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The Regressive Nature of Card Payments

Categories : Cash covers a broad range of transactions, Cash ensures competition among payment instruments, Cash is available to all users, Costs of cash versus costs of electronic payment instruments
February 8, 2023
Tags : Canada, Card payments, Cards, Credit card, Debit card, Digital payments, Financial inclusion, US
Card payments have regressive distributional effects: cash and debit card transactions subsidize credit card payments, and credit cardholders tend to be higher-income consumers.
Manuel A. Bautista-González

Ph.D. in U.S. History, Columbia University in the City of New York

Post-Doctoral Researcher in Global Correspondent Banking, 1870-2000 – Mexico and South America, University of Oxford

This post is also available in: Spanish

Since the 1990s, some scholars have argued that lower-cost debit card and cash transactions subsidize credit card payments (see Frankel 1998).

Evidence from Canada (1)

In a 2017 paper, Anneke Kosse, Heng Chen, Marie-Hélène Felt, Valéry Dongmo Jiongo, Kerry Nield, and Angelika Welte (Bank of Canada, BoC) used survey data from retailers, financial entities, and cash management companies to look into the costs of cash, debit and credit card payments in Canada in 2014.

Evidence from Canada (2)

In a 2019 paper, Kim P. Huynh, Gradon Nicholls, and Oleksandr Shcherbakov (BoC) used consumer-side and merchant-side surveys to determine the cost of payments for different consumers.

Graph 1. Canada: Variable Private Costs per Transaction By Transaction Value (Canadian Dollars, CAD), 2014

Source: Kosse et al. (2017: 38) in Huynh et al. (2019: 3).

Evidence from the United States and Canada

In a 2020 paper, Marie-Hélène Felt (BoC), Fumiko Hayashi (Federal Reserve Bank of Kansas City), Joanna Stavins (Federal Reserve Bank of Boston), and Angelika Welte (BoC)  quantified consumers’ net pecuniary cost of using cash, credit and debit cards in the United States and Canada.

Table 1. Average Value and Number of POS Purchases per Consumer per Month by Payment Instrument and Income Cohort.

Panel A: United States (2018)

Panel B: Canada (2017)

Source: Felt et al. (2020: 38, 39).

Graph 2. Ratio of Net Pecuniary Cost to POS Purchase Amount in the United States (2018) and Canada (2017)

Source: Felt et al. (2020: 49).

Poverty Premium When Using Cash Only

There is a “poverty premium” when using cash only when retailers accept cards widely.

This post is also available in: Spanish