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Discussion Paper
Who pays for credit cards?
We model side payments in a competitive credit-card market. If competitive retailers charge a single (higher) price to cover the cost of accepting cards, banks must subsidize convenience users to prevent them from defecting to merchants who do not accept cards. The side payments will be financed by card users who roll over balances at interest if their subjective discount rates are high enough. Despite the feasibility of cross subsidies among cardholders, price discrimination without side payments is Pareto preferred because of the costliness of the card network--unless banks have other ...
Newsletter
Innovations, incentives, and regulation: forces shaping the payments environment
The migration to more efficient payment mechanisms is affected by innovations, incentives, and regulation. While advances in technology have yielded numerous payment method alternatives, many have not been widely adopted. A recent Chicago Fed conference explored why certain payment innovations have been more successful than others.
Journal Article
Why invest in payment innovations?
In this paper, we provide a framework to study the creation and adoption of innovations by payment providers and processors. We identify several motivating factors for banks and nonbanks to invest in payment innovations. In addition, we discuss the evolutionary process of payment innovations from inception to commoditization recognizing that innovations differ in the time necessary to evolve from proprietary technology to commodization and some may never evolve completely. Finally, we consider a snapshot of payment innovations at different stages of development. We compare proprietary versus ...
Discussion Paper
Theory of credit card networks: a survey of the literature
Credit cards provide benefits to consumers and merchants not provided by other payment instruments as evidenced by their explosive growth in the number and value of transactions over the last 20 years. Recently, credit card networks have come under scrutiny from regulators and antitrust authorities around the world. The costs and benefits of credit cards to network participants are discussed. Focusing on interrelated bilateral transactions, several theoretical models have been constructed to study the implications of several business practices of credit card networks. The results and ...
Working Paper
The double play: simultaneous speculative attacks on currency and equity markets
This paper investigates the potential for foreign speculators to profit from simultaneously taking short positions in foreign exchange and equity markets under a fixed exchange rate regime, in what has been termed as the double play. Such a strategy is considered when the monetary authority is faced with two conflicting objectives exchange rate stability and low interest rates. While the monetary authority may not be able to directly intervene to stabilize interest rates under the fixed exchange rate regime, it may consider intervention in equity markets to head off speculative pressure on ...
Working Paper
Toward a theory of merchant credit card acceptance
In this article, we construct a two-period model to investigate what market conditions would support a credit card equilibrium given two commonly observed credit card pricing conventions consumers rarely are charged higher prices for using their credit cards and if they payoff their credit card obligations every month, they enjoy interest-free short-term credit. The results of the model indicate that when the card issuer's cost of funds is not too high and the merchant's profit margin is sufficiently high, a credit card equilibrium can exist. We also and that the credit-issuer's ability to ...
Journal Article
Why do we use so many checks?
The authors identify underlying disincentives for payment system participants to migrate to electronic payments. Their analysis sheds light on why check usage remains higher in the United States relative to other industrialized countries when the real resource cost of processing payments may decrease by using electronic payment networks.
Working Paper
Regulating two-sided markets: an empirical investigation
We study the effect of government encouraged or mandated interchange fee ceilings on consumer and merchant adoption and usage of payment cards in an economy where card acceptance is far from complete. We believe that we are the first to use bank- level data to study the impact of interchange fee regulation. We find that consumer and merchant welfare improved because of increased consumer and merchant adoption leading to greater usage of payment cards. We also find that bank revenues increased when interchange fees were reduced although these results are critically dependent on merchant ...
Working Paper
Managerial incentives and financial contagion
This paper proposes a framework to examine the comovements of asset prices with seemingly unrelated fundamentals, as an outcome of the optimal portfolio strategies of large institutional fund managers. In emerging markets, the dominant presence of dedicated fund managers whose compensation is linked to the outperformance of their portfolio relative to a benchmark index, and of global fund managers whose compensation is linked to the absolute returns of their portfolios, leads to portfolio decisions that result in systematic interactions between asset prices even in the absence of asymmetric ...