Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/241231
Authors: 
Felt, Marie-Hélène
Hayashi, Fumiko
Stavins, Joanna
Welte, Angelika
Year of Publication: 
2021
Series/Report no.: 
Bank of Canada Staff Working Paper No. 2021-8
Publisher: 
Bank of Canada, Ottawa
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.
Subjects: 
Bank notes
Financial institutions
Financial services
Market structure and pricing
Payment clearing and settlement systems
JEL: 
D12
D23
D31
E42
G21
L81
Document Type: 
Working Paper

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