Credit-Card Regulation Robs from the Poor and Gives to the Rich

That's the obvious conclusion from a recent study by the Federal Reserve Bank of Boston:

Merchant fees and reward programs generate an implicit monetary transfer to credit card users from non-card (or “cash”) users because merchants generally do not set differential prices for card users to recoup the costs of fees and rewards. 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. On average, and after accounting for rewards paid to households by banks, the lowest-income household ($20,000 or less annually) pays $23 and the highest-income household ($150,000 or more annually) receives $756 every year. We build and calibrate a model of consumer payment choice to compute the effects of merchant fees and card rewards on consumer welfare. Reducing merchant fees and card rewards would likely increase consumer welfare.

(I'm quoting from the report and and not the more understandable news items about it in protest of the clown described here.)

In other words, anything that makes credit cards cheaper that has to be paid for by business will cause the businesses to raise prices across the board and not just on credit cards. Since people paying by credit card are richer than people paying by cash such regulations rob from the rich and give to the poor.

I'm reminded of Dennis Moore on Monty Python: “This redistribution of wealth thing is harder than I thought…”

On the other hand …

I'm dubious about the assumption that credit-card fees are paid for by business. If they were, we would either see more cash-only businesses or price discrimination by payment method. Using credit cards might lower the cost business by more than the cost of the fees. That, in turn, would mean that the credit users are subsidizing the cash users.