A new paper from the Boston Fed investigates the transfers that occur as a result of credit card interchange fees:
On average, each cash-using household pays $151 to card-using households and each card-using household receives $1,482 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 $23 and the highest-income household ($150,000 or more annually) receives $756 every year.
I’ve only read the abstract, so I can’t vouch for quality, but the headline numbers are interesting. It’s important to remember that the interchange fees pay for the existence of the entire system, and so there are many benefits that must be weighed against those costs. The availability of short term revolving credit may be much more valuable to low-income households such that the net costs and benefits are not actually regressive.
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Tuesday ~ July 27th, 2010 at 4:09 pm
The Boston Fed on Regressive Transfers in Interchange Fees « Rortybomb
[...] Transfers in Interchange Fees Posted in Uncategorized by Mike on July 27, 2010 (h/t modeled behavior) A new report out from the Boston Fed: “Who Gains and Who Loses from Credit Card Payments? [...]
Wednesday ~ July 28th, 2010 at 10:00 pm
jazzbumpa
After only reading your excerpt, I think the point is that low income households don’t have the same access to credit cards, and therefore to the revolving credit they offer.
Thus, there is no obvious offset to the $151 net cash outflow that they experience.
But the existence of interchange fees raises cost for merchants, which is typically passed to all consumers, irrespective of card use, (gas stations not withstanding.)
I’m not at all sure that interchange fees really “pay for the system,” either. Money is too fungible to realistically parse profitability, which is a net resultant, according income compomenets: interest charges, user fees and penalties, and transfer fees.
What if I propose that interest charges pay for the existence of the system, and interchange fees are pure profit?
Cheers!
JzB