ECONOMISTS usually hold that disaggregating goods creates value for consumers: instead of having to pay for a bundled product at a uniform price, people who don't want some portion of the bundled product at the asking price don't have to buy it, while those who do want it can pay for it themselves. I'm often suspicious of this argument, as I feel it underestimates the frequent occasions when you just want a product to come with all the normal trimmings without having to think about how much each trimming is worth. (Do you really want to have to pay an extra 25 cents for mustard on your hot dog, and be forced to think about whether the mustard is worth 25 cents to you? How about the bun? The napkin?)

That said, the Boston Fed has found an example of a good that clearly should be disaggregated: the interchange fees charged to merchants by credit-card companies. (Via Kevin Drum, via Adam Ozimek.) The analysis is clear and simple. Credit-card companies charge merchants 1-2% of the price of a product when a customer uses their credit card to buy it. Merchants raise prices to compensate for this cost, but they don't charge cash-paying customers less; they simply charge a uniform price. (Apparently this is because credit-card companies require them to.) As a result, cash customers are subsidising credit-card users. And because credit-card users tend to be richer, the transfer of wealth is regressive.

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.

I find this example particularly salient because I spend a lot of time in countries where credit-card fees actually are disaggregated. In a lot of emerging-market countries, for whatever reason, merchants tend to charge the credit-card fees only to customers who use the cards. The fees tend to be higher in such countries, in the range of 2-3%. My instinctive reaction to being charged that fee is annoyance: what a pain in the keister; in an advanced economy use of the credit card would be "free". But, obviously, that's a naive and incorrect view. Nothing is ever free. In an advanced economy, I'd be paying the credit-card fee without realising it.

This, in fact, points to an alternative view of who suffers from the bundling of credit-card fees in advanced economies. The Boston Fed paper argues that cash users lose from bundling, while credit-card users win. But an alternative view would be that both lose, since credit-card users lose the opportunity to save money by using cash. For example, on a recent purchase of airline tickets in an emerging-market country, I saved about $200 by paying cash rather than using a credit card. In America, I wouldn't have been able to do that. Using the credit card would have been "free".

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