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

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  • Fumiko Hayashi

Abstract

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 that wants all merchants in a given industry to accept cards sets a lower merchant fee initially and then gradually increases it to the highest possible level, which may be higher than the sum of the merchant’s transactional benefit and the merchant’s initial margin without cards. Such merchant fees potentially create inequality between cardholders and non-cardholders.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Kansas City in its series Payments System Research Working Paper with number PSR WP 04-02.

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Date of creation: 2004
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Handle: RePEc:fip:fedkpw:psrwp04-02

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Keywords: Credit cards;

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References

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  1. Julio J. Rotemberg, 2011. "Fair Pricing," Journal of the European Economic Association, European Economic Association, vol. 9(5), pages 952-981, October.
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  9. W. Bolt, 2003. "Retail Payments in the Netherlands: some Facts and Some Theory," WO Research Memoranda (discontinued) 722, Netherlands Central Bank, Research Department.
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  12. Graeme Guthrie & Julian Wright, 2003. "Competing Payment Schemes," Departmental Working Papers wp0311, National University of Singapore, Department of Economics.
  13. Fumiko Hayashi & Elizabeth Klee, 2002. "Technology adoption and consumer payments : evidence from survey data," Payments System Research Working Paper PSR WP 02-01, Federal Reserve Bank of Kansas City.
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  15. Chakravorti, Sujit & To, Ted, 2007. "A theory of credit cards," International Journal of Industrial Organization, Elsevier, vol. 25(3), pages 583-595, June.
  16. Fumiko Hayashi & Rick Sullivan & Stuart E. Weiner, 2006. "A guide to the ATM and debit card industry - 2006 update," Monograph, Federal Reserve Bank of Kansas City, number 2006agttaadci2, December.
  17. Baxter, William F, 1983. "Bank Interchange of Transactional Paper: Legal and Economic Perspectives," Journal of Law and Economics, University of Chicago Press, vol. 26(3), pages 541-88, October.
  18. Alexander F. Tieman & Wilko Bolt, 2003. "Pricing Debit Card Payment Services," IMF Working Papers 03/202, International Monetary Fund.
  19. repec:reg:rpubli:253 is not listed on IDEAS
  20. W. Bolt & A.F. Tieman, 2003. "Pricing Debit Card Payments Services: An IO approach," WO Research Memoranda (discontinued) 735, Netherlands Central Bank, Research Department.
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Citations

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Cited by:
  1. Fumiko Hayashi & Stuart E. Weiner, 2005. "Competition and credit and debit card interchange fees: a cross-country analysis," Payments System Research Working Paper PSR WP 05-03, Federal Reserve Bank of Kansas City.
  2. Zhu Wang, 2008. "Market structure and credit card pricing: what drives the interchange?," Payments System Research Working Paper PSR WP 06-04, Federal Reserve Bank of Kansas City.
  3. Fumiko Hayashi & Stuart E. Wiener, 2006. "Interchange fees in Australia, the UK, and the United States : matching theory and practice," Economic Review, Federal Reserve Bank of Kansas City, issue Q III, pages 75-112.
  4. David S. Evans & Richard Schmalensee, 2005. "The economics of interchange fees and their regulation : an overview," Proceedings – Payments System Research Conferences, Federal Reserve Bank of Kansas City, issue May, pages 73-120.
  5. Fumiko Hayashi, 2008. "The economics of payment card fee structure: policy considerations of payment card rewards," Research Working Paper RWP 08-08, Federal Reserve Bank of Kansas City.
  6. Nicole Jonker, 2011. "Card acceptance and surcharging: the role of costs and competition," DNB Working Papers 300, Netherlands Central Bank, Research Department.
  7. Stuart E. Weiner & Julian Wright, 2005. "Interchange fees in various countries: developments and determinants," Payments System Research Working Paper PSR WP 05-01, Federal Reserve Bank of Kansas City.
  8. James McAndrews & Zhu Wang, 2006. "Microfoundations of two-sided markets: the payment card example," Payments System Research Working Paper PSR WP 06-01, Federal Reserve Bank of Kansas City.
  9. James McAndrews & Zhu Wang, 2008. "The economics of two-sided payment card markets: pricing, adoption and usage," Research Working Paper RWP 08-12, Federal Reserve Bank of Kansas City.
  10. Fumiko Hayashi, 2006. "Pricing and welfare implications of payment card network competition," Payments System Research Working Paper PSR WP 06-03, Federal Reserve Bank of Kansas City.
  11. Nicole Jonker & Anneke Kosse & Lola Hern�ndez, 2012. "Cash usage in the Netherlands: How much, where, when, who and whenever one wants?," DNB Occasional Studies 1002, Netherlands Central Bank, Research Department.
  12. Robin A. Prager & Mark D. Manuszak & Elizabeth K. Kiser & Ron Borzekowski, 2009. "Interchange fees and payment card networks: economics, industry developments, and policy issues," Finance and Economics Discussion Series 2009-23, Board of Governors of the Federal Reserve System (U.S.).
  13. Chakravorti, Sujit & To, Ted, 2007. "A theory of credit cards," International Journal of Industrial Organization, Elsevier, vol. 25(3), pages 583-595, June.
  14. Fumiko Hayashi, 2008. "The economics of payment card fee structure: what drives payment card rewards?," Research Working Paper RWP 08-07, Federal Reserve Bank of Kansas City.
  15. Fumiko Hayashi, 2008. "The economics of payment card fee structure: what is the optimal balance between merchant fee and payment card rewards?," Research Working Paper RWP 08-06, Federal Reserve Bank of Kansas City.
  16. Nicholas Economides & David Henriques, 2011. "To Surcharge or Not To Surcharge? A Two-Sided Market Perspective of the No-Surcharge Rule," Working Papers 11-03, NET Institute.
  17. Wang, Zhu, 2010. "Market structure and payment card pricing: What drives the interchange?," International Journal of Industrial Organization, Elsevier, vol. 28(1), pages 86-98, January.

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