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

Author

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  • Marie-Hélène Felt
  • Fumiko Hayashi
  • Joanna Stavins
  • Angelika Welte

Abstract

Using data from Canada and the United States, we quantify consumers’ net pecuniary cost of using cash, credit cards, and debit cards for purchases across income cohorts. The net cost includes fees paid to financial institutions, rewards received from credit or debit card issuers, and the merchant cost of accepting payments that is passed on to consumers as higher retail prices. Even though credit cards are more expensive for merchants to accept compared with other payment methods, merchants typically do not differentiate prices at checkout, but instead pass through their costs to all consumers. As a result, credit card transactions are cross-subsidized by cheaper debit and cash payments. Card rewards and consumer fees paid to financial institutions are additional sources of cross-subsidies. We find that consumers in the lowest-income cohort pay the highest net pecuniary cost as a percentage of transaction value, while consumers in the highest-income cohort pay the lowest. This result is robust under various scenarios and assumptions, suggesting payment card pricing and merchant cost pass-through have regressive distributional effects in Canada and the United States.

Suggested Citation

  • Marie-Hélène Felt & Fumiko Hayashi & Joanna Stavins & Angelika Welte, 2021. "Distributional Effects of Payment Card Pricing and Merchant Cost Pass-through in Canada and the United States," Staff Working Papers 21-8, Bank of Canada.
  • Handle: RePEc:bca:bocawp:21-8
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    References listed on IDEAS

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    Cited by:

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    2. Ho, Anson T.Y. & Morin, Lealand & Paarsch, Harry J. & Huynh, Kim P., 2022. "A flexible framework for intervention analysis applied to credit-card usage during the coronavirus pandemic," International Journal of Forecasting, Elsevier, vol. 38(3), pages 1129-1157.
    3. Andrew Usher & Edona Reshidi & Francisco Rivadeneyra & Scott Hendry, 2021. "The Positive Case for a CBDC," Discussion Papers 2021-11, Bank of Canada.
    4. Christopher Henry & Matthew Shimoda & Julia Zhu, 2022. "2021 Methods-of-Payment Survey Report," Discussion Papers 2022-23, Bank of Canada.
    5. Annetta Ho & Sriram Darbha & Yuliya Gorelkina & Alejandro García, 2022. "The Relative Benefits and Risks of Stablecoins as a Means of Payment: A Case Study Perspective," Discussion Papers 2022-21, Bank of Canada.

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    More about this item

    Keywords

    Bank notes; Financial institutions; Financial services; Market structure and pricing; Payment clearing and settlement systems;
    All these keywords.

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L81 - Industrial Organization - - Industry Studies: Services - - - Retail and Wholesale Trade; e-Commerce

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