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Optimal pricing of payment services when cash is an alternative

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  • Cyril Monnet
  • William Roberds

Abstract

Payments are increasingly being made with payment cards rather than currency-this despite the fact that the operational cost of clearing a card payment usually exceeds the cost of transferring cash. In this paper, the authors examine this puzzle through the lens of monetary theory. They consider the design of an optimal card-based payment system when cash is available as an alternative means of payment, and derive conditions under which cards will be preferred to cash. The authors find that a feature akin to the controversial "no-surcharge rule" may be necessary to ensure the viability of the card payment system. This rule, which is part of the contract between a card provider and a merchant, states that the merchant cannot charge a customer who pays by card more than a customer who pays by cash. ; Also issued as Payment Cards Center Discussion Paper No. 07-15

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Bibliographic Info

Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 07-26.

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Date of creation: 2007
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Handle: RePEc:fip:fedpwp:07-26

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Keywords: Payment systems;

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References

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  15. Thorsten Koeppl & Cyril Monnet & Ted Temzelides, 2006. "A Dynamic Model of Settlement," Working Papers 1053, Queen's University, Department of Economics.
  16. Hunt Robert M., 2003. "An Introduction to the Economics of Payment Card Networks," Review of Network Economics, De Gruyter, vol. 2(2), pages 1-17, June.
  17. Humphrey David & Willesson Magnus & Lindblom Ted & Bergendahl Göran, 2003. "What Does it Cost to Make a Payment?," Review of Network Economics, De Gruyter, vol. 2(2), pages 1-16, June.
  18. Dean Corbae & Joseph Ritter, 2004. "Decentralized credit and monetary exchange without public record keeping," Economic Theory, Springer, vol. 24(4), pages 933-951, November.
  19. Thorsten Koeppl & Cyril Monnet & Ted Temzelides, 2007. "A dynamic model of the payment system," Working Papers 07-22, Federal Reserve Bank of Philadelphia.
  20. Hahn, Robert W. & Layne-Farrar, Anne & Swartz, Daniel D. Garcia, 2004. "The Move toward a Cashless Society: A Closer Look at Payment Instrument Economics," Working paper 247, Regulation2point0.
  21. Chakravorti, Sujit & To, Ted, 2007. "A theory of credit cards," International Journal of Industrial Organization, Elsevier, vol. 25(3), pages 583-595, June.
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