Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/59219 
Year of Publication: 
2010
Series/Report no.: 
Public Policy Discussion Papers No. 10-3
Publisher: 
Federal Reserve Bank of Boston, Boston, MA
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 $149 to card-using households and each card-using household receives $1,133 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 $21 and the highest-income household ($150,000 or more annually) receives $750 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.
Subjects: 
credit cards
cash
merchant fees
rewards
regressive transfers
no-surcharge rule
JEL: 
E42
D14
G29
Document Type: 
Working Paper

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