Tag: nytimes

Microeconomics and Credit Card Reward Points

A lovely little article in the New York Times is worth a ponder, especially if you are a student of microeconomics:

There’s an undeniable feeling of excitement when you turn your daily credit card swipes at Starbucks into first-class airfare or a weekend jaunt to Costa Rica. Thanks to mobile banking and the ease of autopay, you can scrupulously avoid any additional costs by paying your monthly bill in full. Free flights and exclusive discounts abound.
Something for nothing, right?
Not exactly nothing. Credit card perks for educated, usually urban professionals are being subsidized by people who have less. In other words, when you book a hotel room or enjoy entry to an airport lounge at no cost, poor consumers are ultimately footing the bill.

https://www.nytimes.com/2023/03/04/opinion/credit-card-rewards-points-poor-interchange-fees.html

As you probably already know, one can “earn” reward points for spends on your credit card. You can then use these points to buy stuff, or earn cashbacks on these points, or spend them at partner stores. And there are other perks and benefits too. If you’ve travelled through an Indian airport, you might have seen the crowd waiting to get into an airport lounge – more often than not, access is tied to the kind of credit card you have in your wallet.

But remember, there is no such thing as a free lunch. You may not be paying for these perks as a credit card holder, but one of the first lessons of economics is that somebody, somewhere, is paying for it. So who is paying, in this case? As the last sentence in the excerpt makes clear, according to the article, that someone is the group of poor consumers.

Some background, based partially on the article in question, and partially on my own understanding of this space:

  1. Richer consumers are likely to spend more, but tend to not revolve much, if at all. To this group of consumers, a credit card is a way to get a (up to) 45 day interest free loan, with the added bonus of these reward points to boot. Remember, incentives matter – and these reward points are the carrot that is offered to people in order to get them to sign up.
  2. Dangling these reward points as a carrot makes business sense, for that allows a credit card company to sign up folks who will spend more via these credit cards. Credit card companies make money when people “revolve” – that is, when they spend using their credit cards, but do not pay up the entirety of their credit card bill on time. How much money do these companies make? Here, take a look.
  3. So consumers who take a credit card, spend a lot on it, and pay back the entirety of their credit card bill – these kinds of customers are actually a loss-making proposition for the credit card company.
  4. Consumers who spend a fair bit, find themselves unable to repay the entirety on time, and end up paying over months (if not years) – these customers are where the credit card companies earn their bread and butter (and jam and peanut butter, while they’re at it).
  5. Consumers who borrow a lot using their credit cards, and default on these loans – these are the very worst type of consumers for credit card companies. Risk departments in such firms exist to predict which consumers should be denied access to credit cards, and which of the existing customers are likely to default on their credit card loans.
  6. But broadly speaking, the NY Times article says that it is pt. 4 consumers (and pt. 5 consumers) who end up paying for the freebies that pt. 3 consumers enjoy. (but also see below, after this section)
  7. In addition, another way to make money for these credit card companies is to charge higher credit card processing charges to all consumers. This fee changes from country to country, but as a thumb-rule, assume it to be around 1-2% of each transaction. That’s not an exact estimate, but good enough for us over here. Rewards to specific folks, to be offset by diffusing the costs of offering these rewards across a much wider group, in other words. And note that merchants (who are charged these fees) will usually pass these fees on to the consumers. See here, for example.
  8. A 1-2% increase in price may not be the end of the world if your income is high enough – it is an inconvenience, not a crisis. But for low income earners, already on a tight budget, this price increase across all transactions can bite a fair bit.
  9. An out and out free market economist might say that this is fine, the market will work itself out. That is, if this 1-2% charge is an act of rent collection, new entrants in such a market will end up charging lower to no fees, and incumbents will be forced to respond by lowering their own fees. That’s econ 101, but life is more complicated than that.
  10. And that is a good first-pass answer, but as many people will tell you, markets don’t always work as designed or intended. Incumbents will go out of their way to prevent new entrants (through lobbying, through pricing, through R&D, and through a dozen different ways), which is why regulation is important.
  11. But will regulators do what they’re supposed to? What are their incentives? How can we make sure that regulation will be balanced between the interests of the incumbents, the new entrants, the potential entrants, and the customers? Hello, industrial organization, and hello, public choice.
  12. What is the role for government in all of this? In terms of participation (think UPI, for example, but note that this is a complicated story in its own right), in terms of regulation (both from a domestic and international financial markets perspective) and in terms of oversight?

All these points (and I hope you come up with more) are worth thinking about as a student. Remember, these points aren’t proven facts – they are a summary in part of the article an in part of my own reflections for having read the article. Discussions such as these are a great way to outline a research agenda – but that is when the job of a researcher begins. Can we convert these points into testable hypotheses? Can we get data to prove/disprove these hypotheses? Can that data then be used to reach a definitive conclusion? Can that conclusion be used to formulate policy, or start a business?

In terms of research about this topic, sample this from the conclusion of a paper on the topic: “While credit card rewards are often framed as a “reverse Robin Hood” mechanism in which the poor subsidize the rich, our results show that this explanation is at best incomplete.”

But also from the very last paragraph of the same paper:

We conclude by documenting that the costs and benefits of credit card rewards are unequally distributed across geographies in the United States. Credit card rewards transfer income from less to more educated, from poorer to richer, and from high- to low minority areas, thereby widening existing spatial disparities.

https://www.federalreserve.gov/econres/feds/files/2023007pap.pdf

And here’s the link to a directive from the RBI about the issuance of and conduct regarding credit and debit cards in India.

Homework: who (ultimately) pays for CRED from a distributional perspective? Whatever your answer, explain your reasoning, and either provide data to back up your arguments, or explain what kind of data you would need to research this question further.

Try discussing this question with your friends and your professors (including ChatGPT, and yes, you should be thinking of it as one of your professors) – it will be a great way to learn the nuances of microeconomics!

My thanks to Mihir Mahajan for suggesting this topic.

Work, Why Don’t You?

How should I beef up my CV is a question that will start to make the rounds on campuses all over the country, for it will soon be placement season.

LinkedIn will be awash with people happy to report, or excited to share (or in some cases, elated to announce) that they have completed course XYZ on platform ABC. Recommendation requests will come flowing in through the pipelines, and endorsements will abound. But simple Econ 101 should tell us that each of these have become so easy to acquire, and so commonplace an occurrence, that their value on your CV is commensurately lower.

Pamela Paul, writing in the NYT, has an idea that is fairly popular in the United States (although as the column explains, it could always be more popular), but doesn’t have quite as many takers in India: get a part time job.

Many instead favor an array of extracurricular activities that burnish their college applications, like student government and peer tutoring. This may be a mistake even for those parents and kids more concerned about college admissions than about what happens after that. Consider that having an afternoon job cultivates skills like time management and instills a sense of independence and personal responsibility — attributes that many college administrators say some students today lack.
But after-school jobs teach more concrete lessons as well. Personally, I learned more working outside school — starting with three afternoons a week when I was 14 and ending with three jobs juggled, seven days a week, my senior year of high school — than I did in the classroom.

https://www.nytimes.com/2022/07/30/opinion/jobs-teenagers.html

The ability to get, hold on to, and do well in a job – any job – is a rare old skill, and one that you’d do well to cultivate. In fact, what better way to signal that you are ready for the hurly-burly of the labor market than by proving that you’re already a participant? Pamela lists out ten ways in which a job helped her, and while you should go ahead and read the whole column, I’ll list out the ten factors here. Note that this is my summary of her ten points:

  1. Being good at a job is a very different skillset when compared to being good at studies – which is a polite way of saying college doesn’t teach you all you need to know. Every single person who has left academia and joined the corporate world will nod appreciatively on reading this statement, guaranteed.
  2. Being fired, or quitting your job, is not the end of the world.
  3. You tend to appreciate money a lot more when you realize how little you are paid for an hour of honest work
  4. Promotions can be based on duration of employment, not on level of skill, and this is an important lesson for life
  5. You are paid for your time, and the work you put in during that time. Slacking ain’t appreciated!
  6. Bosses can be mean. Not all, and not all the time. but bosses can be mean.
  7. You will work with folks who are different from you, in many ways and with many consequences, and you have to figure out how to deal with it
  8. Some of these folks, simply because of who they are and how they made it to the same job as you, will pull you down to earth, by helping you realize how lucky you are to be where you are
  9. Boredom is part and parcel of all jobs.
  10. School skills can be acquired out of school – but the reverse isn’t true.

Any job is fine – it needn’t be a desk based job. In fact, the more physical labor is involved, the more you are likely to learn. I managed an art gallery while I was in college to earn money on the side, and also taught econ to students of commerce, and I learnt more by trying to handle the art gallery.

But a job interview is likely to go that much better if you are able to say yes in response to a question about prior work experience. The more interesting the job, and the more well thought out your responses to a question about what you learnt on the job, the better your chances!

Further reading: Tyler Cowen tells us about his first job (follow up post here), as does Alex Tabbarok (this post has more than a dash of surrealism!)

Chitarman’s “Shah Jahan on a Terrace, Holding a Pendant Set With His Portrait,”

You’ve probably seen this already, for it has been making the rounds on Twitter this past week. But just in case you haven’t, arm yourself with a cup (or two) of coffee, and spend about thirty minutes going over this feature.

It is beautifully done, and covers India, Persia, aspects of Christianity, Rembrandt(!), the advent of the British in India, Aurangzeb, the Taj Mahal and much more in a wonderfully informative package. Plus, personally speaking, I added two words to my vocabulary: anthomaniac, and lapidary.