Payment Cards Center Discussion Paper Research Articles

Optimal Pricing of Payment Services When Cash is an Alternative

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

A Dynamic Model of the Payment System

The authors study the design of efficient intertemporal payment arrangements when the ability of agents to perform certain welfare-improving transactions is subject to random and unobservable shocks. Efficiency is achieved via a payment system that assigns balances to participants, adjusts them based on the histories of transactions, and periodically resets them through settlement. Their analysis addresses two key issues in the design of actual payment systems. First, efficient use of information requires that agents participating in transactions that do not involve monitoring frictions subsidize those that are subject to such frictions. Second, the payment system should explore the trade-off between higher liquidity costs from settlement and the need to provide intertemporal incentives. In order to counter a higher exposure to default, an increase in settlement costs implies that the volume of transactions must decrease, but also that the frequency of settlement must increase. ; Also issued as Payment Cards Center Discussion Paper No. 07-14

Another Look at Credit Card Pricing and its Disclosure: Is the Semi-Annual Pricing Data Reported by Credit Card Issuers to the Fed Helpful to Consumers or Researchers?

Credit Card Pricing Developments and Their Disclosure, a January 2003 Payment Cards Center Discussion Paper, examined the history and dynamics of credit card pricing and how such pricing is described to consumers in Truth in Lending solicitation disclosures. In a new paper, co-authors Mark Furletti and Christopher Ody examine credit card pricing as revealed to consumers in a different context: a semiannual shopping guide that the Board of Governors publishes pursuant to the Truth in Lending Act. Specifically, the authors ask two questions: Are the data on credit card pricing in the guide useful to consumers? Are the data collected for the guide (commonly known as Terms of Credit Card Plan [TCCP] data) of value to researchers? With respect to both of these questions, the authors find that the data are becoming less useful.

What is the value of recourse to asset-backed securities? A clinical study of credit card banks

The present paper uses data from revolving credit card securitizations to show that, conditional on being in a position where implicit recourse has become necessary and actually providing that recourse, recourse to securitized debt may benefit short- and long-term stock returns, and long-term operating performance of sponsors. The paper suggests that this result may come about because those sponsors providing the recourse do not seem to be extreme default or insolvency risks. However, sponsors providing recourse do experience an abnormal delay in their normal issuance cycle around the event. Hence, it appears that the asset-backed securities market is like the commercial paper market, where a firm's ability to issue is directly correlated with credit quality. Therefore, although in violation of regulatory guidelines and FASB140, recourse may have beneficial effects for sponsors by revealing that the shocks that made recourse necessary are transitory. ; Also issued as Payment Cards Center Discussion Paper No. 03-04