Academic journal article Chicago Fed Letter

What Is the Role of Public Authorities in Retail Payment Systems?

Academic journal article Chicago Fed Letter

What Is the Role of Public Authorities in Retail Payment Systems?

Article excerpt

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.

Over the past two decades, market participants in the developed economies have rapidly adopted electronic payments. In some cases, acceptance of payment cards (i.e., credit, debit, and prepaid cards) has been mandated by public authorities; in others, merchants have chosen to accept only cards for payment. To explore the role of public authorities in retail payment systems and related matters, the Federal Reserve Bank of Chicago and the University of Granada convened a conference featuring four academic panels, three public policy panels (focusing on the Single Euro Payments Area, or SEPA) , and five lectures by payment system researchers and a Spanish industry participant. In this Chicago Fed Letter, we summarize the keynote addresses and policy panels.1

Effects of new regulation on payments

At the start of the conference, Charles Kahn, University of Illinois at UrbanaChampaign, stated that wholesale payment systems weathered the recent financial crisis extremely well and retail payment systems were barely affected. Even so, a flurry of new legislation affecting payments has been enacted.

Kahn discussed two recent U.S. congressional acts that directly affect U.S. retail payment systems. First, the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act increases cardholder rights by altering certain practices; e.g., the act restricts arbitrary rate increases, over-the-limit fees, and promotion of cards to "vulnerable" individuals, such as those with little experience with financial products. Kahn argued that the act will increase the cost or reduce the availability of consumer credit. Second, a section of Title 10 of the D odd-Frank Wall Street Reform and Consumer Protection Act giants the Federal Reserve the authority to set interchange fee rules on debit and prepaid cards subject to certain guidelines.2 Interchange fees are per debit (or credit) transaction fees paid by the merchant's financial institution to the card issuer. Kahn argued that there will be greater restrictions on financial institutions in the name of consumer protection and that these will accelerate the move of new retail payment arrangements away from traditional providers.

Next, Sujit Chakravorti, Federal Reserve Bank of Chicago, discussed the underlying economics of the fee structure of retail payments.3 His main conclusions from reviewing the payment card literature are the following. First, an asymmetric fee structure for consumers and merchants may be necessary to achieve optimal usage of a given payment instrument. Second, "business stealing" among merchants may lead to higher than optimal interchange fees set by networks. Third, economists generally agree that society benefits when merchants are able to adjust their prices to account for cost differences, such as those related to a consumer's choice of payment instrument. However, there are instances when merchants may charge more than the fees they pay to their payment providers. Fourth, increasing competition among card networks or card issuers does not necessarily improve the balance of consumer and merchant fees. Fifth, only a few academic models consider the trade-offs between usage of these cards by those who do not need to avail themselves of credit extensions and the additional cost to support a creditbased system. Other issues that have received little attention, Chakravorti said, include honor-all-cards rules that require merchants to accept a card from a given network regardless of issuer or type of card, the potential impact of reduced fee income on innovation, and the integration of fraud mitigation costs into consumer and merchant fees. …

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