[Dave Birch] A correspondent writes to point me to the new report from Federal Reserve Bank of Boston called “Who Gains and Who Loses from Credit Card Payments? Theory and Calibrations“, hoping to infuriate me by quoting from the abstract, which says

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.

So people who use cash subsidise people who use cards? Well, yes, if you take the same definition as this report does…

For simplicity, we refer to consumers who do not pay by credit card as cash payers, where “cash” represents all payment instruments other than credit cards: cash, checks, debit and prepaid cards, etc

Ah… now I understand. So what the report is saying is that without price discrimination at point of sale, people who don’t use credit cards subsidise people who do (this is correct) and that because the people who use credit cards tend to be richer, so the poor are subsidising the rich because of the payment systems in place in the US (also correct). Yet another argument for abolishing cash, if you ask me, since cash is the payment method that imposes the highest transaction costs on the poor.

Now, one the one hand the idea that people who are poor subsidise people who are rich in retail environments is nothing new. Guatamalan coffee was a quid off for buying two packs in my local supermarket today, so poor people who could only afford to buy one pack of coffee, were clearly subsidising me because I could afford to buy two packs and get a quid off. So what is the solution? Should the government intervene to stop shops from offering two-for-one deals? Should the regulators step in to determine how much Walmart is allowed to charge for waffles or Tesco for toilet paper?

The analysis in the FRB paper is very interesting, but one thing it doesn’t include is the cost of cash on the rest of society, aside from the merchant. Naturally, merchants will act to minimise their costs, even if this loads more costs on to the rest of society. So if the total social cost of cash is high enough, then society is worse off than if people used credit cards and non-cash users are subsidising cash users (which is correct).

These opinions are my own (I think) and presented solely in my capacity as an interested member of the general public [posted with ecto]

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