Cash Users May Be Subsidizing Premium Credit Card Rewards

Focusing on the rewards consumers get from using premium credit cards is a simple way to gauge a card’s benefits. But according to the Harvard Business School working paper Who Pays for Payments?, premium credit card rewards can shift costs onto consumers who pay with cash or debit.

Let’s take a closer look at the winners and the losers when it comes to high-end credit card perks. Mark Egan, Professor of Business Administration in the Finance Unit at Harvard Business School and one of the paper’s authors, said the biggest winners are premium credit card users who receive high rewards.

“They’re expensive for merchants to accept. So for the average premium card, it costs a merchant about 2% to 3% roughly to accept that card. From the consumer’s perspective, you’re gonna get most of that back in the form of higher rewards. So they’re the real winners,” Egan told us.

Who Loses With Premium Credit Card Rewards?

The losers in this scenario would be people who pay with cash or debit cards. Egan and his co-authors found that cash and debit card users subsidize premium rewards cards users to the tune of $30 billion a year.

“This is gonna come at the cost of cash users and also debit card users, especially those debit card users that get their debit card from what we call a regulated bank. So a bank with greater than $10 billion in assets, they tend to have lower fees and lower rewards,” Egan said.

Here’s why cash buyers and debit card users are getting hurt by premium credit card rewards. Merchants are charged 2% to 3% when they accept a premium credit card for payment.

When merchants pass on interchange costs to retail prices, the paper finds that shoppers using cash and debit can end up subsidizing rewards for credit card users.

And that is how premium credit card rewards end up costing people who pay by cash. Debit card users without a lot of rewards also wind up paying higher prices from merchants. 

The Rise of Premium Card Usage

Why have premium credit cards grown from 15% of credit card volume in 2006 to 60% in 2022, according to the Harvard study?

One reason is it’s a good value for the consumers using these premium cards.

“If I adopt a premium credit card, I’m going to get higher rewards. I impose a higher cost on that merchant, but I actually don’t bear most of that cost because I’m just the one consumer shopping at the merchant. It’s going to be shared by the people who pay with debit cards, cash, and basic credit cards,” Egan said.

Consumers are attracted to the higher rewards available on a premium credit card.  

“Consumers are always gonna wanna adopt the more expensive payment method, because they’re gonna get the benefits of higher rewards, and they don’t have to pay the full cost,” Egan said.

How Much Are Premium Cards Costing Other Shoppers?

How much more are people paying at retailers because of premium rewards cards?

“In our analysis, we do find roughly that when merchants pay a higher fee, they pass that through to higher prices, roughly dollar for dollar,” Egan told us. 

And in these instances lower-income cash shoppers are subsidizing the costs of premium rewards credit cards of higher-income consumers. 

“This ends up being really a regressive transfer from poorer consumers to wealthier consumers.” — Mark Egan, Harvard Business School

“In general, those people who use these premium credit cards tend to be higher income, whereas people who use cash … and regulated debit cards tend to be lower-income consumers,” Egan said. 

“So this ends up being really a regressive transfer from poorer consumers to wealthier consumers.”

A Closer Look at U.S. Payment Habits

In 2024, cash accounted for 14% of all U.S. consumer payments. Credit cards made up 35% of payments, and debit cards accounted for 30% of payments, according to the Federal Reserve Financial Services. 

Flagship Advisory Partners estimates that high-end cardholders account for 85% of U.S. credit card spending, up from 81% in 2019.