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Series:Occasional Paper; Emerging Payments  Bank:Federal Reserve Bank of Chicago 

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 motives, such as purchasing options on future borrowing by convenience users.
AUTHORS: Chakravorti, Sujit; Emmons, William R.
DATE: 2001

Discussion Paper
A study of the interrelated bilateral transactions in credit card networks
Over the last decade, consumers have tripled their use of credit cards as more merchants have increased their acceptance of them. This increase suggests that incentives in today's marketplace favor greater credit card use by consumers and acceptance by merchants. In this paper, we study the set of interrelated bilateral transactions in credit card networks. First, we survey the recent theoretical papers using this approach and find there is a lack of consensus regarding the optimal set of pricing policies. Second, we explore each of these interrelated transactions emphasizing common market practices and the underlying regulatory and legal framework. Third, we analyze the impact of certain credit card market practices on competing payment instruments such as debit cards.
AUTHORS: Chakravorti, Sujit; Shah, Alpa
DATE: 2001

Discussion Paper
Credit, debit, or ACH: consequences & liabilities a comparison of the differences in consumer liabilities
A number of recent initiatives have encouraged use of debit cards and ACH debits/credits for Internet sales transactions. This paper outlines the different statutory and regulatory protections available to consumers and financial institution based upon the method by which payment is made.
AUTHORS: Spiotto, Ann H.
DATE: 2001

Discussion Paper
Competition and innovation in the consumer e-payments market? considering the demand, supply, and public policy issues
Significant debate has occurred over the last several decades regarding whether there is adequate competition and innovation in the non-recurring consumer payments segment of the banking industry. The Department of Justice and some retailers have sued Visa and MasterCard for limiting competition and innovation. There has also been a host of high profile product failures in the consumer e-payment market place (e.g., e-cash and smart card products). Meanwhile, some researchers have suggested that consumers are irrational and unresponsive to marketplace incentives (for instance, see Ausubel (1991)). ; Despite anecdotal reports which imply to some that theres something wrong in this market, we find strong, though not yet scientifically conclusive evidence, that there is increasing competition, strong innovation, and customers who respond to market stimuli in the non-recurring consumer payments market. As a result, this paper argues that going forward, public sector involvement in the consumer non-recurring payment market will be less warranted. Based on the analysis of a unique 1,300 person survey, documentation and analysis of recent private sector-led developments, and a Federal Reserve payments benchmarking study, this paper discusses several of the demand-side, supply-side, consumer protection, and competition policy dimensions influencing this market. Four general lessons may be of particular interest to public policy makers and private sector firms.
AUTHORS: Mantel, Brian; McHugh, Timothy
DATE: 2001

Discussion Paper
Why don't consumers use electronic banking products? towards a theory of obstacles, incentives, and opportunities
This paper proposes a framework for describing why consumers use electronic banking products such as electronic bill payment, credit cards, debit cards, stored value, and e-cash. The paper surveys the literature; reports on the results of several studies, and develops a framework for evaluating consumer electronic banking usage. The framework includes three primary factors that explain consumer electronic banking usage: (1) household wealth, (2) personal preferences (e.g., convenience, budgeting, control, incentives, involvement, security), and (3) transaction-specific factors (e.g., dollar size, variability of dollar amount, offline versus online location, etc.). A number of ad hoc theories could be created to explain payment instrument successes on a case by case basis. However, the author proposes that this general decision-making framework is a superior tool for management and public policy analysis because of its simplicity, ability to explain a range of outcomes, and ability to develop testable forecasts.
AUTHORS: Mantel, Brian
DATE: 2000

Discussion Paper
Financial account aggregation: the liability perspective
This article describes financial account aggregation and explores potential financial risks to the consumer and account holding financial institutions from aggregation. The current state of the law and contractual relationships relevant to such risks are analyzed. These risks include, theoretically, an increase in the incidence of unauthorized transactions due to the concentration of information (including consumer user/IDs and passwords) and losses to the consumer as a result of reliance upon bad or old account data. ; The following conclusions are reached under the law as it is today: (1) parties other than the consumer appear to bear the ultimate liability for financial losses in most situations where an unauthorized transaction occurs (whether or not the consumer has signed up for an aggregation service), and (2) parties other than the account holding financial institution appear to bear the ultimate responsibility for financial losses resulting from unauthorized transactions in a number of situations. With respect to losses resulting from reliance upon bad account data, it is suggested that this has not been much of a practical problem to date; however, if it does become problematic, the consumer will probably have a more difficult time shifting losses to either the account holding financial institution or another party. ; The Article evaluates whether the currently existing laws and regulations are adequate to protect consumers and concludes that additional regulation is not needed at this time, given both the absence of any significant dollar clearly losses clearly tied to aggregation and the relatively small number of consumers using aggregation. It suggests that existing laws and regulations may be sufficient to protect the consumer and that new laws and regulations should not be added until it has been demonstrated that existing ones are not adequate to handle problems with aggregation services. It points out that where theoretical problems are "solved" by new legislation/regulations before problems actually develop, the solutions may be unnecessary or result in unanticipated negative consequences. It recommends that regulators continue to monitor business practices and developments in connection with the aggregation product and take regulatory action if the need arises.
AUTHORS: Spiotto, Ann H.
DATE: 2002

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Emmons, William R. 1 items

McHugh, Timothy 1 items

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