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

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In the United States and Canada, merchants generally do not differentiate prices based on payment methods. They pass through their total costs of accepting payment methods evenly to all customers through higher retail prices. However, credit cards are more expensive for merchants to accept than debit cards or cash. Higher-income consumers use credit cards for a larger share of their purchases than lower-income consumers and therefore have an advantage. Card rewards and consumer fees paid to financial institutions may also benefit higher-income individuals more than those with lower incomes.

Using data from the United States and Canada, we quantify consumers’ net pecuniary cost of using cash, credit cards and debit cards for different income cohorts. The net cost includes merchants’ costs of accepting payments that are passed on to customers, fees paid by consumers to financial institutions, and consumer rewards received for credit or debit card use. We then examine whether lower-income consumers incur a disproportionally greater net pecuniary cost than higher-income consumers.

In both countries, individuals in the highest-income cohort pay the least as a percentage of their transaction amount, and those in the lowest-income cohort pay the most. This main result also holds when we change some of the assumptions behind our model. We point out which important caveats must be considered before drawing research and policy lessons from our results.