Reverse Robin Hood: An Analysis of the Complicated Relationship between Consumers and the Credit Card System

The emergence of credit reward points has often been commercialized as an incentive to use credit cards in exchange for value, such as cashback, airline, hotel rewards, and loyalty programs. The dynamics of the rewards points created vary based on the financial company. A study conducted by Agarwal, S., Presbitero, A., Silva, A. F., & Wix, C. (2023) explains how the system of credit card rewards works. Agarwal, S., Presbitero, A., Silva, A. F., & Wix, C. (2023) states, “Cash back cards refund a small percentage amount of the net purchase volume (usually between 0.5 and 3 percent), while miles and points cards let cardholders accrue bonus points that can be redeemed at frequent flyer programs (miles cards) or, more generally, at partnering airlines, hotels, or retailers points cards.” (p1). The same study shows alternative sources of how credit reward points are funded. According to Agarwal, S., Presbitero, A., Silva, A. F., & Wix, C. (2023), “Another source of funding for credit card rewards, however, are interest payments from credit cardholders with unpaid outstanding balances as well as fees e.g., late and overlimit fees”(9). Overall, the redistributions of this methodology can benefit consumers but can be detrimental if you do not have a strong background in financial literacy. 

What is reverse Robin Hood?

An article published (Stewart, Emily 2021) quoted Aaron Klein’s definition of reverse Robin Hood, “The American payment system has evolved into a reverse Robin Hood whereby middle-class and working-class Americans who pay with a debit card, prepaid card, or cash are subsidizing the wealthy, who pay less for everything” (1). As a result, the reverse Robin Hood can be considered a problem for Americans living check-to-check with mounting credit card debt. Further publications of (Aaron Klien, 2018) show that the business model of credit card reward programs is causing cycles of financial disparities and inequalities for people with low income.

The Disconnects between Consumers and Credit Card Use: 

It appears that consumers who approach the use of credit cards seem not to have a firm understanding of how the intricate details work. This has resulted in the mismanagement of credit cards over time (Soll, J. B., Keeney, R. L., & Larrick, R. P. 2013). According to (Soll, J. B., Keeney, R. L., & Larrick, R. P. 2013), 

“People misunderstand the relationship between monthly payments and payoff time when payments barely cover or fall short of interest charges. Study 1a showed that people underestimate the steepness of the payoff time curve near the asymptote, where monthly payments barely cover the interest charges. Study 1b demonstrated that some people fail to recognize that the balance on the card will increase when payments fall short of interest charges. The pattern of error in both studies is consistent with a simple principal plus-adjustment heuristic that relies on familiar, everyday math. The heuristic performs poorly with smaller payments in which the interest-to-principal ratio is high but can lead to good approximations when payments are at least double the interest charges. In situations in which the heuristics fail, less numerate participants underestimated payoff times and balances by larger amounts than those more numerate” (p.72/73). 

Conclusion:

Words of encouragement: You are never too old to learn about financial management and strategies. Greenpoint Knowledge Venture LLC has assisted with personal and business strategies that will allow you to prosper long-term. An important metric in this study is to understand the importance of paying all of the credit balances altogether. Overall, if you don't have the funds or income to use credit cards, then I would recommend you don’t use them without a game plan.  

Let Greenpoint Knowledge Venture LLC. help you develop a winnable game plan.

Works Cited:

Agarwal, S., Presbitero, A., Silva, A. F., & Wix, C. (2023). Who Pays For Your Rewards? Redistribution in the Credit Card Market.

 Klien, Aaron (2018). America's Poor Subsidize Wealthier Consumers: The Vicious Income Inequality Cycle. NBC News. https://www.nbcnews.com/think/opinion/america-s-poor-subsidize-wealthier-consumers-vicious-income-inequality-cycle-ncna845091

Soll, J. B., Keeney, R. L., & Larrick, R. P. (2013). Consumer misunderstanding of credit card use, payments, and debt: Causes and solutions. Journal of Public Policy & Marketing, 32(1), 66-81.

Stewart, Emily, 2021, The ugly truth behind your fancy rewards credit card, vox.com June 3, 2021, https://www.vox.com/the-goods/22454885/who-pays-for-credit-cardrewards.