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 ...
Learning, diffusion and the industry life cycle
An industry typically experiences initial mass entry and later shakeout of producers over its life cycle. It can be explained as a competitive equilibrium outcome driven by the dynamic interaction between technology progress and demand diffusion. When a new product is introduced, high-income consumers tend to adopt it first. Technology then improves with cumulative output and demand growth generates S-shaped diffusion as the product penetrates lower-income groups. Eventually fewer new adopters are available and the number of firms starts to decline. It is shown that faster technological ...
Technology adoption and consumer payments : evidence from survey data
Consumers pay for hundreds of goods and services each year, but across households and across goods, consumers do not choose to pay the same way. This paper posits that these differences depend in part on consumers' propensity to adopt new technologies, and depend in part on the nature of the transaction. In order to test these hypotheses, this paper offers comparisons of payment instrument use at the point of sale and for bill payment from a sample of consumers surveyed in 2001, drawn primarily from users of the Internet. The results indicate that consumers who use technology or computers are ...
Payment card rewards programs and consumer payment choice
Card payments have been growing very rapidly. To continue the growth, payment card networks keep adding new merchants and card issuers try to stimulate their existing customers? card usage by providing rewards. This paper seeks to analyze the effects of payment card rewards programs on consumer payment choice, by using consumer survey data. Specifically, we examine whether credit/debit reward receivers use credit/debit cards relatively more often than other consumers, if so how much more often, and which payment methods are replaced by reward card payments. Our results suggest that (i) ...
Nonbanks in the payments system: European and U.S. perspectives
This paper presents the initial results of a joint study undertaken by staff at the European Central Bank and the Federal Reserve Bank of Kansas City to document and analyze nonbanks in the payments system. The focus is on electronic (non-paper) retail payment services in the European Union and the United States. The results show that nonbanks are making their presence felt at all stages of the payments chain. And, at this time, nonbanks appear most prominent in the United States, but are prominent in many European countries as well. And, most importantly, nonbank presence appears to be ...
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 ...
Community bank access to payment card networks : has it become more expensive?
The payment industry is undergoing significant change. Consolidations among payment networks and processors have been seen in every payment service area and technological advances provide incentives for even larger financial institutions to outsource their transaction processing. As a result, a smaller number of networks or processors are competing more vigorously for larger financial institutions. In doing so, volume-based pricing or volume discounts are commonly practiced in the industry. This paper examines whether the change in fee structure of networks and processors make community ...
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 ...
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 ...
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.