Why Do Debit Card Networks Charge Percentage Fees?
Why do debit card networks base their fees on a percentage of transaction amounts when the marginal cost of executing a transaction does not vary by amount? Research suggests that this type of fee structure, a linear ad valorem fee, maximizes profits for card networks by allowing price discrimination. Also, because percentage fees make card usage more economical for lower-value transactions, such a fee structure tends to increase social welfare.
Welfare Analysis of Debit Card Interchange Fee Regulation
Merchants pay interchange fees to card issuers when they accept credit or debit cards as payment. Many merchants have complained that the fees far exceed issuers' costs for processing such transactions. In response to those complaints, Congress directed the Federal Reserve to impose a cap on debit card interchange fees. The cap lowered interchange fees for most merchants, but it yielded some unintended consequences. An analysis of the payment-card market suggests several factors to consider, in addition to issuer costs, when setting interchange fees to maximize social welfare.
What Two Billion Retail Transactions Reveal about Consumers’ Choice of Payments
Although cash continues to be a major form of payment in retail transactions, data on the use of cash are challenging to obtain. Research at the Richmond Fed has exploited a large dataset of cash, check, credit card, and debit card transactions at a nationwide retail chain to examine consumer payment choice based on transaction size and location, day-of-week and day-of-month cycles, and longer-term trends.
Explaining the car industry cluster: the case of U.S. car makers from 1895-1969
The geographic clustering of companies within an industry is often attributed to several agglomeration economies: intra-industry spillovers (benefits from proximity to firms in the same industry), inter-industry spillovers (benefits from proximity to firms in related industries), and spinoffs (firms established by former employees of a company in the same industry). Analysis of data on the U.S. auto industry in its first 75 years sheds light on the relative importance of those forces to the clustering of car makers
Did the Durbin Amendment Reduce Merchant Costs? Evidence from Survey Results
Debit cards facilitate nearly 50 billion transactions annually ? so the fees that debit card networks and issuers assess on each transaction are of great interest to merchants, consumers, and, more recently, regulators. In 2010, the so-called Durbin Amendment of the Dodd-Frank Act aimed to lower merchants' costs of accepting debit cards by capping debit interchange fees. New survey results suggest that the regulation has had limited and unequal effects on merchants. This Economic Brief discusses the causes of these findings as well as the implications of the regulation for end users.
The Decline in Currency Use at a National Retail Chain
We bring new evidence to bear on the contributions of changing transaction sizes and changing demographics to the decline in cash payments at a national retail chain. On average, across the thousands of store locations in our study, the share of cash transactions fell by 8.6 percentage points from February 2011 to February 2015. Our statistical model attributes approximately 1.3 percentage points of that decline to increasing transaction sizes. Changes in demographic and other location-specific variables contribute between 0.5 and 1.3 percentage points, so our analysis attributes ...
Why Do Platforms Use Ad Valorem Fees? Evaluating Two Alternative Explanations
Platforms such as Amazon and Visa intermediate transactions between buyers and sellers. They typically charge ad valorem fees, in which fees depend on transaction values. Given that these platforms do not incur significant costs that vary with transaction value, their use of ad valorem fees poses a great puzzle. In this article, we review recent research on two alternative explanations: double marginalization versus price discrimination. With a generalized framework, we show that the two theories complement each other in explaining this pricing puzzle, and their relative importance is ...
Debit card interchange fee regulation: some assessments and considerations
The debit card interchange fee regulation introduced by the Durbin Amendment to the Dodd-Frank Act went into effect in October 2011. The regulation limits the maximum permissible interchange fee that a covered issuer can collect from merchants for a debit card transaction. In this article, we review the regulation's first-year impact on different players in the debit card market. We also discuss how the regulation may affect payments efficiency.
The Impact of the Durbin Amendment on Merchants: A Survey Study
The Durbin Amendment to the Dodd-Frank Act introduced a regulation on debit card interchange fees, which went into effect in October 2011. Based on a merchant survey conducted two years after the regulation, we investigate the impact of the regulation on merchants' costs of accepting debit cards. We also examine merchants' reactions to the regulation in terms of changing prices and debit card restrictions.
Consumer Payment Choice in the Fifth District: Learning from a Retail Chain
This paper studies payment variation across locations and time using five years of transactions data from a large discount retail chain with hundreds of stores across the Fifth District. The results show that the median transaction size, demographics, education levels, and state fixed effects are the top factors in explaining cross-location payment variation in the sample. We also identify interesting time patterns of payment variation, particularly the longer-term decline in the cash share of transactions largely replaced by debit.