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Cuts to rewards plans unlikely to hurt credit card use

22.07.2009
What would happen if credit card holders no longer received rewards? Not much – but it could cut consumer credit card debt, says a new study on the impact of rewards programs on credit and debit card use.

The paper, co-published by the University of Toronto's Rotman School of Management, found that removing rewards would result in only a small number of credit card customers switching to more debit card and cash transactions.

"A lot of customers use credit cards or debit cards to pay because they like it. So if you take away the rewards, it's not going to change their behaviour that much," says Andrew Ching, a Rotman professor who co-wrote the study with Fumiko Hayashi of the Federal Reserve Bank of Kansas City. "Potentially, it could be better for everybody."

The study used data on consumer payment preferences from the American Bankers Association and Dove Consulting. Researchers also found that rewards programs encouraged consumers to use credit cards even when they carried balances – suggesting eliminating rewards could help reduce consumer debt.

The findings are particularly relevant as more governments consider consumer protection legislation and rules prohibiting credit card companies from covering the costs of their reward programs through interchange fees charged to merchants each time a customer uses plastic to pay.

The paper's findings are backed up by what happened in Australia when that country's government ordered credit card companies to reduce their interchange fees in 2003. Australia's big three credit card companies have since dramatically reduced their rewards programs. Market share has been slightly reduced but credit card transactions have increased.

The complete study is available at: www.rotman.utoronto.ca/newthinking/creditcards.pdf

For the latest thinking on business, management and economics from the Rotman School of Management, visit www.rotman.utoronto.ca/NewThinking.

The Rotman School of Management at the University of Toronto is redesigning business education for the 21st century with a curriculum based on Integrative Thinking. Located in the world's most diverse city, the Rotman School fosters a new way to think that enables the design of creative business solutions. The School is currently raising $200 million to ensure Canada has the world-class business school it deserves. For more information, visit www.rotman.utoronto.ca.

For more information:
Ken McGuffin
Manager, Media Relations
Rotman School of Management
University of Toronto
Voice 416.946.3818
E-mail mcguffin@rotman.utoronto.ca

Ken McGuffin | EurekAlert!
Further information:
http://www.utoronto.ca

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