Why Don’t Most Merchants Use Price Discounts to Steer Consumer Payment Choice?
- 288 Downloads
Recent legislation and court settlements in the United States allow merchants to use price discounts to steer customers to pay with means of payment that are less costly to merchants. We use transaction data to compute rough estimates of the expected net cost reduction by merchant type of giving debit card and cash price discounts. We find that steering consumers to debit and cash via simple price discounts reduces most merchants’ card processing cost; however, this reduction is small and may be insufficient to offset the increase in the cost of administering price menus that vary by payment instrument.
KeywordsSteering payment methods Price discounts Card surcharges Merchant discount fee Swipe cost Payment instruments Payment methods
- Arango, C., Huynh, K., & Sabetti, L. (2011). How do you pay? The role of incentives at the point-of-sale. Bank of Canada Working Paper 2011–23.Google Scholar
- Board of Governors of the Federal Reserve System (BOG) (2012). Average debit card interchange fee by payment card network. http://www.federalreserve.gov/paymentsystems/regii-average-interchange-fee.htm.
- Bounie, D., & François, A. (2006). Cash, check or bank card? The effects of transaction characteristics on the use of payment instruments. Telecom Paris Economics and Social Sciences Working Paper No. ESS-06-05.Google Scholar
- DeYoung, R., & Phillips, R. (2009). Payday loan pricing. Federal Reserve Bank of Kansas City, Research Working Paper No. 09–07.Google Scholar
- Foster, K., Meijer, E., Schuh, S., & Zabek, M. (2011). The 2009 survey of consumer payment choice. Federal Reserve Bank of Boston: Public Policy Discussion Paper No. 11–1Google Scholar
- Frankel, A. (1997). Monopoly and competition in the supply and exchange of money. Antitrust Law Journal, 66(2), 313–362.Google Scholar
- Garcia-Swartz, D., Hahn, R., & Layne-Farrar, A. (2006). The move toward a cashless society: Calculating the costs and benefits. Review of Network Economics, 5(2), 25–54.Google Scholar
- Gill, D., & Thanassoulis, J. (2013). Competition in posted prices with stochastic discounts. Economics Department, University of Oxford, Working Paper No. 682.Google Scholar
- Hayashi, F. (2012). Discounts and surcharges: Implications for consumer payment choice. Payments system research briefing, Federal Reserve Bank of Kansas.Google Scholar
- Koboldt, C., Maldoom, D., & Salsas, R. (2011). How strong are merchant constraints on interchange fees? DotEcon Discussion Paper No. 11/01.Google Scholar
- Shy, O. (2012). Who gains and who loses from the 2011 debit card interchange fee reform?” Federal Reserve Bank of Boston, Public Policy Discussion Paper No. 12–6.Google Scholar