing for non bathroom users?

Imagine this scenario:

You walk into a gas station convenience store and say, “Hi, I would like the no-credit-card-convenience, the no-bathroom-convenience, and no-trash-can-convenience special pricing for my gallon of milk, please. Is that possible? Oh, and one other thing, can you please reduce the price a little more and give me the no-customer-service-for-asking-stupid-questions pricing as well?”

To which the reply is: “I am sorry sir, but the pricing is the same for everyone – and you would not qualify for the no-customer-service-for-asking-stupid-questions pricing even if such a thing existed, my friend.”

What do YOU Think?

Do you agree with the conclusions of the study?

What do you think about the “Give and Take” framing of the argument?

Why do you suppose the authors of the study chose to imply this “robbing of the poor to give to the rich” type of effect?

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6 Responses to “Why the “Reverse Robin Hood” Credit Card Study is a Load of Crock”

  1. I don’t know how this happens, that a certain industry (health insurance, petroleum, now credit cards) just gets vilified for no good reason. The conventional wisdom is that credit card issuers are somehow “bullying” merchants by forcing them to set identical prices for customers, regardless of payment method.

    I never thought about how credit card acceptance is just another factor to be incorporated into retail prices, no different than electricity or water. Try that next time you’re at the 7-Eleven: “You have to refrigerate the soda, so can I get a .005¢ discount for buying these Twizzlers instead?” Thanks for making me look at an issue from a different perspective, something rare among personal finance bloggers.

    • Joel says:

      Very true – it is quite interesting to see how consumer sentiment rises against different industries (usually with passions stoked by politicians who have self serving reasons for getting consumers stirred up). For example, before the passage of health care “reform” it was common to hear President Obama and others in favor of the bill continually saying that health insurance companies are greedy, making too much money, and profiting absurdly at the expense of sick people BUT the truth of the matter is that health insurance companies actually have very low profit margins – much lower than many other industries – the facts don’t fit the argument but the politicians knew what they were doing by preying on the emotions of the public.

  2. Len Penzo says:

    Well done, Joel. The referenced study and its conclusions are fatally flawed. It’s just another clumsy attempt to rile up a little class warfare from the usual suspects.

    I’ve said it before and I’ll say it again: if you are financially responsible and pay off the balance every month, there is nothing to fear from credit cards. Nothing. Credit cards provide convenience, rewards and valuable services for consumers that cash simply can’t match.


    Len Penzo dot Com

  3. Dr Dean says:

    What about all the politicians pushing casinos and the lottery. The argument, (which is much more substantial, from an actual money standpoint) that they take from the poor to subsidize the rich-ie less taxes- is forgotten when the pols budget woes are severe enough.

    Life isn’t fair, and no matter how much you tinker around the margins, you will not make it fair.

  4. Melanie says:

    Most people approaching this topic from your perspective adopt an arogant tone of entitelement and disdain for the poor. I appreciate your calm logic and well thought-out arguments. After reading the report last week I generally agreed with it, but you have me thinking differently.

  5. You know Joel, I did stop using all of my credit cards last year for a little while because one got cloned and it kind of freaked me out. I’ve gone back to being a happy CC user – just very cautious about the card leaving my sight (think restaurants).
    Love your post though AND love my rewards! I buy most of my Christmas and Birthday presents through credit card rewards and save up my CC grocery store points to eat as free as possible every year in December.
    It’s called responsibility. I’m happy however that there is restrictions in place now where CC companies can’t raise limits without a specific request from the customer. My CC has increased from a $500 limit to $15k over the last number of years. Sure, I can handle it and pay it off every month (and have never come close to charging 1/4 of the limit I have, but others may not be able to.
    I’m not about to boycott McDonalds because some people got too fat and sued.

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