Saturday, April 11, 2020 | 2 a.m.
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In the American dream, hard work and ambition are rewarded, and everyone has an equal chance of access to wealth.
But in reality, we’re a nation plagued by massive income inequality. And as Brookings Institution economics expert Aaron Klein noted in a recent lecture at UNLV, that imbalance is being driven by two hidden factors — credit cards and our current payment system.
As Klein told his audience, “we are taking billions of dollars a year out of the pockets of people who are working paycheck to paycheck, and redistributing them aggressively to those who are truly wealthy. And we all participate in it.”
One element of the problem, Klein explained, is that the business model behind credit cards benefits those who already have money.
To understand why, first know that credit card companies make profit not from consumer interest, but rather from the swipe fees paid by merchants.
This system benefits wealthy families who rack up thousands of dollars a year on high-end credit cards that offer low interest, cash-back rewards and other benefits. Lower-income families, on the other hand, tend to obtain cards with fewer benefits and higher interest rates. They also may struggle to pay their balance on a regular basis, which can subject them to late-payment fees and adds to their debt. And lower-income families who pay with cash get none of the rewards offered to higher-income families with cash-back cards.
Klein reasons that if merchants did not have to pay swipe fees, “we’d see either the wealthier paying higher prices or customers using cash or debit cards paying less.”
Another key part of the problem is the lack of what is known as a universal real-time payment system. This system, which has been adopted in a number of industrialized nations, allows account holders to make payments as a credit push while deposits are being processed.
But in the U.S. system, the deposits must be fully processed before funds can be withdrawn. This can result in Americans who live paycheck to paycheck often having to wait three to four days to access their deposited funds.
For lower-income families, this can lead to overdraft fees and late-payment charges. In severe cases, it can prompt those families to turn to payday loans, which generally come with high interest rates and fees.
Imagine working multiple jobs, raising multiple kids, and taking out payday loans to meet unexpected expenses. Likewise, imagine getting paid on a Thursday and facing multiple payments on that Friday, when your deposit may not be fully processed until after the weekend passes. Unless you were in a country where real-time payment was possible, you would most likely be penalized.
With tens of thousands of Nevadans having lost their jobs amid the COVID-19 outbreak, many of them are no doubt contending with problems related to slow payment processing. With little to no money in one’s bank account, the consequence of waiting a few days — especially in a time of this pandemic — can be dire, leading to penalties and fines. This can send a family into a downward spiral, simply because it takes days upon days to process a simple payment.
The American payment system is slow and inefficient. It affects many Americans, especially those who live paycheck to paycheck. Whether you fall within the bracket of the working class or not, the payment system is a sly driver of income inequality. We all participate in this system one way or another.
But we can help fix the problem by urging Nevada’s congressional delegates to support a change to an effective real-time payment system. Especially during the pandemic, it’s something Nevadans need right now.
Kyle Catarata is a second-year student of the Brookings Public Policy Minor at UNLV.
