A Puzzle of Card Payment Pricing: Why Are Merchants Still Accepting Card Payments?

Topics:
Commercial Banking
Tags:
Finance,
Merchant,
Operational Accounting,
Payment
Source:
Federal Reserve Bank of Kansas City

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Overview: This paper presents models that explain why merchants accept payment cards even when the fees they face exceed the transactional benefits they receive from a card transaction. Such merchant behaviors can be explained by competition among merchants and/or the effectiveness of the merchant's card acceptance in shifting cardholders' demand for goods upward. A card network that wants all merchants in a given industry to accept cards sets a lower merchant fee initially and then gradually increases it to the highest possible level, which may be higher than the sum of the merchant's transactional benefit and the merchant's initial margin without cards.

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Format: PDF | Size: 229KB | Date: Dec 2004 | Pages: 46

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