Who Pays for Payments?

A Harvard Business School paper by Mark Egan, Gregor Matvos, Amit Seru, Lulu Wang and Vincent Yao analyses US payments to work out who pays. What is novel in the study is not that card interchange fees to merchants fund consumer rewards, or that users of low-cost payment methods (e.g. cash and debit cards) cross-subsidise high-reward credit card users who shop at the same merchant. What is new is that the level of wealth redistribution depends on the joint distribution of payment choices across merchants.

At the heart of the redistribution is that while transfers arise because payment acceptance costs vary significantly by payment method, retail prices do not. Since interchange fees flow back to consumers as rewards, a cross-subsidy emerges: all consumers pay higher retail prices, but the users of high-interchange-fee credit cards capture most of the rewards.