When a card is used to buy something, the shop pays a fee that goes to the cardholder’s bank. In the US the fee on a premium credit card is around 2.1% of the sale. On a debit card from a large bank it’s 0.7%. The shop recovers the fee through its prices. The bank may choose to pass that fee back to the cardholder as cashback, loyalty points, or air miles.
Shops can’t refuse the expensive premium credit cards. Visa and Mastercard require a merchant that accepts one of their cards to accept all of them. A merchant that adds a surcharge for premium cards gets complaints, so almost none do. Not many shops use surveillance pricing yet, so generally everyone pays the same price.
Who Pays for Payments?, an NBER working paper by Mark Egan, Gregor Matvos, Amit Seru, Lulu Wang and Vincent Yao, calculates this transfer of wealth. They used data from Fiserv, a US card processor, whose million merchants handled a fifth of US card payments in 2022. Cash and debit card users lose US$30 billion a year to credit card users. Cash users lose 0.96% of their spending power and debit users at the large banks lose 0.47%. Premium cardholders gain 0.59%. Households earning under US$150,000 lose about US$88 a year each, and households above that gain about US$390.
The twist is that Visa and Mastercard actually moderate the wealth transfer. Rich shoppers mostly shop where other rich shoppers do, so there’s less overlap than the averages suggest, which cuts the transfer by US$8.6 billion. Grocers and retailers with over US$1 billion in card sales, where the overlap is greatest, negotiate lower fees, which returns another US$1.7 billion to cash and debit users. The networks’ deals with their largest merchants stand between the poorest shoppers and a larger bill.
And there’s another twist in the 2011 Durbin Amendment, which capped US debit fees to help ordinary consumers. Banks, facing a loss of revenue, withdrew free current accounts, so regulated debit users ended up US$9.6 billion a year worse off. Shop prices fell for everyone, so credit card users gained US$4.3 billion and cash users US$1.9 billion. The paper puts the net result at about US$1 billion a year moving from middle-income to high-income households.
The final twist is premiumisation. Premium cards grew from 15% of US credit card volume in 2006 to 60% in 2022. All of these cards carry higher fees. The cost of those fees fell mainly on debit and basic credit card users, who shop at the same supermarkets and shops as premium cardholders. Premiumisation cost cash users US$1.1 billion a year and debit users US$5.1 billion.
Here in Malaysia Bank Negara has capped interchange since 1 July 2015. Under the Payment Cards Framework ceilings in force since 1 January 2023, credit card interchange is limited to 0.60% and domestic debit to 0.10% or 37 sen, whichever is lower. The US premium rate is 3.5 times our credit ceiling. RAM Ratings reported in March 2016 that issuers had scaled back rewards and were pushing overseas spending, where the cap doesn’t apply. So my card earns fewer points than an American one, and the fee buried in the price of my groceries is smaller. I think that’s the better deal, and I’d think so even if I paid cash.
In the US data, premium cardholders receive 43% of rewards and pay 30% of the fees. Cash users receive nothing and pay 10%. Rewards aren’t generosity. They’re a transfer, collected at one price from everyone and handed to those with the best cards.
Being poor is an expensive business.
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