Credit Cards and the Reverse Robin Hood Fallacy : Do Credit Card Rewards Really Steal from the Poor and Give to the Rich?

This paper considers the evidence for and against the reverse Robin Hood hypothesis. Under the “reverse Robin Hood” hypothesis, credit-card companies rob from the poor users of cash and give to the rich users of credit cards. But there are problems with this story. Indeed, the reverse Robin Hood may be more mythical than the original Robin Hood.Part I describes a strong form of the reverse Robin Hood hypothesis in more detail. Part II subjects this strong form of the reverse Robin Hood hypothesis to economic scrutiny. First, the economics of multisided markets is introduced to provide a basic framework to understand the operation of credit-card networks and the roles played by interchange fees and rewards programs. Second, the logic of the reverse Robin Hood hypothesis is analyzed in light of those economic principles, as well as the system’s empirical realities. Implicit to the conjectures that make up the reverse Robin Hood hypothesis are a number of propositions that must be true for the hypothesis to be upheld. Two main observations falsify the hypothesis. First, merchants are not able to pass on all costs to consumers. Second, the availability of rewards cards is more tied to credit ratings than to income, which means that even those with lower incomes do benefit from the use of rewards cards. Part III considers and rejects a weaker form of the reverse Robin Hood hypothesis from a 2020 Boston Fed Study. Finally, the brief considers the likely distributional effects of proposed legislative or regulatory action to target credit-card interchange fees. Specifically, Part IV considers the evidence related to merchant pass-through of interchange-fee caps in the form of lower prices for consumers, as well as the likely ways banks and other card issuers would adapt to any such fee caps. If the experience with caps on debit card fees under the Durbin Amendment is any indication, the benefits of interchange-fee caps will be much smaller than the costs to consumers, especially lower-income consumers