U.S. Payment Trends and Regulatory Developments

The provision of retail payment services is complex with many participants engaging in a series of interrelated bilateral transactions and subject to large economies of scale and scope along with strong adoption, usage and network externalities. This makes sound public policy difficult. We focus on three types of market interventions for various countries. We argue that intervention into payment markets should concentrate on the removal of entry barriers in payment markets and providing greater incentives to adopt efficient payment instruments without stifling private sector investment in more efficient payment technologies over the long term. While the theoretical literature on the economics of payment cards is growing, the empirical literature is yet too limited to provide much guidance to public authorities. Eventually, the outcomes from different types of market interventions will provide a useful “natural experiment” to refute or validate the various theories of the economics of payments.

In his presentation to Bank of Mexico economists and payment experts, Chakravorti presented an update of economic models that consider various forms of regulation.

Bolt and Chakravorti discuss different types of market interventions by public authorities in retail payment markets. They concentrate on three types of market interventions. First, they analyze the impact of removing pricing restrictions placed on merchants that prevent them from setting different prices based on the payment instrument used to make purchases. Second, they summarize the impact of public authorities mandating caps on interchange fees – the fees paid by the payer’s financial institution to the payee’s financial institution – on the adoption and usage of payment cards. Third, they discuss the forced acceptance of all types of payment cards belonging to a single payment network (ie, credit, debit and prepaid) when merchants enter into contracts with acquirers. Such rules are often called honor-all-cards rules. While their focus is on payment cards, various pricing policies used to reach critical mass and steal market share from other payment instruments may also be valid for other types of payment instruments.