A Puzzle of Card Payment Pricing: Why Are Merchants Still Accepting Card Payments?

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. The prevalent assumption – merchants accept cards only when they earn positive net transactional benefits – holds only for a monopoly merchant who faces an inelastic consumer demand. The paper also explores possible explanations for the recent gradual increases in merchant fees in the United States. Three possible explanations are 1) inflexible product price setting by merchants, 2) decreases (increases) in cardholder fees (rebates), and 3) increases in cardholding-customer proportion in a given industry.

Market structure and payment card pricing: What drives the interchange?

“…Data sources: Visa USA, Federal Reserve Board, Evans and Schmalensee (2005) and Frankle (2006). 6 For example, Schmalensee (2002), Rochet and Tirole (2002), Wright (2003Wright ( , 2004, Schwartz and Vincent (2006), Hayashi (2006), McAndrews and Wang (2008). 7 Payment card systems are not the only case of such two-sided markets.…”

The Industrial Organization of Banking

“…Hayashi (2006), for instance, motivates retailers' acceptance of credit and debit cards by the upward shifts in product demands confronting individual merchants, which thereby yield incremental sales. For instance, an individual who owns a card entitling her to access payment-clearing services of a network benefits when others opt to use the same card, because this increases the likelihood that retailers will choose to accept the network's card.…”

The No Surcharge Rule and Card User Rebates: Vertical Control by a Payment Network

“…Our second simplifying assumption is that merchants are local monopolists, so we do not explore an important aspect studied by Rochet and Tirole (2002) and Hayashi (2005), the interdependence between merchants' decisions to accept or reject cards. In Rochet and Tirole, imperfect merchant competition is the sole reason why under the NSR card use relative to cash use can be excessive (a merchant's gain from accepting cards comes partly by diverting sales from the other merchant).…”