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Economics of Payments

Paper Session

Saturday, Jan. 4, 2020 2:30 PM - 4:30 PM (PDT)

Marriott Marquis, Del Mar
Hosted By: American Economic Association
  • Chair: Marc S. Rysman, Boston University

Sustained Credit Card Borrowing

Sergei Koulayev
,
Consumer Financial Protection Bureau (CFPB)
Daniel Grodzicki
,
Pennsylvania State University and Consumer Financial Protection Bureau (CFPB)

Abstract

Using a large panel of credit card accounts, we examine the dynamics of credit card
borrowing and repayment in the United States and what these imply for the expected
costs of credit card debt to consumers. Our analysis reveals that: (1) credit cards
are predominantly used to borrow, (2) card debt is sustained for long periods and
balances frequently rise before being repaid, (3) this debt is potentially more costly
than anticipated. We document that 82% of outstanding balances are debt
and that 70% of this debt accrues to those borrowing continuously for a year or more.
The expected annualized cost of an episode of continuous borrowing is 28% of its initial
balance, or 13 p.p. higher than the average APR. Moreover, credit scores decline during
episodes, further raising the expected cost of borrowing on a card.

Price Negotiation with Merchant Heterogeneity in the Payment Card Industry

Chun-Yu Ho
,
State University of New York-Albany
Li Xu
,
Shanghai Jiao Tong University
Daiqiang Zhang
,
State University of New York-Albany

Abstract

We examine the negotiated acquirer fee in the payment card industry by exploiting a unique merchant-industry-city-level dataset from China. By estimating a bargaining model between an acquirer and a merchant, we find that on aver-age the bargaining power of the acquirer is weaker than that of merchants, which is consistent with the acquirer’s use of a low-price strategy to nurture merchants’ habit of using card services when point-of-sale (POS) machine installations are not widespread. Further, the variation in the acquirer fee is mainly driven by the variation in the merchant-specific surplus. This suggests that the industry-level regulation policy, which restricts acquirer fees across merchants within an industry and ignores the substantial merchant heterogeneity, hinders the use of acquirer fees to allocate card usage across merchants efficiently.

Two-Sided Market, R&D, and Payments System Evolution

Zhu Wang
,
Federal Reserve Bank of Richmond
Bin Grace Li
,
International Monetary Fund
James McAndrews
,
TNB USA Inc

Abstract

It takes many years for more efficient electronic payments to be widely used, and the fees that merchants (consumers) pay for using those services are increasing (decreasing) over time. We address these puzzles by studying payments system evolution with a dynamic model in a two-sided market setting. We calibrate the model to U.S. payment card data and conduct welfare and policy analysis. Our analysis shows that the market power of electronic payment networks plays important roles in explaining the slow adoption and asymmetric price changes, and the welfare impact of regulations may vary significantly through the endogenous R&D channel.

Explaining the Interplay between Merchant and Consumer Decisions in Two-Sided Market For Payment Methods

Oleksandr Shcherbakov
,
Bank of Canada
Kim P. Huynh
,
Bank of Canada
Gradon Nicholls
,
Bank of Canada

Abstract

The market for payment cards are inherently two-sided. Consumers benefit from
increased merchant acceptance of payment cards and vice-versa. To quantify the
interdependence of consumer and merchants or network externalities, we construct
and estimate a structural two-sided model of a payment choice. We exploit a unique
data set consisting of the Bank of Canada's consumer Method-of-Payment diaries
and the Retailer Survey of Cost of Payment surveys. We find that consumer adoption
of payment cards is inelastic but usage of credit cards declines in favor of cash while
merchants reduce the acceptance of credit and opt to accept only cash. The model
estimates are used to conduct counterfactual simulations by increasing in the cost
of cash. We find that usage of cash persists even for large increases in usage costs
for both consumers and merchants. In addition, when all methods of payment are
available to consumers and merchants, cash use declines by about half, while credit
card usage increases.
Discussant(s)
Oleksandr Shcherbakov
,
Bank of Canada
Sergei Koulayev
,
Consumer Financial Protection Bureau (CFPB)
Chun-Yu Ho
,
University at Albany
Zhu Wang
,
Federal Reserve Bank of Richmond
JEL Classifications
  • L8 - Industry Studies: Services
  • G2 - Financial Institutions and Services