Who Bears the Surcharge? Card Segmentation and the Distributional Incidence of Merchant Credit Card Fees

Egan et al. (2026) estimate that interchange fees transfer approximately $30 billionper year from cash and debit card users to credit card users, assuming merchants setuniform prices. We extend their sufficient-statistics framework to incorporate merchantsurcharging and show that it attenuates the pooled cross-subsidy by $1–2 billion (3–7%). The correct aggregation uses transfer-weighted sector shares, not expenditureshares; the naive alternative overstates the correction fivefold. Using transaction-leveldata from the Diary of Consumer Payment Choice (2022–2024), we document thatsurcharging has nearly doubled since 2021 and is concentrated in sectors where smallbusinesses face high interchange costs. At the transaction level, credit card purchasesby consumers with household income below $25,000 are surcharged at twice the rate of1those above $150,000 (p = 0.038, respondent-clustered standard errors with merchant-category fixed effects). However, this gradient is fragile: it does not survive aggregationto the respondent level, is present in 2024 but not in 2022, and is largely absorbed bycontrolling for rewards card status. Surcharging widens inequality in the net benefitsof card use primarily through card segmentation—non-rewards cardholders face highersurcharge rates—rather than through an independent income channel.