The Reverse-Robin-Hood-Cross-Subsidy Hypothesis: Do Credit Card Systems Effectively Tax the Poor and Reward the Rich?

Robin Hood and his band of merry men infamously, if apocryphally, robbed from the rich and gave to the poor. Over the last decade, some economists have postulated that credit card companies do the opposite: forcing low-income cash customers to pay higher prices for retail goods that effectively fund the frequent-flier miles and other rewards that go predominantly to affluent cardholders. Because credit card systems prohibit surcharging, everyone pays the same price. But, these analysts reason, merchants inflate their prices across the board to cover the cost of credit card acceptance. While credit card customers are rewarded handsomely, the poor, who often use cash or checks, get the shaft. In this sense, these commentators claim, card systems are reversing Robin Hood's redistributive quest.Until recently, the reverse-Robin-Hood-cross subsidy ("RRHCS") hypothesis was limited largely to theoretical economic analysis. Not any longer. Merchants have recently filed more than 50 lawsuits (now consolidated) against the card systems, alleging that the "No-Surcharge Rule effectively compels cash payers and users of other low-cost payment forms to subsidize all of the costly perquisites given by [Card-]Issuing Banks to consumers using more expensive payment forms such as Visa and MasterCard Payment Cards, including frequent-flier miles, rental-car insurance, free gifts, and even cash-back rewards." The potential damages in these cases are said to exceed the annual pre-tax profit of the entire U.S. banking industry.This Article questions the RRHCS hypothesis, providing reasons to doubt that card use increases retail prices in a substantial and systematic way. Although the best available evidence indicates that merchants pay more out-of-pocket to accept credit cards than they do for other forms of payment, these costs are only half the story. Credit cards provide significant benefits to merchants that could outweigh the incrementally higher out-of-pocket costs and thus lead to lower retail prices. Although the evidence is inconclusive, credit card acceptance appears to make all consumers better off than they would be if the particular merchants with whom they deal did not accept cards.Second, this Article demonstrates that the empirical evidence allegedly proving the hypothesis (surveys of gasoline retailers in the 1980s) in fact does not. Factors unique to gasoline retailing are more likely to explain the cross subsidies that existed in the 1980s, than is any generalizable principle about the relationship between card acceptance fees and retail prices. Moreover, when viewed in the context of the entire card-accepting economy, the 1980s gas station experience may cut against the RRHCS hypothesis. The data show that when a significant cross-subsidy favoring card users existed, a significant percentage of the dealers in a large and profitable industry adopted a cash-discounting policy. The paucity of similar discounting schemes today (or, alternatively, of merchants that do not accept credit cards) suggests that the 1980s gas station experience was unique and that substantial cross-subsidies across means of payment are now rare.Lastly, this Article evaluates the impact of any potential subsidy favoring credit card use within an economy that is rife with similar ones. It proposes measures aimed at bringing those who have no banking relationships into the system. Enabling more consumers to benefit from banking services, including credit cards, would provide a greater public service than battling a cross subsidy that may not exist.