Optimal pricing of payment services when cash is an alternative

Cyril Monnet and William Roberds

No 07-26, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: Payments are increasingly being made with payment cards rather than currency-this despite the fact that the operational cost of clearing a card payment usually exceeds the cost of transferring cash. In this paper, the authors examine this puzzle through the lens of monetary theory. They consider the design of an optimal card-based payment system when cash is available as an alternative means of payment, and derive conditions under which cards will be preferred to cash. The authors find that a feature akin to the controversial \"no-surcharge rule\" may be necessary to ensure the viability of the card payment system. This rule, which is part of the contract between a card provider and a merchant, states that the merchant cannot charge a customer who pays by card more than a customer who pays by cash. ; Also issued as Payment Cards Center Discussion Paper No. 07-15

Keywords: Payment; systems (search for similar items in EconPapers)
Date: 2007
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