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Bank:Federal Reserve Bank of Kansas City  Series:Payments System Research Working Paper 

Working Paper
Competition and credit and debit card interchange fees: a cross-country analysis

This paper seeks to provide a bridge between the theoretical and empirical literatures on interchange fees. Specifically, the paper confronts theory with practice by asking, to what extent do existing models of interchange fees match up with actual interchange fee practices in various countries? For each of four countries?Australia, the Netherlands, the UK, and the United States?models that ?best? fit the competitive and institutional features of that country?s payment card market are identified, and the implications of those model are compared to actual practices. Along what competitive ...
Payments System Research Working Paper , Paper PSR WP 05-03

Working Paper
Internet banking: an exploration in technology diffusion and impact

This paper studies endogenous diffusion and impact of a cost-saving technological innovation -- Internet Banking. When the innovation is initially introduced, large banks have an advantage to adopt it first and enjoy further growth of size. Over time, as the innovation diffuses into smaller banks, the aggregate bank size distribution increases stochastically towards a new steady state. Applying the theory to a panel study of Internet Banking diffusion across 50 US states, we examine the technological, economic and institutional factors governing the process. The empirical findings allow us to ...
Payments System Research Working Paper , Paper PSR WP 05-05

Working Paper
The supervisory framework surrounding nonbank participation in the U.S. retail payments system : an overview

Nonbank providers of payment services are important in the United States and appear to have become more prominent in recent years. This development, by itself, poses unique risks to the payments system. Associated with this change is a significant transformation in the mix of payment types away from checks and towards electronic payments, which introduces new risks to the payments system and potentially compounds the risks posed by increased reliance on nonbank providers of payment services. This paper reviews these recent developments in the retail payments system, discusses the associated ...
Payments System Research Working Paper , Paper PSR WP 04-03

Working Paper
Nonbanks and risk in retail payments

This paper documents the importance of nonbanks in retail payments in the United States and in 15 European countries and analyzes the implications of the importance and multiple roles played by nonbanks on retail payment risks. This paper also reviews the main regulatory safeguards in place, and concludes that there may be a need to reconsider some of them in view of the growing role of nonbanks and of the global reach of risks in the electronic era.
Payments System Research Working Paper , Paper PSR WP 07-02

Working Paper
Microfoundations of two-sided markets: the payment card example

This paper provides a theory of two-sided market dynamics with arguably better microfoundations. These alternative microfoundations focus on observable heterogeneities of both sides of the market in a competitive framework. The theory is rich in empirical predictions and is less dependent on a particular form of imperfect competition than other approaches. Our findings in the payment card example point to adoption costs and the distribution of consumer incomes and firm sizes as the key determinants of the shares of costs borne by each side. This result provides clear implications for industry ...
Payments System Research Working Paper , Paper PSR WP 06-01

Working Paper
A puzzle of card payment pricing : why are merchants still accepting card payments?

This paper presents models that explain why merchants accept payment cards even when the fees they face exceed the transactional benefits they receive from a card transaction. Such merchant behaviors can be explained by competition among merchants and/or the effectiveness of the merchant?s card acceptance in shifting cardholders? demand for goods upward. The prevalent assumption used in payment card literature?merchants accept cards only when their transactional benefits are higher than the fees they pay?holds only for a monopoly merchant who faces an inelastic consumer demand. A card network ...
Payments System Research Working Paper , Paper PSR WP 04-02

Working Paper
Network competition and merchant discount fees

Pricing in two-sided markets has not been fully understood yet. Especially, investigations of how competition in these markets affects the price structure or levels are still underway. This paper takes the payment card industry as an example of two-sided markets and examines whether two networks? competition lowers one of the prices in the industry, merchant discount fees, and if it does, how much it lowers equilibrium merchant fees compared with the fee set by a monopoly network. If some cardholders hold only one card and the other cardholders hold two different cards, whether network ...
Payments System Research Working Paper , Paper PSR WP 05-04

Working Paper
Pricing and welfare implications of payment card network competition

This paper examines how competition among payment card networks three-party scheme networks and four-party scheme networks affects pricing as well as the welfare of various parties. A competing network has an incentive to provide rewards to its card users. By providing more generous rewards than its rival networks, the network can increase its own card transactions because multihoming cardholders who hold multiple networks cards choose to use its card instead of using its rivals. Although a monopoly network does not have such an incentive, in a monopoly four-party scheme network, competition ...
Payments System Research Working Paper , Paper PSR WP 06-03

Working Paper
Interchange fees in various countries: developments and determinants

Interchange fees and related issues in credit and debit card markets have been the focus of considerable attention in recent years. The academic community has begun to address the economics of these markets. Public officials have begun to address the policy implications of developments in these markets. Meanwhile, these markets continue to experience dynamic change as credit, and especially debit, transactions account for an ever-growing share of overall payments. This paper provides an overview of interchange fee developments and issues in a number of countries. It also presents a ...
Payments System Research Working Paper , Paper PSR WP 05-01

Working Paper
Nonbanks in the payments system

Nonbanks have always been a key component of the nation's payments system. In recent years, however, nonbanks have become even more prominent. This heightened visibility raises several questions. In which payments activities are nonbanks engaged? What roles do nonbanks play in specific payments types? What types of risk are potentially associated with nonbank participation? This paper begins to address these questions. Preliminary findings include: (1) Nonbanks are involved in a myriad of activities and roles, both in traditional and emerging payments types; (2) Nonbank business relationships ...
Payments System Research Working Paper , Paper PSR WP 02-02

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