Debit card interchange fees generally lead to cash-promoting cross-subsidisation

Cards and cash are competing payment instruments at point-of-sale. The twosided market platform theory, based on general benefit assumptions, supports the use of multilateral interchange fees for card payments as a means of promoting the use of cards. However, analysis of the issue from the concrete processing cost viewpoint leads to the opposite conclusion: collection of debit card interchange fees by issuers results in subsidisation of cash and so actually promotes the use of cash instead of cards. Banks use card interchange revenues to cover cash distribution costs. For merchants, interchange fees increase payment costs and thus reduce the possibilities to pass through to customers the cost savings flowing from card efficiency. Moreover, because of high merchant fees due to high interchange fees, merchants are also more reluctant to accept payment cards. An MIF based on the tourist level approach will result in all parties being indifferent between cash and cards and thereby delay the realisation of the cost benefits of increased debit card usage. The resent actions of authorities to increase transparency and reduce cross-subsidisation seem to point in the right direction – towards more efficient resource allocation in payments.interchange fee; cross-subsidies in payments

The economics of interchange fees and their regulation : an overview

Debit cards ; Credit cards

The Economics of Interchange Fees and Their Regulation: An Overview

This essay surveys the economic literature on interchange fees and the debate over whether interchange should be regulated and, if so, how. We consider, first, the operation of unitary payment systems, like American Express, in the context of the recent economic literature on two-sided markets, in which businesses cater to two interdependent groups of customers. The main focus is on the determination of price structure. We then discuss the basic economics of multi-party payment systems and the role of interchange in the operation of such systems under some standard, though unrealistic, simplifying assumptions. The key point of this discussion is that the interchange fee is not an ordinary price; its most direct effect is on price structure, not price level. We then examine the implications for privately determined interchange fees of some of the relevant market imperfections that have been discussed in the economic literature. While some studies suggest that privately determined interchange fees are inefficiently high, others point to fees being inefficiently low. Moreover, there is a consensus among economists that, as a matter of theory, it is not possible to arrive, except by happenstance, at the socially optimal interchange fee through any regulatory system that considers only costs. This distinguishes the market imperfections at issue here for multi-party systems from the more familiar area of public utility regulation, where setting price equal to marginal cost is theoretically ideal. Next, we consider the issues facing policy makers. Since there is so much uncertainty about the relation between privately and socially optimal interchange fees, the outcome of a policy debate can depend critically on who bears the burden of proof under whatever set of institutions and laws the deliberation takes place. There is no apparent basis in today's economics - at a theoretical or empirical level - for concluding that it is generally possible to improve social welfare by a noticeable reduction in privately set interchange fees. Thus, if antitrust or other regulators had to show that such intervention would improve welfare, they could not do so. This, again, is quite unlike public utility regulation or many areas of antitrust including, in particular, ordinary cartels. By the same token, there is no basis in economics for concluding that the privately set interchange fee is just right. Thus, if card associations had to bear the burden of proof - for example, to obtain a comfort or clearance letter from authorities for engaging in presumptively illegal coordinated behavior - it would be difficult for them to demonstrate that they set socially optimal fees. We take a pragmatic approach by suggesting two fact-based inquiries that we believe policymakers should undertake before intervening to affect interchange. First, policymakers should establish that there is a significant market failure that needs to be addressed. Second, policymakers should establish that it is possible to correct a serious market imperfection, assuming one exists, by whatever intervention they are considering (such as cost-based regulation of interchange fee levels) and thereby to increase social welfare significantly after taking into account other distortions that the intervention may create. We illustrate both of these points by examining the recent Australian experience.Technology and Industry, Regulatory Reform

Innovations in Wind and Solar PV Financing

There is growing national interest in renewable energy development based on the economic, environmental, and security benefits that these resources provide. Historically, greater development of our domestic renewable energy resources has faced a number of hurdles, primarily related to cost, regulation, and financing. With the recent sustained increase in the costs and associated volatility of fossil fuels, the economics of renewable energy technologies have become increasingly attractive to investors, both large and small. As a result, new entrants are investing in renewable energy and new business models are emerging. This study surveys some of the current issues related to wind and solar photovoltaic (PV) energy project financing in the electric power industry, and identifies both barriers to and opportunities for increased investment

Logistical constraints on international trade in the Maghreb

Without a competitive transport industry, the Maghreb countries will not truly benefit from reform aimed at increasing the region's share of international trade. A study of barriers to the region's trade, especially with countries of the European Union, identified more than 30 barriers, in four categories: barriers to imports, to exports, of infrastructure and equipment, and of intra-Maghreb trade. These include: 1) direct barriers including: (a) from traditional distortions (price, discriminatory access to markets); (b) nontariff barriers (administrative, regulatory and tax-related restrictions); (c) traffic agreements (protecting national flags); and (d) lack of infrastructure and equipment; and 2) indirect barriers deriving from: (a) trade harmonization (simplified customs procedures and tariffs structures, elimination of quotas, reduction of customs tariffs on transport equipment); and (b) technology lags (telecommunications and handling). The authors quantify barriers in terms of"tariff equivalents,"expressed as a nominal rate of protection based on the freeon board value of the merchandise. But the nominal rate of protection measures only the direct costs of distortions. The effective rate of protection measures both direct and indirect effects, and effective rates are generally twice as high as nominal rates. To reconcile macroeconomic and microeconomic approaches to measuring effective rates, the authors use a partial equilibrium model (SMART model) to estimate the impact on the balance of payments of eliminating excess costs. Most of the corrective policies they recommend concern multimodal transport in the trade between Europe and the Arab Maghreb Union. The challenges are considerable: not only does such a system pave the way for cost and time savings ("just-in-time"transport), but it also adopts the logistics management that the most advanced European enterprises use to orchestrate their raw material purchasing, production and marketing functions. A multimodal transport system allow them to reduce inventories significantly and to respond better to volatile demand. Essential for just-in-time multimodal transport and logistics management include efficient modern transport techniques, efficient communications systems, efficient modern merchandise handling, and appropriate regulations. These conditions are still not fully in place in the Maghreb countries, except partially in some parts of the clothing and textile industry.Economic Theory&Research,Transport and Trade Logistics,Common Carriers Industry,Environmental Economics&Policies,Payment Systems&Infrastructure,Economic Theory&Research,Transport and Trade Logistics,Common Carriers Industry,TF054105-DONOR FUNDED OPERATION ADMINISTRATION FEE INCOME AND EXPENSE ACCOUNT,Environmental Economics&Policies

The Growth Potential of Debit Cards in Singapore

This paper starts by examining the evolution of the Singapore payments system from a historical perspective by reviewing the institutional evolution, as well as the development and adoption of some of the newest payment instruments. Two major trends in recent Singapore payment history are revealed, i.e. cash and check payments are being displaced by credit and debit card and other electronic mode of payments and usage of debit cards is seeing significant growth. From the literature review, it is known that purchases made using debit cards surpassed credit-card purchases for the first time in USA history during the last quarter of 2008, giving the debit-card revolution a new push. With that, this paper aims to provide a better understanding of signature-based debit cards and specifically its growth potential in Singapore, post the Central Bank’s liberalization program to grant foreign banks Qualifying Full Banks (QFBs) status who were then allowed to compete more effectively with the domestic national banks in the payments arena and provide debit services on an EFTPOS network. With the regulatory change to the debit card space, the Network for Electronic Transfers (NETS) was no longer the only debit card operator in Singapore. Debit card as a mode of payment has indeed been increasingly preferred for everyday purchases with wide usage and viewed as a valuable service if accompanied with rewards, cash rebates and discount benefits to cardholders. Hence, the competition for debit cards in Singapore increased in intensity with consumers experiencing greater choice and accessibility. Next, we deployed the Michael Porter’s Five Forces and PEST analysis to examine the debit card industry in Singapore. While consumers are familiar with debit cards, its sustainable growth will come by increasing consumer education, awareness of the locations where it can be used and tailored marketing programs targeted at the right customer segment to encourage wider usage. It is evident from the questionnaire that differentiating the debit card value proposition by incorporating rewards, rebates and discounts can drive profitability and increase market share for banks, card companies and merchants in their respective ways. At the same time, consumers, by carrying less cash, lowers the risk of loss and benefit from the usage of debit cards through loyalty programs tailored for their needs. Meanwhile, the bank issuers and card companies must continue to embrace technological advancements and innovations, leverage them to execute pro-active customer relationship management with all stakeholders in the value chain, including merchants, governmental organizations, regulatory authorities to minimize the disintermediation risks, potential litigations and any other implications on the fixing of pricing and interchange rates for debit cards. Bank issuers must also capitalize on this current positive orientation to debit cards to diversify their revenue streams and aggressively drive their businesses to the next level of sustainable competitive advantage

The Economics of Interchange Fees and Their Regulation: An Overview

This essay surveys the economic literature on interchange fees and the debate over whether interchange should be regulated and, if so, how. We consider, first, the operation of unitary payment systems, like American Express, in the context of the recent economic literature on two-sided markets, in which businesses cater to two interdependent groups of customers. The main focus is on the determination of price structure. We then discuss the basic economics of multi-party payment systems and the role of interchange in the operation of such systems under some standard, though unrealistic, simplifying assumptions. The key point of this discussion is that the interchange fee is not an ordinary price; its most direct effect is on price structure, not price level. We then examine the implications for privately determined interchange fees of some of the relevant market imperfections that have been discussed in the economic literature. While some studies suggest that privately determined interchange fees are inefficiently high, others point to fees being inefficiently low. Moreover, there is a consensus among economists that, as a matter of theory, it is not possible to arrive, except by happenstance, at the socially optimal interchange fee through any regulatory system that considers only costs. This distinguishes the market imperfections at issue here for multi-party systems from the more familiar area of public utility regulation, where setting price equal to marginal cost is theoretically ideal. Next, we consider the issues facing policy makers. Since there is so much uncertainty about the relation between privately and socially optimal interchange fees, the outcome of a policy debate can depend critically on who bears the burden of proof under whatever set of institutions and laws the deliberation takes place. There is no apparent basis in today's economics - at a theoretical or empirical level - for concluding that it is generally possible to improve social welfare by a noticeable reduction in privately set interchange fees. Thus, if antitrust or other regulators had to show that such intervention would improve welfare, they could not do so. This, again, is quite unlike public utility regulation or many areas of antitrust including, in particular, ordinary cartels. By the same token, there is no basis in economics for concluding that the privately set interchange fee is just right. Thus, if card associations had to bear the burden of proof - for example, to obtain a comfort or clearance letter from authorities for engaging in presumptively illegal coordinated behavior - it would be difficult for them to demonstrate that they set socially optimal fees. We take a pragmatic approach by suggesting two fact-based inquiries that we believe policymakers should undertake before intervening to affect interchange. First, policymakers should establish that there is a significant market failure that needs to be addressed. Second, policymakers should establish that it is possible to correct a serious market imperfection, assuming one exists, by whatever intervention they are considering (such as cost-based regulation of interchange fee levels) and thereby to increase social welfare significantly after taking into account other distortions that the intervention may create. We illustrate both of these points by examining the recent Australian experience

The Growth Potential of Debit Cards in Singapore

This paper starts by examining the evolution of the Singapore payments system from a historical perspective by reviewing the institutional evolution, as well as the development and adoption of some of the newest payment instruments. Two major trends in recent Singapore payment history are revealed, i.e. cash and check payments are being displaced by credit and debit card and other electronic mode of payments and usage of debit cards is seeing significant growth. From the literature review, it is known that purchases made using debit cards surpassed credit-card purchases for the first time in USA history during the last quarter of 2008, giving the debit-card revolution a new push. With that, this paper aims to provide a better understanding of signature-based debit cards and specifically its growth potential in Singapore, post the Central Bank’s liberalization program to grant foreign banks Qualifying Full Banks (QFBs) status who were then allowed to compete more effectively with the domestic national banks in the payments arena and provide debit services on an EFTPOS network. With the regulatory change to the debit card space, the Network for Electronic Transfers (NETS) was no longer the only debit card operator in Singapore. Debit card as a mode of payment has indeed been increasingly preferred for everyday purchases with wide usage and viewed as a valuable service if accompanied with rewards, cash rebates and discount benefits to cardholders. Hence, the competition for debit cards in Singapore increased in intensity with consumers experiencing greater choice and accessibility. Next, we deployed the Michael Porter’s Five Forces and PEST analysis to examine the debit card industry in Singapore. While consumers are familiar with debit cards, its sustainable growth will come by increasing consumer education, awareness of the locations where it can be used and tailored marketing programs targeted at the right customer segment to encourage wider usage. It is evident from the questionnaire that differentiating the debit card value proposition by incorporating rewards, rebates and discounts can drive profitability and increase market share for banks, card companies and merchants in their respective ways. At the same time, consumers, by carrying less cash, lowers the risk of loss and benefit from the usage of debit cards through loyalty programs tailored for their needs. Meanwhile, the bank issuers and card companies must continue to embrace technological advancements and innovations, leverage them to execute pro-active customer relationship management with all stakeholders in the value chain, including merchants, governmental organizations, regulatory authorities to minimize the disintermediation risks, potential litigations and any other implications on the fixing of pricing and interchange rates for debit cards. Bank issuers must also capitalize on this current positive orientation to debit cards to diversify their revenue streams and aggressively drive their businesses to the next level of sustainable competitive advantage