Credit Cards Are More Cost Effective to Merchants Than Cash, Yet Processing Fees Still Too High

October 5th, 2012
in econ_news, syndication

Follow up:

A Richmond Fed Study Concludes in part:

Adopting payment cards requires consumers and merchants to pay a fixed cost, but yields a lower marginal cost of making payments. Considering adoption and usage externalities among heterogeneous consumers and merchants, our theory yields some unique insights distinct from the existing literature. One of our first results shows that in equilibrium, wealthy consumers and large merchants are more likely to adopt card devices.

Meanwhile, three types of merchants exist in the market: Some only serve cash customers, some only serve card customers, and some serve both. Our model also predicts that payment cards are adopted by lower-income consumers and smaller merchants over time. These findings fit well with empirical evidence. In another difference with existing models, cash users in our model benefit when a store has sales paid for both by cards and cash. In other words, cash users are “subsidized” by card users.

Compared with cash and checks, payment cards are more cost effective for merchants in terms of lowering payment processing, fraud and monitoring costs. As a result, accepting cards allows merchants to lower retail prices, which can also benefit cash users who make purchases in the same store. In reality, merchants do complain about the interchange fees they pay to accept cards. Nevertheless, the fact that most merchants continue to accept payment cards suggests that cards are still more cost effective than alternative paper payments in spite of the high interchange fees.

Our analysis shows that the market-determined merchant fees tend to be too high from a consumer welfare point of view. Moreover, as the payment card market evolves, merchant fees tend to rise but consumer fees tend to fall, as observed in the data. We also show that imposing a cap on merchant (interchange) fees may improve consumer welfare.  These findings provide some support for regulating down merchant (interchange) fees, though there are additional challenging issues that policymakers may need to address.

This study does not address the effects on business of sources of credit such as cash advance online - which provide consumers sources of money when needed.

source document from Richmond Fed



Make a Comment

Econintersect wants your comments, data and opinion on the articles posted. You can also comment using Facebook directly using he comment block below.

 navigate econintersect .com


Analysis Blog
News Blog
Investing Blog
Opinion Blog
Precious Metals Blog
Markets Blog
Video of the Day


Asia / Pacific
Middle East / Africa
USA Government

RSS Feeds / Social Media

Combined Econintersect Feed

Free Newsletter

Marketplace - Books & More

Economic Forecast

Content Contribution



  Top Economics Site Contributor TalkMarkets Contributor Finance Blogs Free PageRank Checker Active Search Results Google+

This Web Page by Steven Hansen ---- Copyright 2010 - 2018 Econintersect LLC - all rights reserved