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.
Spin-offs: theory and evidence from the early U.S. automobile industry
We develop "passive learning" model of firm entry by spin-off : firm employees leave their employer and create a new firm when (a) they learn they are good entrepreneurs (type I spin-offs) or (b) they learn their employer's prospects are bad (type II spin-offs). Our theory predicts a high correlation between spin-offs and parent exit, especially when the parent is a low-productivity firm. This correlation may correspond to two types of causality: spin-off causes firm exit (type I spin-offs) and firm exit causes spin-offs (type II spin-offs). We test and confirm this and other model ...
Two-sided Market, R&D and Payments System Evolution
It takes many years for more efficient electronic payments to be widely used, and the fees that merchants (consumers) pay for using those services are increasing (decreasing) over time. We address these puzzles by studying payments system evolution with a dynamic model in a two-sided market setting. We calibrate the model to the U.S. payment card data, and conduct welfare and policy analysis. Our analysis shows that the market power of electronic payment networks plays important roles in explaining the slow adoption and asymmetric price changes, and the welfare impact of regulations may vary ...
Idea Diffusion and Property Rights
We study the innovation and diffusion of technology at the industry level. We derive the full dynamic paths of an industry’s evolution, from birth to its maturity, and we characterize the impact of diffusion on the incentive to innovate. The model implies that protection of innovators should be only partial due to the congestion externality in meetings in which idea transfers take place. We fit the model to the early experiences of the automobile and personal computer industries both of which show an S-shaped growth of the number of firms.
Technology Adoption and Leapfrogging: Racing for Mobile Payments
Paying with a mobile phone is a cutting-edge innovation transforming the global payments industry. However, some advanced economies like the U.S. are lagging behind in mobile payment adoption. We construct a dynamic model with sequential payment innovations to explain this puzzle, which uncovers how advanced economies' past success in adopting card-payment technology holds them back in the mobile-payment race. Our calibrated model matches the cross-country adoption patterns of card and mobile payments and also explains why advanced and developing countries favor different mobile payment ...
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.
Product innovation and network survival in the U.S. ATM and debit card network industry
This paper studies product innovation and firm survival in the U.S. ATM/debit card industry. The industry started with a few shared ATM networks in the early 1970s. The number of networks grew quickly up until the mid 1980s, but then declined sharply. We construct a theoretical model based on Jovanovic and MacDonald (1994). In contrast to their model focusing on cost-saving technological innovation, our model shows a major product innovation may also trigger the shakeout. The theoretical predictions are tested using a novel dataset on network entry, exit, size, location, ownership and product ...
Payment Choice and the Future of Currency: Insights from Two Billion Retail Transactions
This paper uses transaction-level data from a large discount chain together with zip-code-level explanatory variables to learn about consumer payment choices across size of transaction, location, and time. With three years of data from thousands of stores across the country, we identify important economic and demographic effects; weekly, monthly, and seasonal cycles in payments, as well as time trends and significant state-level variation that is not accounted for by the explanatory variables. We use the estimated model to forecast how the mix of consumer payments will evolve and to forecast ...
Demand externalitites and price cap regulation: Learning from a two-sided market
This paper studies unintended consequences of price cap regulation in the presence of demand externalities in the context of payment cards. The recent U.S. debit card regulation was intended to lower merchant card acceptance costs by capping the maximum interchange fee. However, small-ticket merchants found their fees instead higher after the regulation. To address this puzzle, I construct a two-sided market model and show that card demand externalities across merchant sectors rationalize card networks? pricing response. Based on the model, I study socially optimal card fees and an ...