Toward a theory of merchant credit card acceptance

In this article, we construct a two-period model to investigate what market conditions would support a credit card equilibrium given two commonly observed credit card pricing conventions consumers rarely are charged higher prices for using their credit cards and if they payoff their credit card obligations every month, they enjoy interest-free short-term credit. The results of the model indicate that when the card issuer's cost of funds is not too high and the merchant's profit margin is sufficiently high, a credit card equilibrium can exist. We also and that the credit-issuer's ability to charge higher merchant discount fees depends on the number of customers gained when credit cards are accepted. Thus, credit cards exhibit characteristics of network goods.Credit cards ; Payment systems

Why do we use so many checks?

The authors identify underlying disincentives for payment system participants to migrate to electronic payments. Their analysis sheds light on why check usage remains higher in the United States relative to other industrialized countries when the real resource cost of processing payments may decrease by using electronic payment networks.Checks ; Payment systems

Managerial Incentives and Financial Contagion

This paper proposes a framework for comovements of asset prices with seemingly unrelated fundamentals, as an outcome of optimal portfolio strategies by fund managers. In emerging markets, dedicated managers outperforming a benchmark index and global managers maximizing absolute returns lead to systematic interactions between asset prices, without asymmetric information. The model determines optimal portfolio weights, the incidence of relative value strategies, and prices systematically deviating from fundamentals with limits to arbitraging this differential. Managerial compensation contracts, optimal at the firm level, may lead to inefficiencies at the macroeconomic level. We identify conditions when shocks in one emerging market affect others.Financial Crises, Index Investors, Global Linkages

Payment instrument choice: the case of prepaid cards

The costs and benefits to payment system participants can differ depending on which payment mechanism is used. The authors specifically explore the costs and benefits of prepaid card applications versus other payment instruments, such as cash, checks, and debit cards, for certain payment segments, including gift, payroll, and employer-initiated and government benefit programs.Payment systems

The double play: simultaneous speculative attacks on currency and equity markets

This paper investigates the potential for foreign speculators to profit from simultaneously taking short positions in foreign exchange and equity markets under a fixed exchange rate regime, in what has been termed as the double play. Such a strategy is considered when the monetary authority is faced with two conflicting objectives exchange rate stability and low interest rates. While the monetary authority may not be able to directly intervene to stabilize interest rates under the fixed exchange rate regime, it may consider intervention in equity markets to head off speculative pressure on interest rates. The model determines market conditions where speculators may find the double play strategy profitable and the impact of government intervention on speculative short equity positions and the interest rate, concluding that intervention can never simultaneously reduce speculation in the equity and the money markets. In the case where country fundamentals are strong, intervention while reducing short positions in equity markets actually increases short positions in the money market and induces higher interest rates. The paper concludes by discussing the Hong Kong Monetary Authority's intervention in the Hong Kong equity market within the context of this model.Economic stabilization ; Foreign exchange rates ; Stock exchanges

Innovations, incentives, and regulation: forces shaping the payments environment

The migration to more efficient payment mechanisms is affected by innovations, incentives, and regulation. While advances in technology have yielded numerous payment method alternatives, many have not been widely adopted. A recent Chicago Fed conference explored why certain payment innovations have been more successful than others.Payment systems

A Study of the Interrelated Bilateral Transactions in Credit Card Networks

Over the last decade, consumers have tripled their use of credit cards as more merchants have increased their acceptance of them. This increase suggests that incentives in today's marketplace favor greater credit card use by consumers and acceptance by merchants. In this paper, we study the set of interrelated bilateral transactions in credit card networks. First, we survey the recent theoretical papers using this approach and find that there is a lack of consensus regarding the optimal set of pricing policies. Second, we explore each of these interrelated transactions emphasizing common market practices and the underlying regulatory and legal framework. Third, we analyze the impact of certain credit card market practices on competing payment instruments such as debit cards.credit cards, rents, antitrust, networks

Bargaining efficiency and the repeated prisoners' dilemma

The infinitely repeated prisoners' dilemma has a multiplicity of Pareto-unranked equilibria. This leads to a battle of the sexes problem of coordinating on a single efficient outcome. One natural method of achieving coordination is for the players to bargain over the set of possible equilibrium allocations. If players have different preferences over cooperative bargaining solutions, it is reasonable to imagin that agents randomize over their favorite choices. This paper asks the following question: do the players risk choosing an inefficient outcome by resorting to such randomizations? In general, randomizations over points in a convex set yields interior points. We show, however, that if the candidate solutions are the two most frequently used the Nash and Kalai-Smorodinsky solutions then for any prisoners'' dilemma, this procedure guarantees coordination of an efficient outcome.Bargaining Theory

Debit card and cash usage: a cross-country analysis

During the last decade, debit card transactions grew rapidly in most advanced countries. While check usage declined and has almost disappeared in some countries, the stock of currency in circulation has not declined as fast. We use panel estimation techniques to analyze the change in transactional demand for cash resulting from greater usage of debit cards in 13 countries from 1988 to 2003. We are able to disentangle cash’s store of value function from its payment function by separating cash into three denomination categories. We find that the demand for low denomination notes and coins decreases as debit card usage increases because merchants need to make less change for customer purchases. On the other hand, the demand for high denomination notes is generally less affected suggesting that these denomination notes are also used for non-transactional purposes.Debit cards ; Cash flow ; Payment systems

Platform competition in two-sided markets: the case of payment networks

In this article, we construct a model to study competing payment networks, where networks offer differentiated products in terms of benefits to consumers and merchants. We study market equilibria for a variety of market structures: duopolistic competition and cartel, symmetric and asymmetric networks, and alternative assumptions about multihoming and consumer preferences. We find that competition unambiguously increases consumer and merchant welfare. We extend this analysis to competition among payment networks providing different payment instruments and find similar results.Payment systems ; Competition