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Central Bank and Multilateral Agency Publication | March 01, 1997

How Do We Pay?

Market Trends

Chakra Advisors LLC has advised companies on the current state of payments focusing on opportunities and challenges to improve.

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How Do We Pay?

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Market Trends Payments
By: Sujit "Bob" Chakravorti
Source: Federal Reserve Bank of Dallas Financial Industry Issues

When purchasing goods and services, consumers can choose from an array of payment instruments. These choices include cash, checks, credit cards, debit cards, automated clearinghouse (ACH) payments and stored-value cards. Recent technological advances in electronics and telecommunications have reduced the cost of processing electronic payment instruments to a level that is, in most cases, below that of their paper-based counterparts. However, consumers continue to rely heavily on nonelectronic payment instruments, such as cash and checks.

What forces might stimulate greater acceptance of electronic means of payment over their paper counterparts? Part of the answer lies in the incentives that consumers and merchants have when using and accepting different forms of payment. In the short run, the dominant retail payment instrument will depend not only on cost, but also on the comfort and faith that it engenders. Once consumers are comfortable with and have faith in the electronic alternatives, cost differentials and other incentives, such as rewards for frequent use, will be the key factors in determining the dominant payment instrument.

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Central Bank and Multilateral Agency Publication | October 01, 2002

Why Do We Still Write So Many Checks?

In this article, Chakravorti and McHugh address why consumers, merchants, and financial institutions are reluctant to embrace electronic payments even though electronic payment networks, such as the credit card and automated clearinghouse (ACH) networks, have existed for more than 25 years. While most Internet-based transactions are primarily processed via credit card networks, most noncash off-line payments by both consumers and businesses in the United States are made with checks.

Book Chapter | August 01, 2012

Digitization of Retail Payment Systems

Bolt and Chakravorti investigate the research on electronic payment systems. The rapid growth in the use of electronic payment instruments, especially payment cards, is a striking feature of most modern economies. Payment data indicate that strong scale economies exist for electronic payments. Payment costs will decrease through the consolidation of payment processing operations as economies of scale are realized. They come to the following conclusions: competition does not necessarily improve the balance of prices for two-sided markets and the ability of merchants to charge different prices is a powerful incentive to convince consumers to use a certain payment instrument. The effect of interventions on consumers, merchants, and banks in Australia, Spain, the European Union, and the United States are discussed. The authors also consider a few areas of payment economics that deserve greater attention.

Central Bank and Multilateral Agency Publication | March 01, 2006

Payment Instrument Choice: The Case of Prepaid Cards

In this article, Chakravorti and Lubasi conclude that prepaid applications potentially provide a more cost-effective means to transfer funds when: 1) recipients of funds do not have transactions accounts; 2) disbursers of funds do not have access to the recipient’s transactions accounts, or 3) the disbursers of funds need to restrict where and on what the underlying funds can be spent. As with other payment instruments, all payment system participants need to be on board to spur adoption. General-purpose prepaid cards usually utilize existing payment networks to clear and settle transactions. In addition, in most cases, linking the merchants’ acceptance of general-purpose prepaid products with other more familiar payment products offered by the same payment network allows issuers of prepaid value to provide greater value to consumers.

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