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

67 Pages Posted: 1 Mar 2021

See all articles by Marie-Helene Felt

Marie-Helene Felt

Government of Canada - Bank of Canada

Fumiko Hayashi

Federal Reserve Bank of Kansas City

Joanna Stavins

Federal Reserve Bank of Boston

Angelika Welte

Government of Canada - Bank of Canada

Date Written: December 2020

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 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 the United States and Canada.

Keywords: Regressive effects, rewards, credit cards, interchange fees, pass-through

JEL Classification: D12, D31, G21, L81

Suggested Citation

Felt, Marie-Helene and Hayashi, Fumiko and Stavins, Joanna and Welte, Angelika, Distributional Effects of Payment Card Pricing and Merchant Cost Pass-through in the United States and Canada (December 2020). Federal Reserve Bank of Kansas City Working Paper No. 20-18, Available at SSRN: https://ssrn.com/abstract=3754452 or http://dx.doi.org/10.2139/ssrn.3754452

Marie-Helene Felt

Government of Canada - Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada

Fumiko Hayashi (Contact Author)

Federal Reserve Bank of Kansas City ( email )

1 Memorial Dr.
Kansas City, MO 64198
United States

Joanna Stavins

Federal Reserve Bank of Boston ( email )

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

Angelika Welte

Government of Canada - Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada

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