In Distributional Effects of Payment Card Pricing and Merchant Cost Pass-through in the United States and Canada, Felt, Hayashi, Stavins, and Welte revisit the effects of non-differentiated check out prices regardless of payment option choosen, showing that relatively cheaper debit and cash payments subsidize relatively costly credit card transactions.
Using data from the United States and Canada, 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 the United States and Canada.
Punishing the cash option, which is already an unfair market logic, is also a tax on privacy, seeing that cash is one of the most powerful ways to evade everyday surveillance, the bread and butter of credit card companies.