The Economics of Retail Payments: Theory and Practice

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.

On June 21–22, 2010, the Chicago Fed and the University of Granada co-sponsored a conference that brought together policymakers, academics, and industry practitioners to discuss evolving retail payment systems and the role of public authorities, with several panels focusing on the Single Euro Payments Area.

The key questions that Chakravorti asks in this book chapter are: (1) How is the payment system evolving? (2) What are the economic forces driving the adoption of new payment instruments? (3) Would recent developments in the payment system limit the central bank from conducting monetary policy? He argues that the migration to cash substitutes will not impact monetary policy unless final interbank settlement of most transactions occurs in non-central bank issued reserves. Furthermore, if the central bank maintains price stability and provides sufficient quantities of currency, the likelihood of its currency not being the generally-accepted medium of exchange is negligible.