Discussion Paper

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.

Keywords: Credit cards;

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Bibliographic Information

Provider: Federal Reserve Bank of Boston

Part of Series: Public Policy Discussion Paper

Publication Date: 2010

Number: 10-3