Distributional Effects of Payment Card Pricing and Merchant Cost Pass-through in the United States and Canada
In the United States and Canada, merchants generally do not differentiate prices based on payment methods. Instead, they pass through their costs of accepting payment methods to all consumers, even though credit cards are more expensive for them to accept than either debit cards or cash. As a result, credit card transactions are cross-subsidized by lower-cost debit and cash payments. Card rewards and consumer fees paid to financial institutions may be other sources of cross-subsidies. Credit card rewards are proportional to the amount charged on a card. This disproportionately benefits higher-income consumers, who are more likely to hold rewards cards, tend to hold cards with higher reward levels, and tend to spend more on those cards.
Using data from the United States and Canada, the authors quantify the net pecuniary cost of using cash, credit cards, and debit cards to consumers in a range of income cohorts. The net cost includes the merchants’ cost of accepting payments that is passed on to consumers, fees paid to financial institutions, and rewards received from credit or debit card issuers. The authors examine whether payment card pricing and merchant cost pass-through have regressive distributional effects, that is, whether low-income consumers incur a disproportionally greater net pecuniary cost relative to their transaction amount.