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

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

No RWP 20-18, Research Working Paper from Federal Reserve Bank of Kansas City

Abstract: Using data from the United States and Canada, 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 higher retail prices passed on to consumers to cover merchants’ payment processing costs. 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 net cost. This result is robust under various scenarios and assumptions, suggesting payment card pricing and merchant cost pass-through have regressive distributional effects in the United States and Canada.

Keywords: Regressive Effects; Credit Cards; Rewards; Interchage Fees; Pass-through (search for similar items in EconPapers)
JEL-codes: D12 D31 G21 L81 (search for similar items in EconPapers)
Pages: 65
Date: 2020-12-18
New Economics Papers: this item is included in nep-ban, nep-com, nep-mac and nep-pay
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DOI: 10.18651/RWP2020-18

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