The report authors contend that using credit cards as payment generates "a nontrivial transfer of income from cash to card payers" and from the poor to the wealthy because retailers don't generally set different prices based on the form of payment. "Cash" includes all forms of payment except for credit cards.
Credit card companies forbid retailers from passing the fees associated with credit card payments --which average around 2 percent according to the National Retail Federation -- directly to cardholders through a minimum purchase requirement or surcharge on credit card purchases. Rather, the researchers write, "merchants mark up their retail prices for all consumers by enough to recoup the merchant fees from credit card sales."
How cash payers and low-income folks get penalized
Because these fees help to fund credit card rewards programs and cash users pay those fees through higher retail prices, cash payers partly finance the rewards that others enjoy. The report also notes that credit card spending and rewards are positively correlated with income, which means that poorer consumers are subsidizing wealthier households.
"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," the authors state.
The report goes on to suggest that lowering merchant fees and card rewards "would likely increase consumer welfare."
Will interchange reform really help?
The new financial reform law calls on the Federal Reserve to set standards for "reasonable and proportional" interchange fees for debit card transactions, will permit credit card minimums of $10 or less and allow merchants to offer discounts for preferred payment methods, such as cash or debit cards instead of credit cards.
Yet it remains to be seen whether consumers -- as cash or credit card payers -- will see a real benefit from interchange fee reforms that clearly favor merchants. Nothing in the new law requires merchants to lower their prices or provide discounts for using cheaper forms of payment. Lower retail prices didn't result from reduced interchange fees in Australia, according to a November 2009 report from the U.S. Government Accountability Office. Instead, issuers pared back rewards programs and increased annual fees.
What are your thoughts on the subject? Is the sharing of credit card costs through inflated prices justified since many people use credit cards, or do you think that cash payers and lower-income folks are being unfairly penalized?
Follow me on Twitter.