Priceless? The social costs of credit card merchant restraints

Who pays for credit card rewards? This Article demonstrates empirically that credit card rewards programs are funded in part by a highly regressive, sub rosa subsidization of affluent credit consumers by poor cash consumers. In its worst form, food stamp recipients are subsidizing frequent flier miles. The subsidization is created by a set of credit card network rules called "merchant restraints" that combines with a cognitive bias known as the framing effect to limit merchants' ability to price payment systems according to cost. The Article also shows how the subsidization of credit card use increases the transactional use of credit cards. A set of cognitive biases amplifies increased transacting usage toward an increase in credit card debt. Credit card merchant restraints thus ultimately contribute to credit defaults, reduced consumer savings and purchasing power, inflation, and consumer bankruptcy filings. There are profound policy questions that arise from the social externalities caused by credit card merchant restraints, including whether private control of essential services like payment systems is appropriate. In light of the negative social externalities of credit card merchant restraints, the Article proposes legislative intervention to ban merchant restraint rules.