No. 10-03
Who Gains and Who Loses from Credit Card Payments?
Theory and Calibrations
Scott Schuh, Oz Shy, and Joanna Stavins
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.
Keywords: credit cards, cash, merchant fees, rewards, regressive transfers, no-surcharge rule
JEL Classifications: E42, D14, G29
Scott Schuh is Director of the Consumer Payments Research Center and a senior economist in the research
department at the Federal Reserve Bank of Boston. Oz Shy is a senior economist and a member of the Consumer
Payments Research Center and Joanna Stavins is a senior economist and policy advisor and a member of the
Consumer Payments Research Center, both in the research department at the Federal Reserve Bank of Boston. Their
email addresses are
scott.schuh@bos.frb.org, oz.shy@bos.frb.org, and joanna.stavins@bos.frb.org, respectively.
This paper, which may be revised, is available on the web site of the Federal Reserve Bank of Boston at
http://www.bos.frb.org/economic/wp/index.htm.
We thank Tamás Briglevics for most valuable research assistance, analysis, and advice. We also thank Santiago
Carbó Valverde, Dennis Carlton, Bob Chakravorti, Alan Frankel, Jeff Fuhrer, Fumiko Hayashi, Bob Hunt, Suzanne
Lorant, John Sabelhaus, Irina Telyukova, Bob Triest, Lotta Väänänen, Zhu Wang, Paul Willen, and Michael Zabek,
as well as seminar participants at the Boston Fed and at the Economics of Payments IV conference (New York Fed,
May 2010), the conference on Platform Markets (ZEW Mannheim, June 2010), and the conference on Payment
Markets (University of Granada, June 2010) for valuable comments and suggestions on earlier drafts.
The views and opinions expressed in this paper are those of the authors and do not necessarily represent the views
of the Federal Reserve Bank of Boston or the Federal Reserve System.
This version: August 31, 2010