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Economics of payment cards: a status report
This article surveys the recent theoretical literature on payment cards (focusing on debit and credit cards) and studies this research's possible implications for the current public policy debate over payment card networks and the pricing of their services for both consumers and merchants.
AUTHORS: Chakravorti, Sujit; Bolt, Wilko
What is the role of public authorities in retail payment systems?
On June 21?22, 2010, the Chicago Fed and the University of Granada co-sponsored a conference that brought together policymakers, academics and industry practitioners to discuss evolving retail payment systems and the role of public authorities, with several panels focusing on the Single Euro Payments Area.
AUTHORS: Rodriguez-Fernandez, Francisco; Carbo-Valverde, Santiago; Gorjon, Sergio; Bolt, Wilko; Chakravorti, Sujit
Consumer choice and merchant acceptance of payment media
We study the ability of banks and merchants to influence the consumer's payment instrument choice. Consumers participate in payment card networks to insure themselves against three types of shocks -- income, theft, and their merchant match. Merchants choose which payment instruments to accept based on their production costs and increased profit opportunities. Our key results can be summarized as follows. The structure of prices is determined by the level of the bank's cost to provide payment services including the level of aggregate credit loss, the probability of theft, and the timing of income inflows. We also identify equilibria where the bank finds it profitable to offer one or both payment cards. Our model predicts that when merchants are restricted to charging a uniform price for goods that they sell, the bank benefits while consumers and merchants are worse off. Finally, we compare welfare-maximizing price structures to those that result from the bank's profit-maximizing price structure.
AUTHORS: Bolt, Wilko; Chakravorti, Sujit
Payment network scale economies, SEPA, and cash replacement
The goal of SEPA (Single Euro Payments Area) is to facilitate the emergence of a competitive, intra-European market by making cross-border payments as easy as domestic transactions. With crossborder inter-operability for electronic payments, card transactions will increasingly replace cash and checks for all types of payments. Using different methods, the authors estimate card and other payment network scale economies for Europe. These indicate substantial cost efficiency gains if processing is consolidated across borders rather than "piggybacked" onto existing national operations. Cost reductions likely to induce greater replacement of small value cash transactions are also illustrated.
AUTHORS: Bolt, Wilko; Humphrey, David B.
The effect of transaction pricing on the adoption of electronic payments: a cross-country comparison
Pricing should speed up the substitution of low cost electronic payments for expensive paper-based transactions and cash. But by how much? Norway has explicitly priced individual payment transactions and rapidly shifted to electronic payments while the Netherlands has experienced the same shift without direct pricing. Controlling for differences between countries, the authors estimate the incremental effect of pricing on the shift to electronic payments. If users strongly value the improved convenience or security of electronic payments, pricing?viewed negatively by most consumers?may not be necessary to ensure rapid adoption of electronic payments. ; Also issued as Payment Cards Center Discussion Paper No. 05-18
AUTHORS: Humphrey, David B.; Uittenbogaard, Roland; Bolt, Wilko
Competition in bank-provided payment services
Banks supply payment services that underpin the smooth operation of the economy. To ensure an efficient payment system, it is important to maintain competition among payment service providers, but data available to gauge the degree of competition are quite limited. We propose and implement a frontier- based method to assess relative competition in bank-provided payment services. Billion dollar banks account for around 90 percent of assets in the U.S., and those with around $4 to $7 billion in assets turn out to be both the most and the least competitive in payment services, not the very largest banks.
AUTHORS: Bolt, Wilko; Humphrey, David B.