The Boston Fed on Regressive Transfers in Interchange Fees

(h/t modeled behavior) A new report out from the Boston Fed: “Who Gains and Who Loses from Credit Card Payments? Theory and Calibrations.” 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 $151 to card-using households and each card-using household receives $1,482 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 $23 and the highest-income household ($150,000 or more annually) receives $756 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.

A fascinating paper. The credit card and cash in your wallet are little inequality-generating machines. I’ve long been impressed with the empirical consumer work coming out of the Boston Fed since I first started seeing it presented, and it is good to see them take on this empirical topic. I don’t always agree with where they are coming from or going to, but it’s high quality work.

(The last study about upward redistribution of interchange fees that we looked at was ” Trickle-Up Wealth Transfer: Cross-subsidization of consumers in the payment card market” by Efraim Berkovich of University of Pennsylvania.)

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3 Responses to The Boston Fed on Regressive Transfers in Interchange Fees

  1. Arpit says:

    How can there be a 10:1 ratio between cash and card using households? Surely households using cash aren’t ten times as numerous than those using cards?

    If so–wow.

  2. Pingback: Richard (RJ) Eskow: The Card Sharps: The Fight Over Wall Street's 'Invisible Tax'

  3. Pingback: The Poor Get Swiped by Swipe Fees, the Rich Make Bank » New Deal 2.0

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