Distributional effects of payment card pricing and merchant cost pass-through in Canada and the United States

Arbeitspapier

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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Bank of Canada Staff Working Paper ; No. 2021-8

Classification and Topics

• Classification: Wirtschaft ; Consumer Economics: Empirical Analysis ; Organizational Behavior; Transaction Costs; Property Rights ; Personal Income, Wealth, and Their Distributions ; Monetary Systems; Standards; Regimes; Government and the Monetary System; Payment Systems ; Banks; Depository Institutions; Micro Finance Institutions; Mortgages ; Retail and Wholesale Trade; e-Commerce
• Subject: Bank notes ; Financial institutions ; Financial services ; Market structure and pricing ; Payment clearing and settlement systems

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Felt, Marie-Hélène ; Hayashi, Fumiko ; Stavins, Joanna ; Welte, Angelika
• Event: Veröffentlichung
• (who): Bank of Canada
• (where): Ottawa
• (when): 2021

Further information

• DOI: doi:10.34989/swp-2021-8
• Handle: http://hdl.handle.net/10419/241231
• Last update: 10.03.2025, 11:43 AM CET