Adoption and Usage

The Role Of Interchange Fees In Two-Sided Markets: An Empirical Investigation On Payment Cards

Abstract:

Carbó, Chakravorti and Rodriguez study the impact of lowering interchange fees on consumer and merchant adoption and usage along with bank revenues during a ten-year period in Spain using bank-level data. Using cutting-edge econometric techniques, they are able to test two-sided market models predictions about payment card pricing policies. They find that the lowering of interchange fees over a ten-year period in Spain resulted in greater payment card usage because merchant adoption increased significantly from a relatively low base. They caution that such policies may only be effective if merchant and consumer adoption is far from complete. Furthermore, they remain agnostic on any transfers between merchants and banks.

Why Do Banks Reward Their Customers To Use Their Credit Cards?

Abstract:

Using a unique administrative level dataset from a large and diverse U.S. financial institution, Agarwal, Chakravorti, and Lunn test the impact of rewards on credit card spending and debt. Specifically, we study the impact of cash-back rewards on individuals before and during their enrollment in the program. We find that with an average cash-back reward of $25, spending and debt increases by $79 and $191 a month, respectively during the first quarter. Furthermore, we find that cardholders who do not use their card prior to the cash-back program increase their spending and debt more than cardholders with debt prior to the cash-back program. In addition, we find that 11 percent of cardholders that did not use their cards in the previous 3 months prior to the cash-back program spent at least $50 in the first month of the program. Finally, we find heterogeneous responses by demographic and credit constraint characteristics.

Platform Competition In Two-Sided Markets: The Case Of Payment Networks

Abstract:

Chakravorti and Roson 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 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.

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