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Working Paper
Distributional Effects of Payment Card Pricing and Merchant Cost Pass-through in the United States and Canada
Using data from the United States and Canada, we quantify consumers’ net pecuniary cost of using cash, credit cards, and debit cards for purchases across income cohorts. The net cost includes fees paid to financial institutions, rewards received from credit or debit card issuers, and the merchant cost of accepting payments that is passed on to consumers as higher retail prices. Even though credit cards are more expensive for merchants to accept compared with other payment methods, merchants typically do not differentiate prices at checkout, but instead pass through their costs to all ...
Briefing
Market Structure of Core Banking Services Providers
Three core providers dominate the market for core banking systems for depository institutions (DIs). These providers also have a large presence in vertically related markets, such as card network services; payment processing services for DIs, merchants, or governments; and banking-as-a-service. This market structure may make it difficult for DIs to switch their core providers, affecting their ability to offer new services and stay competitive.
Working Paper
Faster Payments : Market Structure and Policy Considerations
The U.S. payments industry is in the process of developing ubiquitous, safe, faster electronic solutions for making a broad variety of business and personal payments. How this market for faster payments will evolve will be shaped by a range of economic forces, such as economies of scale and scope, network effects, switching costs, and product differentiation. Emerging technologies could alter these forces and lead to new organizational arrangements or market structures that are different from those in legacy payment markets to date. In light of this uncertainty, this paper examines three ...
Journal Article
Mobile Banking Use and Consumer Readiness to Benefit from Faster Payments
The U.S. payments industry is currently implementing faster payments that will enable consumers and businesses to send and receive payments almost instantly at any time of day, any day of the year. Mobile banking in particular may allow consumers to realize the full benefits of faster payments. As a result, a consumer’s use of mobile banking is a good indicator of their readiness to benefit from faster payments.Fumiko Hayashi and Ying Lei Toh examine which consumer characteristics are associated with mobile banking use as well as what other factors may influence consumer readiness. They ...
Journal Article
Do U.S. consumers really benefit from payment card rewards?
Payment card rewards programs have become increasingly popular in the United States. But do consumers really benefit from rewards? In the United States, rewards are paid for primarily by the fees charged to merchants, and merchants may pass on the fees to consumers as higher retail prices. Further, some regulators and analysts claim that rewards may send consumers distorted price signals, which in turn may lead consumers to choose payment methods that are less efficient to society. ; Card networks and merchants have taken opposing sides in the rewards debate. Card networks claim their fee ...
Working Paper
Innovation, Deregulation, and the Life Cycle of a Financial Service Industry
This paper examines innovation, deregulation, and fi rm dynamics over the life cycle of the U.S. ATM and debit card industry. In doing so, we construct a dynamic equilibrium model to study how a major product innovation (introducing the new debit card function) interacted with banking deregulation drove the industry shakeout. Calibrating the model to a novel data set on ATM network entry,exit, size, and product offerings shows that our theory fits the quantitative pattern of the industry well. The model also allows us to conduct counterfactual analyses to evaluate the respective roles that ...
Working Paper
Technology adoption and consumer payments : evidence from survey data
Consumers pay for hundreds of goods and services each year, but across households and across goods, consumers do not choose to pay the same way. This paper posits that these differences depend in part on consumers' propensity to adopt new technologies, and depend in part on the nature of the transaction. In order to test these hypotheses, this paper offers comparisons of payment instrument use at the point of sale and for bill payment from a sample of consumers surveyed in 2001, drawn primarily from users of the Internet. The results indicate that consumers who use technology or computers are ...
Working Paper
The economics of payment card fee structure: what drives payment card rewards?
This paper investigates potential market forces that cause payment card rewards even when providing payment card rewards is not the most efficient. Three factors-oligopolistic merchants, output-maximizing card networks, and the merchant's inability to set different prices across payment methods-may potentially explain the prevalence of payment card rewards programs in the United States today. The paper also points out that competition among card networks may potentially make payment rewards too generous, and thus deteriorate social welfare and its distribution. The situation may potentially ...
Working Paper
Competition and credit and debit card interchange fees: a cross-country analysis
This paper seeks to provide a bridge between the theoretical and empirical literatures on interchange fees. Specifically, the paper confronts theory with practice by asking, to what extent do existing models of interchange fees match up with actual interchange fee practices in various countries? For each of four countries?Australia, the Netherlands, the UK, and the United States?models that ?best? fit the competitive and institutional features of that country?s payment card market are identified, and the implications of those model are compared to actual practices. Along what competitive ...
Briefing
Core Banking Systems and Options for Modernization
Each U.S. depository institution (DI)—including banks and credit unions—uses a back-end information technology system to process daily transactions and manage financial accounts. Many of these “core banking systems” are outdated and unable to fully accommodate modern services, such as open banking and instant payments. Modernizing these systems is a complex process, and DIs may consider a full replacement, a component-based replacement, or augmenting their existing system.