61 Pages Posted: 3 Aug 2010 Last revised: 3 Sep 2010
Date Written: August 31, 2010
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: 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