As I’m in Canada, I thought I might mention that a detailed investigation into the cost of payments at POS just released by the Bank of Canada shows (absolutely as I would have predicted given the scale and dynamics of the Canadian market) that

Debit cards are the least costly in terms of total resource costs, followed by credit cards, whereas cash is the most costly.

No surprise at all. What is surprising, however, is that the total cost of payments in the Canadian market is estimated at 0.78% of GDP (compared to 0.54% for Australia, which I would have e thought a reasonable comparison). I haven’t read every single page of the report but I suspect that the inefficiency must stem somewhat from the size of the country (distributing and collecting cash is expensive) and but mainly from much higher credit card use than in (say) the UK.



Me eating poutine in Montreal.

According to our Canadian cousins, cash only has the lowest cost to society for POS transactions below approximately $6, which means as far as I can see that it is irresponsible to produce banknotes above $10 since by doing so the central bank is making the economy less efficient. (I’m not familiar with their charter but this cannot be one of the goals.) It’s time for action.

The main point I wanted to make about the Canadian payment environment is how it illustrates the difference between incentives based on private costs compared to what is best for the economy. We cannot say what is the “best” payment mechanism since that varies by perspective. Indeed, as the report says:

If stakeholders make their payment choices based on their private costs alone, consumers would prefer to use credit cards, while retailers and financial institutions would prefer debit card payments.

But what we might say is that the best solution for society is the mechanism with the lowest total social cost, and that’s PIN debit (soon to be overtaken by credit push I expect). Hence that is what society should encourage. But it doesn’t: it allows a suboptimal payment system instead. The big winners with this arrangement are the credit card issuers because customer use credit cards to obtain rewards at the expense of other customers who are using debit cards and even cash. In Canada this results in unusually high credit card use because people just love their rewards, such as frequent flyer miles. These, incidentally, have turned into a huge business.

“Airlines are earning upwards of 50 percent of [income] from selling miles to a credit card company, which we believe is a great business to be in”

From Bloomberg

Scatchamagowza. Half? Seriously. Non-credit customers are subsidising a massive programme of wealth transfer to well-off people who like to fly a lot! I’m not complaining, by the way. I use my Amex card with frequent flyer rewards (well, Avios) all the time. And I’m clearly not the only Amex customer who prefers this kind of deal.

American Express says that Delta SkyMiles accounted for approximately 7 percent of its business last year and approximately 20 percent of its outstanding credit card loans as of the end of the year. 

Do Loyalty Programs Make More Money for Airlines Than Flying?

It’s amazing what a big business credit card miles have turned out to be. Every time that the person in front of me at the supermarket pays using cash or a debit card I feel like hugging  them (I don’t, of course, because I’m English) and thanking them personally for their selfless contribution to my cashback, miles and Uber credits.


  1. To be accurate, Dave, it is merchants who are subsidizing these programs more than other customers, since merchants pay the incremental interchange for rewards cards.

    Customers may pay incrementally, to the extent merchants pass on interchange costs, but competitive pressure on price is intense in much of retail, while there is none in the interchange duopoly.

    1. Fair point David but unless the merchants surcharge the customers using the credit cards then the debit cards users (who are paying the same price – the price including the rewards interchange) are cross-subsidising.

  2. Dave, as the Canadian report (like other reports before it) concludes that cash is by far the most expensive means of payment, it should be the ‘cash-payers’ that should be hugging you as a card-payer to thank you for your generous cross-subsidising of their expensive choice of payment method.

    I for one would like see surcharging of cash payments.

  3. > According to our Canadian cousins, cash only has the lowest cost to society for POS transactions below approximately $6, which means as far as I can see that it is irresponsible to produce banknotes above $10 since by doing so the central bank is making the economy less efficient.

    By this logic it’s irresponsible to permit electronic payments below $6 because it is making the economy less efficient?

    Time for action indeed! India’s the place for advice on how to make the economy more efficient. We need to shut down entire segments of the economy in blind A/B trials to figure this out. We will make them more efficient, science will prevail!

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