Payment Card

We study the ability of banks and merchants to influence the consumer’s payment instrument choice. Consumers participate in payment card networks to insure them-selves against three types of shocks — income, theft, and their merchant match. Mer-chants choose which payment instruments to accept based on their production costs and increased profit opportunities. Our key results can be summarized as follows. The struc-ture of prices is determined by the level of the bank’s cost to provide payment services including the level of aggregate credit loss, the probability of theft, and the timing of income flows. We also identify equilibria where the bank finds it profitable to offer one or both payment cards. Finally, when merchants are restricted to charging a uniform price for goods that they sell, the bank benefits while consumers and merchants are worse off