I don't understand this paper. How does the merchant credit card fee change the price that users pay? I understand that they implicitly markup to make up for their loss, but everyone pays that markup, whether they pay with cash or card. This paper makes it seem like those who purchase with credit cards are paying slightly less than those who purchase with cash, and that's how it's being interpreted in the blogosphere: (links listed by closest-to-the-real-paper)

http://modeledbehavior.com/2010/07/27/are-credit-cards-regre...

http://motherjones.com/transition/inter.php?dest=http://moth...

http://kottke.org/10/08/cash-is-expensive

I understand how credit card users make some money due to the rewards programs, and that those reward programs are funded by the merchant fee and thus the markup that everyone (including those who pay with cash) pay. But the paper explicitly mentions the rewards programs, and seems to point to the merchant fee as an additional, separate factor. Anyone understand this?

I guess the paper is using merchant fees to just refer to the transaction fee and base transaction %. Rewards is an additional % on top of the base transaction % and differs for each reward program. I would price my merchandise to cover all costs so I don't understand why this paper is making a claim about subsidy. It should just make a claim about cash customers being penalized (and maybe even some credit card customers who don't have rewards being penalized).

"... cash buyers must pay higher retail prices to cover merchants' costs associated with the credit cards' merchant fees. Because these fees are used to pay for rewards given to credit card users, and since cash users do not receive rewards, cash users also finance part of the rewards given to credit card users."

This doesn't make sense to me at all. What merchant would gamble on having enough cash customers to subsidize his credit card customers? Merchants make the money. They just make more money on cash.

If anyone were to do a cost/benefit analysis for the credit card companies, I dare say they should be paying merchants to accept their card, because I strongly suspect that the companies make far more off of interest than they lose on defaulted accounts, and the profits, on interest alone, absolutely dwarf whatever income they receive from merchant fees.

Credit card debt is a very US-specific phenomenon, and one that could disappear very quicky. Relying exclusively on interest collected from it would be like time-delayed suicide for the companies.

Credit Card debt is in no way different than the supposedly secured debt which precipitated the housing crisis (tell the banks that are sitting on foreclosed properties that they cannot liquidate how "secured" that debt really is).

Both are built upon cash generated out of thin air by banks that, in truth, put up NO assets of their own when they lend money. It is this criminal behavior that is the money-making engine of not only the credit card companies but of all lenders whatsoever.

The entire debt-based banking system is built on time-delayed suicide, and the paltry (in comparison) fees collected from merchants in no way, shape, or form stems the inevitable collapse.

I think you missed my point, which was that getting massively indebted to credit card companies at ruinous interest is something that 1) nobody outside the USA does (instead, people get massively indebted to normal banks, usually for somewhat lower interest) and 2) could quickly disappear inside the USA due to competition from banks or changing regulations.

Thus, it would be a very stupid move for credit card companies to rely on debt interest completely and forego merchant fees, even if doing so would raise their income short-term (which I am not at all convinced it would).

A scribd link would be nice for the RSS (it's de facto a PDF warning)