A puzzle of card payment pricing: why are merchants still accepting card payments?

Fumiko Hayashi

No PSR WP 04-02, Payments System Research Working Paper from Federal Reserve Bank of Kansas City

Abstract: This paper presents models that explain why merchants accept payment cards even when the fees they face exceed the transactional benefits they receive from a card transaction. Such merchant behaviors can be explained by competition among merchants and/or the effectiveness of the merchant?s card acceptance in shifting cardholders? demand for goods upward. The prevalent assumption used in payment card literature?merchants accept cards only when their transactional benefits are higher than the fees they pay?holds only for a monopoly merchant who faces an inelastic consumer demand. A card network that wants all merchants in a given industry to accept cards sets a lower merchant fee initially and then gradually increases it to the highest possible level, which may be higher than the sum of the merchant?s transactional benefit and the merchant?s initial margin without cards. Such merchant fees potentially create inequality between cardholders and non-cardholders.

Keywords: Credit; cards (search for similar items in EconPapers)
Date: 2004
New Economics Papers: this item is included in nep-bec and nep-net
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
https://www.kansascityfed.org/documents/716/rwp-WP ... ceptance12-28-04.pdf Full-text (application/pdf)

Related works:
Journal Article: A Puzzle of Card Payment Pricing: Why Are Merchants Still Accepting Card Payments? (2006)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedkpw:psrwp04-02

Ordering information: This working paper can be ordered from

Access Statistics for this paper

More papers in Payments System Research Working Paper from Federal Reserve Bank of Kansas City Contact information at EDIRC.
Bibliographic data for series maintained by Zach Kastens ().