Regressive Effects of Payment Card Pricing and Merchant Cost Pass-Through in the United States and Canada

Abstract: We use novel datasets from multiple sources to quantify US and Canadian consumers’ net pecuniary costs of making payments across income cohorts. The net costs include merchants’ payment acceptance cost that is passed on to consumers, payment card rewards, and fees paid to financial institutions. We find that the net costs as the ratio to transaction value is generally the highest for the bottom income cohort and the lowest for the top cohort, indicating regressive distributional effects. In Canada, the difference in the ratio between the bottom and top cohorts remains positive under all combinations of alternative assumptions, ranging from 0.24 percentage points (pps) to 0.85 pps. In contrast, in the US the difference ranges from -0.30 pps to 0.74 pps, suggesting that the regressive effects disappear under some combinations of alternative assumptions. Further research with more detailed data is needed to refine our results for the US.