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Pricing in Retail Payment Systems: A Public Policy Perspective on Pricing of Payment Cards

Author

Listed:
  • Wilko Bolt
  • Sujit Chakravorti

Abstract

The provision of retail payment services is complex with many participants engaging in a series of interrelated bilateral transactions and subject to large economies of scale and scope along with strong adoption, usage and network externalities. This makes sound public policy difficult. We focus on three types of market interventions for various countries. We argue that intervention into payment markets should concentrate on the removal of entry barriers in payment markets and providing greater incentives to adopt efficient payment instruments without stifling private sector investment in more efficient payment technologies over the long term. While the theoretical literature on the economics of payment cards is growing, the empirical literature is yet too limited to provide much guidance to public authorities. Eventually, the outcomes from different types of market interventions will provide a useful "natural experiment" to refute or validate the various theories of the economics of payments.

Suggested Citation

  • Wilko Bolt & Sujit Chakravorti, 2011. "Pricing in Retail Payment Systems: A Public Policy Perspective on Pricing of Payment Cards," DNB Working Papers 331, Netherlands Central Bank, Research Department.
    • Handle: RePEc:dnb:dnbwpp:331
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    File URL: https://www.dnb.nl/en/binaries/Working%20Paper%20331_tcm47-264514.pdf
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    References listed on IDEAS

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    1. Bolt, Wilko & Jonker, Nicole & van Renselaar, Corry, 2010. "Incentives at the counter: An empirical analysis of surcharging card payments and payment behaviour in the Netherlands," Journal of Banking & Finance, Elsevier, vol. 34(8), pages 1738-1744, August.
    2. Jean‐Charles Rochet & Jean Tirole, 2006. "Two‐sided markets: a progress report," RAND Journal of Economics, RAND Corporation, vol. 37(3), pages 645-667, September.
    3. Carbó-Valverde, Santiago & Liñares-Zegarra, José M., 2011. "How effective are rewards programs in promoting payment card usage? Empirical evidence," Journal of Banking & Finance, Elsevier, vol. 35(12), pages 3275-3291.
    4. Carbó-Valverde, Santiago & Chakravorti, Sujit & Rodríguez Fernández, Francisco, 2009. "Regulating two-sided markets: an empirical investigation," Working Paper Series 1137, European Central Bank.
    5. 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 541-588, October.
    6. Chang Howard & Evans David S. & Garcia Swartz Daniel D., 2005. "The Effect of Regulatory Intervention in Two-Sided Markets: An Assessment of Interchange-Fee Capping in Australia," Review of Network Economics, De Gruyter, vol. 4(4), pages 1-31, December.
    7. Wilko Bolt & Sujit Chakravorti, 2008. "Economics of payment cards: a status report," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q IV, pages 15-27.
    8. Ching, Andrew T. & Hayashi, Fumiko, 2010. "Payment card rewards programs and consumer payment choice," Journal of Banking & Finance, Elsevier, vol. 34(8), pages 1773-1787, August.
    9. Wilko Bolt & Santiago Carbó-Valverde & Sujit Chakravorti & Sergio Gorjón & Francisco Rodríguez Fernández, 2010. "What is the role of public authorities in retail payment systems?," Chicago Fed Letter, Federal Reserve Bank of Chicago, issue Nov.
    10. Sujit Chakravorti & William R. Emmons, 2001. "Who pays for credit cards?," Occasional Paper; Emerging Payments EPS-2001-1, Federal Reserve Bank of Chicago.
    11. Gene Amromin & Sujit Chakravorti, 2009. "Whither Loose Change? The Diminishing Demand for Small-Denomination Currency," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(2-3), pages 315-335, March.
    12. Sujit Chakravorti & Victor Lubasi, 2006. "Payment instrument choice: the case of prepaid cards," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q II, pages 29-43.
    13. Sumit Agarwal & Sujit Chakravorti & Anna Lunn, 2010. "Why do banks reward their customers to use their credit cards?," Working Paper Series WP-2010-19, Federal Reserve Bank of Chicago.
    14. Wilko Bolt & Sujit Chakravorti, 2008. "Consumer Choice and Merchant Acceptance of Payment Media," DNB Working Papers 197, Netherlands Central Bank, Research Department.
    15. 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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    17. Chakravorti Sujit, 2010. "Externalities in Payment Card Networks: Theory and Evidence," Review of Network Economics, De Gruyter, vol. 9(2), pages 1-28, June.
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    19. Terri Bradford, 2008. "Developments in interchange fees in the United States and abroad," Payments System Research Briefing, Federal Reserve Bank of Kansas City, issue Apr.
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    Cited by:

    1. Carlos A. Arango-Arango & Héctor M. Zárate-Solano & Nicolás F. Suárez-Ariza, 2017. "Determinantes del Acceso, Uso y Aceptación de Pagos Electrónicos en Colombia," Borradores de Economia 999, Banco de la Republica de Colombia.
    2. Arango, Carlos & Huynh, Kim P. & Sabetti, Leonard, 2015. "Consumer payment choice: Merchant card acceptance versus pricing incentives," Journal of Banking & Finance, Elsevier, vol. 55(C), pages 130-141.

    More about this item

    Keywords

    Retail payments; market interventions; pricing; public policy;

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets

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