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Who gains and who loses from credit card payments?: theory and calibrations



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.

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  • Scott Schuh & Oz Shy & Joanna Stavins, 2010. "Who gains and who loses from credit card payments?: theory and calibrations," Public Policy Discussion Paper 10-3, Federal Reserve Bank of Boston.
  • Handle: RePEc:fip:fedbpp:10-3

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    References listed on IDEAS

    1. Julia S. Cheney, 2008. "An examination of mobile banking and mobile payments: building adoption as experience goods?," Payment Cards Center Discussion Paper 08-06, Federal Reserve Bank of Philadelphia.
    2. Terri Bradford & Fumiko Hayashi, 2007. "Complex landscapes: mobile payments in Japan, South Korea, and the United States," Payments System Research Briefing, Federal Reserve Bank of Kansas City, issue Sep.
    3. Claessens, Stijn & Laeven, Luc, 2004. "What Drives Bank Competition? Some International Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(3), pages 563-583, June.
    4. Terri Bradford, 2008. "Developments in interchange fees in the United States and abroad," Payments System Research Briefing, Federal Reserve Bank of Kansas City, issue Apr.
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    Cited by:

    1. Lee, Manjong, 2014. "Constrained or unconstrained price for debit card payment?," Journal of Macroeconomics, Elsevier, vol. 41(C), pages 53-65.
    2. Sumit Agarwal & Sujit Chakravorti & Anna Lunn, 2010. "Why do banks reward their customers to use their credit cards?," Working Paper Series WP-2010-19, Federal Reserve Bank of Chicago.
    3. Berkovich Efraim, 2012. "Card Rewards and Cross-Subsidization in the Gasoline and Grocery Markets," Review of Network Economics, De Gruyter, vol. 11(4), pages 1-38, December.

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