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.)