Who Gains and Who Loses from Credit Card Payments? Theory and Calibrations

61 Pages Posted: 3 Aug 2010 Last revised: 3 Sep 2010

Scott D. Schuh

Federal Reserve Bank of Boston - Research Department

Oz Shy

Independent

Joanna Stavins

Federal Reserve Bank of Boston

Date Written: August 31, 2010

Abstract

Merchant fees and reward programs generate an implicit monetary transfer to credit card users from non-card (or "cash") users because merchants generally do not set differential prices for card users to recoup the costs of fees and rewards. On average, each cash-using household pays $149 to card-using households and each card-using household receives $1,133 from cash users every year. Because credit card spending and rewards are positively correlated with household income, the payment instrument transfer also induces a regressive transfer from low-income to high-income households in general. On average, and after accounting for rewards paid to households by banks, the lowest-income household ($20,000 or less annually) pays $21 and the highest-income household ($150,000 or more annually) receives $750 every year. We build and calibrate a model of consumer payment choice to compute the effects of merchant fees and card rewards on consumer welfare. Reducing merchant fees and card rewards would likely increase consumer welfare.

Keywords: Credit Cards, Cash, Merchant Fees, Rewards, Regressive Transfers, No Surcharge Rule

JEL Classification: E42, D14, G29

Suggested Citation

Schuh, Scott D. and Shy, Oz and Stavins, Joanna, Who Gains and Who Loses from Credit Card Payments? Theory and Calibrations (August 31, 2010). FRB of Boston Public Policy Discussion Paper No. 10-3. Available at SSRN: https://ssrn.com/abstract=1652260 or http://dx.doi.org/10.2139/ssrn.1652260

Scott Schuh (Contact Author)

Federal Reserve Bank of Boston - Research Department ( email )

600 Atlantic Ave.
Boston, MA 02210
United States
617-973-3941 (Phone)
617-619-7541 (Fax)

Oz Shy

Independent ( email )

No Address Available

Joanna Stavins

Federal Reserve Bank of Boston ( email )

600 Atlantic Avenue
Boston, MA 02210
United States
617-973-4217 (Phone)
617-973-4218 (Fax)

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