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Distributional Effects of Payment Card Pricing and Merchant Cost Pass-through in Canada and the United States

Marie-Helene Felt, Fumiko Hayashi, Joanna Stavins and Angelika Welte ()

Staff Working Papers from Bank of Canada

Abstract: Using data from Canada and the United States, we quantify consumers’ net pecuniary cost of using cash, credit cards, and debit cards for purchases across income cohorts. The net cost includes fees paid to financial institutions, rewards received from credit or debit card issuers, and the merchant cost of accepting payments that is passed on to consumers as higher retail prices. Even though credit cards are more expensive for merchants to accept compared with other payment methods, merchants typically do not differentiate prices at checkout, but instead pass through their costs to all consumers. As a result, credit card transactions are cross-subsidized by cheaper debit and cash payments. Card rewards and consumer fees paid to financial institutions are additional sources of cross-subsidies. We find that consumers in the lowest-income cohort pay the highest net pecuniary cost as a percentage of transaction value, while consumers in the highest-income cohort pay the lowest. This result is robust under various scenarios and assumptions, suggesting payment card pricing and merchant cost pass-through have regressive distributional effects in Canada and the United States.

Keywords: Bank notes; Financial institutions; Financial services; Market structure and pricing; Payment clearing and settlement systems (search for similar items in EconPapers)
JEL-codes: D12 D23 D31 E42 G21 L81 (search for similar items in EconPapers)
Pages: 68 pages
Date: 2021-02
New Economics Papers: this item is included in nep-ban, nep-mac and nep-pay
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:21-8

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