Costs and benefits of building faster payment systems: the U.K. experience and implications for the United States
This paper studies the economic cost-benefit analysis behind the decision by the United Kingdom on how to implement its Faster Payments Service (FPS), which allows consumers and businesses to rapidly transfer money between bank accounts, and draws implications for the U.S. payments system.
How are U.S. consumers using general purpose reloadable prepaid cards?: are they being used as substitutes for checking accounts?
Owners of general purpose reloadable prepaid cards (GPR) who do not have checking accounts comprise 4.8 percent of U.S. adults, according to the 2012 Survey of Consumer Payment Choice. This report explores two important aspects of prepaid card use: Do owners of GPR prepaid cards who lack checking accounts use these cards differently than those who have checking accounts? Are these cards substituting for payment services that have traditionally been provided only via traditional checking accounts?
Merchant steering of consumer payment choice: lessons learned from consumer surveys
Recent policy changes allow merchants to influence consumers? choice of payment instruments by offering price discounts and other incentives. This report describes lessons learned from using consumer survey responses to assess whether merchants tried to influence buyers? choice of payment method. To measure the effects of these recent policy changes, we included questions about merchant steering in pilot versions of a new diary survey of U.S. consumers. Our findings are inconclusive because some respondents interpreted the questions differently from the way we intended. This report aims to ...
Account-to-account electronic money transfers: recent developments in the United States
This paper reviews recent developments in online and mobile banking in the United States that provide bank account holders with low-cost interfaces to manage account-to-account electronic money transfers. The paper analyzes the emerging decentralized market in which A2A money transfers are becoming available in the United States and compares it with the A2A market in other countries. The paper constructs analytical examples to explain and evaluate the structure of the emerging U.S. market and discusses possible policy actions that may enhance the use of A2A money transfers in the United ...
Why don’t most merchants use price discounts to steer consumer payment choice?
Recent legislation and court settlements in the United States allow merchants to use price discounts to steer customers to pay with means of payment that are less costly to merchants. This paper suggests one method of calculating merchants? change in profit associated with giving price discounts to buyers who pay with debit cards and cash. We use data from the pilot of the Boston Fed?s Diary of Consumer Payment Choice to compute rough estimates of the expected net cost reduction by merchant type that may result from debit card and cash price discounts. We find that steering consumers to debit ...
An economic analysis of the 2010 proposed settlement between the Department of Justice and credit card networks
In 2010, the Department of Justice (DOJ) filed a lawsuit against the credit card networks American Express, MasterCard, and Visa for alleged antitrust violations. We evaluate the extent to which the recently proposed settlement between the DOJ and Visa and MasterCard (henceforth, "Proposed Settlement") is likely to achieve its central objective: "?to allow Merchants to attempt to influence the General Purpose [Credit] Card or Form of Payment Customers select by providing choices and information in a competitive market." In word and spirit, the Proposed Settlement represents a ...
Who gains and who loses from the 2011 debit card interchange fee reform?
In October 2011, new rules governing debit card interchange fees became effective in the United States. These rules limit the maximum permissible interchange fee that an issuer can charge merchants for a debit card transaction. This paper provides simple calculations that identify the transaction values for which merchants pay higher and lower interchange fees under the new rules. The paper then uses new data from the Boston Fed?s 2010 and 2011 Diary of Consumer Payment Choice to identify the types of merchants who are likely to pay higher and lower interchange fees under the new rules.
Person-to-person electronic funds transfers: recent developments and policy issues
The paper investigates the reasons why person-to-person electronic funds transfers are still not very common in the United States compared with practices in many other countries. The paper also describes recent enhancements to online and mobile banking that provide account holders with low-cost interfaces to manage person-to-person electronic funds transfers via automated clearing house (ACH). On the theoretical side, the paper characterizes the critical mass levels needed for payment instruments to become widely adopted. Given the Fed's long-term heavy involvement in check clearing, the ...
Who gains and who loses from credit card payments?: theory and calibrations
Merchant fees and reward programs generate an implicit monetary transfer to credit card users from non-card (or ?cash?) users because merchants generally do not set differential prices for card users to recoup the costs of fees and rewards. 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. ...
Why do card issuers charge proportional fees?
This paper explains why payment card companies charge consumers and merchants fees which are proportional to the transaction values instead of charging a fixed per-transaction fee. Our theory shows that, even in the absence of any cost considerations, card companies earn much higher profit when they charge proportional fees. It is also shown that competition among merchants reduces card companies' gains from using proportional fees relative to a fixed per-transaction fee. Merchants are found to be the losers from proportional fees whereas consumer and social welfare are invariant with respect ...