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Take On Payments, a blog sponsored by the Retail Payments Risk Forum of the Federal Reserve Bank of Atlanta, is intended to foster dialogue on emerging risks in retail payment systems and enhance collaborative efforts to improve risk detection and mitigation. We encourage your active participation in Take on Payments and look forward to collaborating with you.

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August 29, 2022

Is There a Cost to Payments Exclusion?

Beginning in the mid-1990s, economists have pointed out that debit card and cash users subsidize credit card usersOff-site link at the retail point of sale. How's that, you say?

In most cases, everyone, regardless of payment method, pays the same price for eggs, milk, bread, movie tickets, shoes, a couch, or airline tickets. And even though we all pay the same at checkout, those of us who use a credit card to pay could get a bit of a discount—say 1 percent or so—later in the form of cash back, merchandise, miles or hotel rooms. What's that discount worth? And who benefits?

Researchers at the Bank of Canada estimate that consumers who have only cash and debit cards in their wallets have a cost of paymentsOff-site link of $11 per month. Consumers who have these methods and also have credit cards gain about $48 per month in benefits. "The difference in results could be due to the cost of withdrawing cash or debit card or account fees while most credit cards may offer rewards," the researchers write.

Taking another angle, researchers at the Federal Reserve Banks of Boston and Kansas City and the Bank of Canada find that, in total, low-income consumers pay lessOff-site link in absolute terms to make payments compared to higher-income consumers. As a percentage of transaction amount, however, low-income consumers pay more, and the highest-income consumers pay the least. For this research, cost was the sum of rewards, the fees consumers pay to financial institutions, and the merchant cost passed through as higher prices at checkout.

The conversation about access to payment methods is often in the context of preserving access to cash or finding alternatives to cash. This research examines another aspect of payments access—that is, what it costs to make a payment depending on payment instrument choice or limitation.

For analysis of how consumers with different levels of card ownership make payments using data from the 2021 Diary of Consumer Payment Choice, see "Payment Card Adoption and Payment Choice," posted in the Atlanta Fed's Policy Hub in mid-July.