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It should be obvious from basic efficient market processes that every measurable category of people the credit card companies can subdivide people into is internally profitable without needing subsidization, otherwise they wouldn't serve those people at those interest rates. The only subsidization occurring is
People that don't use credit cards subsidize rewards for people with credit cards since stores are charging higher average prices than they would if credit cards weren't so prolific.
People who have different actual repayment within the same legibility category. Ie, someone with a bad score who ends up in debt, paying a lot of interest, and working their way out of bad credit ends up subsidizing the people with bad scores who end up defaulting on their loans. If the credit card company doesn't know ahead of time which is which, they have to offer interest rates that will enable them to recoup their costs on average across the group. The former ends up paying a lot of interest because the credit card company gave them the same risk profile as the latter.
Now, you could make a claim that XYZ piece of information should be priced in but isn't and thus the market isn't truly efficient. But it's not going to be something as obvious as "rich people" vs "poor people".
Tagging @Opt-out and @magicalkittycat to continue their inclusion in the discussion.
You got it half right. I practiced bankruptcy law for a couple years, and I've seen the credit card industry a little closer-up than I would have liked. The first thing that should be noted is that all credit cards charge interchange fees ranging from around 1%–3% to cover the cost of processing the transaction. From there we can put cards into four rough categories:
Secured Cards: These are the lowest level, and aren't advertised. I dealt with them a lot, though, because they exist more or less to help people who just filed for bankruptcy build credit. The way they work is the borrower puts a small amount of money down (I usually recommended around $500) that acts as their credit limit and collateral for the "loan". Then they use it like any other card, except I usually recommended they only charge a small amount on it each month and just pay it off to build a consistent payment history. There are still interest rates and late fees, but I honestly never looked at them because they aren't designed for people who are going to be paying interest.
Cards for People with Terrible Credit: These are just what they sound like. They have no rewards and the highest interest rates, and are only given people with the worst credit scores. People with recent bankruptcy discharges would often get applications for these in the mail; I would tell them to put them in the garbage and go the secured route. These were people trying to reset their financial lives, and the last thing they needed was access to easy cash whenever things got tough. With secured cards the loss is limited to the amount of the deposit, while with these things can quickly spiral out of control. I gave this advice even to responsible bankrupts who filed due to e.g. medical debt or because of an atypical rough patch (divorce, unemployment, disability) where they were forced to rely on credit cards; these people didn't need my lecturing and were quite different than people who just overspent. Most of the overspenders, though, were so chastened by the experience that they never wanted to look at a credit card again, and I had to talk them into the safety of the secured route since it was worth it for them to build their credit if they wanted to get a car loan or mortgage in the future.
Credit Cards for People Who Use Them For Credit: These last two categories are available to anyone with a halfway decent credit score, but they're targeted at people who pay interest. It's really easy to target this market—advertise low rates. No one would be enticed by a low interest rate if they didn't have any intention of paying interest. These predictably have the lowest interchange fees, since the banks are making money from the interest payments. They don't offer any rewards, because the reward is the lower monthly payment. They're marketed through their interest rates, credit limits, and introductory 0% periods.
Reward Cards: These cards are specifically marketed towards people who don't run balances. After people realized that getting a credit card and paying the balance off every month was a convenient way to build credit and not deal with the inconvenience of cash, banks realized that that they were ignoring an important market segment. The ubiquity of credit card use allowed the companies to charge higher interchange fees, and since the fees were accounting for a share of revenue on par with interest payments, it made sense to try to attract these no-balance customers through reward enticements, which are paid for out of the fees. The interest rates are relatively high because the people who apply for these cards aren't concerned about the rate, and if they end up paying it it's just a bonus for the issuer.
The point I'm trying to make here is that outside of the absolute bottom of the market, credit worthiness doesn't really play into how these cards make their money, because the cards' users are differentiated by what marketing segment they belong to. There's nobody out there who would qualify for a low-interest card that wouldn't qualify for a rewards card, or vice-versa. The reason the interest rates are so high on credit cards (the lowest I've seen a client have was around 15%) is because of the ease of use. I may be able to get a better rate from a bank, but I have to go to the branch and submit paperwork and wait and then get a fixed amount of money with fixed repayment terms. With a credit card I get a limit and I can borrow money pretty much on the spot. Regardless of credit worthiness, this is an inherently riskier form of lending.
Huh, why offer lower interchange fees for category 3? After all, the businesses they're charging don't care about how the customer is using their card -- if anything I might expect group 3 to be more free with their money, justifying a higher fee -- and they're not going to offer a discount for using a lower-fee card (or at least I've never seen that). I suppose there might be marginal businesses that'd refuse higher fee cards? But at most I've seen businesses refusing whole brands, not the products within those brands that are meant for group 4 instead of group 3.
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That is a good matrix for cards. I have a writing problem where I fail to structure my thoughts correctly. And probably something the Fed paper that kicked off the debate on twitter should have started with.
My gut is most people here started out getting category (3) card offers during college and later and eventually saw a lot of ads for category (4) cards. Category (3) you get a lot of offers for 0% balance transfers and (4) airlines and hotels. In (3) you have good enough credit you get offered interest rate buy downs while (4) you get basically a few free flights.
The populist take which I’ve used the term MBA logic for why it fails is that poor people subsidize free flights for rich people. Now more than a few smart people backed this idea (it had a fed paper saying it was true) but I think MBA logic prevails and you can just market segment. Besides AMEX only offers rich people cards and has the best rewards before mid 2010’s when Chase tried to challenge them.
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“It should be obvious from basic efficient market processes that every measurable category of people the credit card companies can subdivide people into is internally profitable”
I agree. Ackman 100% tweeted that it’s not without thinking about it. Even Asnes seemed to agree in a tweet. That’s 100% my opinion that a dumb mba should immediately see the logic behind the fed paper saying the poor subsidize the rich is wrong without reading the paper.
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There are scenarios where this wouldn't necessarily be true. For example, very rich people tend to be politically influential so a little bit of loss on them might be a strategy for looser regulations elsewhere. It doesn't even have to be bribery, just hoping for subconscious good will.
Another way would be that the very rich people are often major business owners, they're slightly biased to picking the card they mainly use personally for their companies too and the CC companies determined the increased chance of making a small fraction of billions of dollars of transactions is worth a small loss on the CEO's class personal spending. This would not be unreasonable, the very rich elites get lots of free gifts and goodies from various companies for that exact reason after all.
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This is my logic. I quoted Ackman agreeing with the logic. But he’s not the only mba type who initially agreed. Here’s another billionaire agreeing that the poor subsidize the rich who I think should see the poor logic: https://x.com/cliffordasness/status/2010360464291889392?s=46
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