Merchant Acceptance, Costs and Perceptions of Retail Payments: A Canadian Survey*

Merchant Acceptance, Costs and Perceptions of

Retail Payments: A Canadian Survey*

By Carlos Arango and Varya Taylor Department of Banking Operations

Bank of Canada

*This paper is a first draft and must not be circulated nor quoted. The views expressed in this paper are those of the authors and should not be attributed to the

Executive Summary

The 2006 Retail Survey on Accepted Means of Payment was commissioned by the Department of Banking Operations of the Bank of Canada. Over 500 retailers across Canada were interviewed by telephone. The main objectives of the survey were to: 1) determine retailers’ perceptions towards retail payments, 2) estimate the share of transactions paid for by cash, debit cards and credit cards, and 3) understand the costs involved in accepting retail payments.

Factors underlying retailer perceptions and preferences; payment card processing fees; and the share of payment instruments in total transactions were studied empirically. When controlling for merchant attributes, ordered probits reveal that average transaction values, sales volume and number of terminals have significant effect over perception variables. Preferences appear to be influenced by average transaction value, retailer size and responses to risk and cost. Similarly, debit and credit cards fees appear associated with merchant characteristics, such as average transaction value and transaction volume. Most importantly, though, the empirical research reveals that once a retailer decides to accept a payment instrument, it has little influence over extent of relative payment use. This suggests that regardless of the retailer’s perceptions or preferences, it is the consumer’s choice that determines the final outcome of point of sale transactions. Lastly, the marginal cost of accepting payment instruments for an average transaction value under different scenarios was also estimated using the survey results. The cost calculations reveal that although the majority of merchants find cash the least expensive payment to accept at the point of sale, it might not always be the least costly when all aspects are considered.

Survey Highlights

According to the Survey Sample:

° Virtually all retailers accept cash, 93 per cent accept debit cards and 92 per cent

accept credit cards.

° Cost, risk and lack of consumer demand are barriers to acceptance for certain

payment methods.

° In terms of annual gross revenue, credit cards represent 31 per cent of

transactions, followed by cash (29 per cent) and debit cards (26 per cent).

° Debit cards are most preferred by 50 per cent of retailers, followed closely by

cash at 42 per cent.

° Debit cards are rated the least risky payment method to accept at the point of sale. ° Cash is rated the cheapest and most reliable to accept at the point of sale.

° Credit cards are the least preferred and rated the most costly and least reliable in

terms of the ease and dependability of processing at the point of sale.

° On average, retailers pay 17 cents for every debit card transaction and 2-4 per

Introduction

The Bank of Canada is interested in understanding retail payments from the retailer’s perspective. Previous research has focused on the perceptions and payment habits of the general public (see Taylor 2006) and revealed important factors underlying the relative use of payment instruments by consumers (see Arango and Taylor 2006). The Bank’s interest in such research stems from its role in providing Canadians with banknotes. The Bank recognizes that the extent of banknote use in transactions is increasingly influenced by alternative payment methods, namely debit and credit cards, and by the developments in the payments environment.

However, only looking at the consumer side ignores the intricacies of two-sided markets and the industry forces behind them. In payments, the two sides of the market are retailers and consumers. Like the classic “chicken and egg” problem, the consumer’s choice to use a particular payment method is associated with the retailer’s decision to accept and vice versa. However, each side is influenced very differently by the payment service providers that bring them together on a common platform. Consequently, consumers and retailers may have extremely different views about the attributes of a particular payment instrument. Therefore, in 2006, the Bank of Canada commissioned a national survey of retailers on their accepted means of payment for point of sale (POS) transactions. The survey questions focused on how retailers perceive payment

instruments, the share of each payment method by annual sales, and the associated costs of accepting payments.

The retail survey was also useful in confirming that acceptance of electronic payments is considerably high in Canada and that the share of transactions by payment method is fairly even, despite the reported differences in relative preferences, perceptions and costs. In fact, 89 per cent of survey participants of a variety of subsectors and sizes accept all three main payment methods, with each method representing close to one-third of the value of annual sales. When asked which payment method they prefer their customers use the most often, debit cards came out on top by 53 per cent of respondents, followed by cash at 39 percent. In stark contrast, only 5 per cent of respondents stated that they prefer their customers to use credit cards the most. The drastic difference in relative preferences can be supported by the fact that credit cards are perceived to be the most costly and least reliable payment method to accept at the POS when the median ratings are compared to cash and debit cards.

Thus, whether or not a retailer has much influence over the final outcome of payment usage, given their perceptions and costs, is a motivating question. In this paper we seek to better understand what underlies the observed heterogeneity in the perceptions towards payment methods in contrast to the homogeneity in acceptance. In doing so, we find significant evidence to suggest that even though preferences are driven by perceptions of cost, risk and reliability, they are also shaped by relative payment instrument usage at the POS. We also find some evidence indicating that payment service providers

card processing fees. Both findings clearly support the need to have a two-sided view of these markets in order to fully understand the final outcomes.

To provide better context to this research, the paper begins with Part I: an overview of retail payments in Canada. It describes the main payment products and services accepted at the POS, the key industry players who provide them, and the implications retailers must consider when accepting them. Though a full industry analysis is beyond the scope of this paper, it may help in understanding the “behind the scenes” influence the

payments industry has through its pricing, incentives, rules and regulations, which are unique to each payment method and unique to the two markets they serve. In Part II, highlights of the survey results are described to set the stage for further analysis. Finally, the empirical findings on payment shares, processing fees, preferences, and perceptions of risk, reliability and cost are presented in Part III. Estimations of the marginal cost of accepting cash, debit cards and credit cards for an average transaction value of $35 are compared.

Part I: An Overview of Retail Payments in Canada

1.1 What retailers actually accept at the POS

The Canadian economy is strongly driven by consumer expenditure on goods and services, which is only made possible by the efficiency and stability of a smooth

functioning payments system. Out of the $425 billion worth of goods and services sold by retailers last year,1 the vast majority of these purchases were paid for by cash, PIN- based debit cards and credit cards (mainly Visa and MasterCard, but also American Express). Gift cards and cheques are also used at the point of sale (POS), but to a lesser extent.

Debit and credit card use in Canada is extensive and growing. Though not restricted to only POS payments, last year Canadians made 3.3 billion debit card transactions worth $149 billion and 2 billion credit card transactions worth $210 billion.2 This represents an average growth rate of 10 per cent and 11 per cent, respectively, over the past five years. While data on the share of POS payments by each method, especially for cash, is not very precise (and thus one objective of this survey!), it is possible that debit and credit cards account for three-quarters of the value of POS transactions and 40 per cent of the volume.3

1 _{Source: Statistics Canada (2006). Data includes annual sales from restaurant/food services and retail} trade.

2 _{Data on credit cards can include transactions made abroad and non-POS payments. Data on debit cards} can include cash back withdrawals. Source: Bank for International Settlements (2007).

3 _{A rough estimation of POS payment shares for cash, debit cards and credit cards is estimated in Taylor} (2006) using ATM withdrawal data.

Growth in payment card use and acceptance has been impressive and can be attributed to a variety of factors. First, rapid advances in telecommunications have made payments faster, more efficient, cost-effective and secure. The technological infrastructure for card payments is well-established. Second, the acquiring business in Canada, which

essentially facilitates merchant acceptance of card payments, has undergone significant restructuring and has become more stream-lined and competitive.4 This has made it more appealing to merchants, from a variety of sub-sectors, to accept cards. Third, over the last decade, consumer spending in retail stores has been fairly robust due to increased wealth and income (Zhang 2005). The developments in retail payments have made access to disposable funds and credit easier than ever and consumers appreciate the advantages of cards, including the convenience of not needing to carry cash to make everyday or unexpected purchases. The “buy now, pay later” appeal of credit cards, in particular, not to mention the rewards, discounts and other incentives affiliated with them, have encouraged consumers to spend more and incur additional debt. 5

The extensive use of card payments by consumers coincides with broad acceptance by merchants. While merchant acceptance of cash at the POS is practically universal, acceptance of payment cards is almost as common. As Figure 1. illustrates, debit card acceptance by retail location has grown an annual average of 6 per cent since its national establishment in 1997 (with a 19 percent jump in 1998). Acceptance of Visa/MasterCard (a more mature market) has grown an annual average of 5 per cent since 1977. 6

However, there has been some decline since 2003 and growth has been minimal over the last two years.

Figure 1

Number of Retail Locations Accepting Visa/MC and Accepting Debit

0 100,000 200,000 300,000 400,000 500,000 600,000 700,000 800,000 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 Visa / MC Debit

4 _{Over the past ten years, the acquiring business in Canada has become more efficient as many of the} financial institutions have outsourced their processing services to third parties who can better achieve economies of scale and invest in technology. Such restructuring was necessary given growing transaction volumes and the threat of much larger American competitors entering the Canadian market.

5 _{According to the 2005 Survey of Financial Security (SFS), consumer debt from credit cards, including all} major credit cards, retail store credit cards, gasoline credit cards, etc., and deferred payment plans,

amounted to $26 billion –a 60 per cent increase over the 1999 survey.

Sources: Canadian Bankers’ Association and Interac Association

Figure 2 shows the range of debit card acceptance by retail subsector is well-represented and broad. Supermarkets stand out as having the highest number of terminals with nearly 5 per store outlet and, correspondingly, the highest number and value of debit card transactions as seen by the last two percentage columns. Also noteworthy is the average debit card transaction value these sectors represent, ranging from just over $17 to $62 when excluding professional and business services, utility and government.

Figure 2 Debit Card Acceptance by Retail Subsector

Source: Interac Association

Missing credit card acceptance by sector.

1.2 The payment cards industry in brief

Two-sided markets tie together two distinct groups of users in a network of products and services called platforms (HBR 2006). Such markets are usually characterized by the “chicken and egg” problem –where successful adoption depends on the number of users on each side- and network effects –where the value of the network increases as the number of participants on both sides grows. Pricing is therefore key to balancing the two sides and a common strategy is to subsidize one side at the expense of the other.

Payment card networks, like those of debit and credit cards, are perfect examples because they bring together consumers and merchants in order to facilitate transactions but under very different terms.7

7 _{Other commonly found two-sided market examples include newspapers (linking readers and advertisers),} video game consoles (linking players and game developers) and PC operating systems (linking consumers to software developers). See Shy, Oz and Tarkka (2004), Markose, Sheri M. and Yiing Jia Loke (2003) and Bolt, Wilko and Alexander F. Tieman (2005) and the literature there in, for further discussion on pricing and agent behaviour in retail payment markets.

In the debit and credit card industry, platform providers include card issuers who provide payment services to consumers and acquirers who provide processing services to

retailers.8 The issuing and acquiring activities are usually coordinated by a central party such as a company (e.g. American Express9 or MasterCard10), a card association (e.g. Visa) or a network (e.g. Interac). It does this by establishing rules, promoting the card brand, centralizing payment processing and settlement, setting certain rates (e.g.

interchange) and resolving other coordination issues. Figure 3 illustrates the roles of these industry players in the example of Visa or MasterCard as they relate to transactions between merchants and consumers.

Figure 3 Schematic.

Critical mass in Canada has been achieved on both sides of the payments market, as shown in the previous section. However, the card industry chooses to subsidize

consumers over merchants because they are seen as adding the most value to the network and because they are viewed as the most price sensitive. Therefore, card issuers, whether they are under the same network or not, compete with each other to attract as many consumers as possible. Aggressive competition in the credit card industry has meant that consumers actually pay zero or even negative transaction fees through rewards, discounts and other programs. The purpose of these incentives is to encourage consumer spending and increase card issuer revenue in the form of finance charges and interchange fees. Acquirers, whether they are financial institutions or third party payment processors, also compete with each other to sign up merchants. In contrast to consumers, merchants do pay per transaction fees and many other costs related to debit and credit card processing.

8 _{While card issuers are financial institutions, acquirers are either financial institutions or affiliated} third-party payment processors. Interestingly, the same financial institution can fulfill both roles.

9 _{American Express acts as both issuer and acquirer in a closed-loop system.}

10 _{Until recently, MasterCard was a non-profit association of financial institutions, but last year MasterCard} became a public company. This altered MasterCard’s corporate structure and changed some of its focus; however, its role as a coordinator between issuers and acquirers essentially remains unchanged. Visa is currently a privately held membership association, but has announced its intention to also go public.

The next section will detail the costs and benefits that merchants consider in accepting such payments. (incomplete)

1.3 Why retailers accept payments: a review of costs and benefits

From the perspective of a retailer, payments are a necessary part of business. In order to accept and process payments, a retailer must hold an account at a financial institution. Financial institutions usually customize their accounts or offer plan variations to suit the needs of individual retailers. They usually pay a monthly package fee in fixed or variable terms, depending on activity and are sometimes required to hold a minimum reserve. Standard packages include the following (in regards to payments) 11:

° Detailed bank statements

° Deposits (cash, debit and credit) ° Banknote and coin ordering

° Debit card and credit card processing (direct or through a third-party) ° POS equipment rental and other services (direct or through a third-party)

The decision to accept a particular method is based on a variety of costs and benefits that the retailer must weigh. Such decisions also takes into account what consumers wish to use and what nearby competitors are willing to accept. Table 1 describes the cost-benefit analysis from the retailer’s perspective. When accepting any payment, a retailer considers the time it takes to process the transaction at the point of sale and how reliable it is in terms of its ease and dependability. The time it takes to reconcile payments at the end of day is another consideration, as is the time it takes for retailers to finally receive funds, whether it is after a cash deposit physically made at the bank or after an electronic payment has been processed (a cost known as float). Each payment instrument is also associated with a certain amount of risk of fraud or loss and varies in the degree of payment finality.

Table 1

Cost-Benefit Considerations for Retailers

For All Payments Unique to Cash Unique to Cards - Bank account fees

- Tender time at the POS - Access to funds (float) - Risk of fraud or loss - Set-up costs

- Payment finality

- Back office reconciliation and deposit preparation time - Deposit / ordering fees - Armoured transportation - Secure storage

- Security measures

- Processing fees - Network reliance - Equipment, software & telecommunications - Rules and regulations - Chargebacks - Facilitate transactions - Accommodate consumer choice - Reliability - Liquidity

- No tangible per transaction fees

- Competitiveness - Increased sales

- Electronic bookkeeping - Loyalty programs - Cash back service - Funds transfer

Cash is the most final and liquid means of payment because the funds are settled and received during the transaction. However, receiving funds directly exposes the retailer to the risk of theft (internal or external) and counterfeiting, as well as the risk of human error during the exchange. Security measures (e.g. surveillance cameras and security guards) and secure storage (e.g. vaults and cash registers) are required. In accepting cash, retailers incur labour costs for the time involved in back office sorting and reconciliation for deposit preparation. Some retailers are large enough to require armoured

transportation services to make such deposits on their behalf. There is usually a banking charge for banknote and coin deposits, as well as for ordering.

As for electronic payments, retailers are charged a fixed fee for every debit card transaction and a percentage fee for every credit card transaction. The credit card fee, known as the merchant’s discount rate (see Box 1), is applied to the total value of the transaction. In addition to the discount rate, some retailers pay a flat transaction fee. Retailers may also face a minimum monthly charge if their credit card fees do not reach a certain threshold.

Box 1

Merchant Discount Rate Versus Interchange Rate

The ad valorem fee on credit card transactions is called the merchant’s discount rate (MDR). Acquirers offer retailers certain rates based on their monthly sales volumes and risk assessment. As such, higher credit card sales volumes are associated with lower rates (encouraging economies of scale), while higher risk, as perceived by the acquirer, is associated with higher rates.

Because of liability arrangements, acquirers face three types of risk: credit risk, chargeback risk and contingent liability risk (quote). Credit risk simply refers to the risk of not receiving the fees owed by the retailer. Chargeback risk refers to the risk of transaction reversal due to fraud or other discrepancy within 120 days of purchase. Since the acquirer’s account is debited by the card issuer, the acquirer must recoup funds from the retailer or else bear the loss. Contingent liability refers to the risk of chargebacks specific to transactions processed in advance of the consumer receiving the goods or services. This liability is extended to 120 days after the purchase is fulfilled (for example, an airline ticket). While the first risk represents the financial worthiness of the retailer, the last two risks illustrate how the acquirer must consider the retailer’s worthiness to honour the goods and services that were agreed upon.

In determining the MDR, the acquirer must therefore assess the nature of the business, including the type of business and the credit history of the retailer. For example, online or mail-order businesses are considered more risky, as are less reputable industries, such as telemarketing, 900 numbers, gambling and online pharmacies. Travel agents and airlines might be more reputable industries, but they represent contingent liability if bankruptcy should occur before the goods and services have been delivered. An example of this is the Canada 3000 airline that defaulted abruptly in 2001, leaving many clients stranded and an acquirer exposed. As well, retailers who manually process credit card transactions will face higher MDRs compared to those who do so electronically because of the decreased transaction security. The MDR may also vary by the type of card accepted, such as a corporate card versus a standard purchase card.

While the MDR covers the acquirer’s processing and card association fees, not to mention its profit, a large part of the MDR (roughly 65 to 80 per cent) is composed of the interchange rate (source). The interchange rate is a set percentage fee paid by the acquirer to the card issuer for every transaction. (Of course, the exception is American Express, which does not pay interchange since it is both the issuer and acquirer.) Conceptually, the interchange rate reflects the card issuer’s cost of advancing funds to the acquirer, as well as its exposure to the risk of fraud (since cardholders have zero liability) and chargebacks if the retailer is able to successfully dispute the claim and prove that it followed proper procedures.

How interchange fees are set is not exactly clear (and somewhat controversial), but according to a report by Diamond Consultants (2006) in the US, only 13 per cent goes towards processing, while as much as 44 per cent goes towards the costs of air miles, rewards, and other perks that consumers enjoy. The remaining goes towards the issuer for other transaction costs and profit, and to the network for branding, servicing and rewards. A very general breakdown of the MDR versus the interchange rate, based on American studies, is depicted in Figures A and B below. (For a discussion on interchange fees across countries, see Weiner, Stuart E. and Julian Wright (2005).

Figure A Figure B

Breakdown of Merchant Discount Rate

Interchange Fees 79% Card Association Fees 5% Acquirer Processing Fees & Profit

16%

Breakdown of Interchange Rate

Issuer Rewards 44% Processing Costs by Issuer and Network 13% Issuer Transaction Costs & Profit

Margin 35% Network Branding, Servicing & Rewards 8%

Source: Source: Diamond Management & Technology Consultants

Insert summary paragraph…

Retailers also face a variety of fixed costs from accepting electronic payments. In addition to installation (and de-installation) fees, they must rent their POS terminals and pay for maintenance and upgrades. Some of the larger retail chains, such as department stores, own their own terminals and customized software. Such equipment also requires telecommunication lines, whether it is dial-up, high speed or satellite.

In terms of finality, debit card transactions are rarely an issue for retailers. PIN

authorization ensures that sufficient funds are available at the time of sale. The funds are debited from the consumer account in real-time and then credited to the retailer usually by the next business day. In the case of fraudulent activity, it is usually the card issuer who will absorb the loss since the authentication relies solely on the technology and has little to do with the retailer.

In contrast, credit cards represent the least payment finality relative to debit cards and cash because of the consumer’s deferred payment advantage and zero liability against fraud. This means that a consumer has 120 days to dispute a credit card transaction, whether it is because of an unresolved dispute with the retailer (i.e. if the consumer is dissatisfied with the product or service) or because there is a fraudulent claim (i.e. the card was used without the cardholder’s authorization). In these cases, the transaction will be reversed through what is known as a chargeback. The chargeback amount is deducted from the retailer’s account by the acquirer while the dispute is under review. Retailers have a limited number of days to provide the information in their defense in order to prove they followed proper procedures. Thus, chargebacks can be costly to retailers since they risk losing both the credit card funds and the actual sale, plus they can be charged for the process itself.

Once the decision to accept has been made, there are many rules and regulations that retailers must abide by under their merchant-acquirer agreements. Many of these rules are created by the card companies/associations themselves, partly to encourage card use by consumers.12 As Levitin (2006) puts it, “Card acceptance is an all-or-none

proposition.” Once a retailer signs a contract, it has very little influence over which payment method a consumer can use, regardless of the different costs and constraints.13 The most notable of such rules include the following:

° Honour all cards: Retailers must accept all credit card products under the card’s

brand without exception. For instance, if Visa is accepted, then all Visa credit cards must be accepted, whether it is Visa Gold or Visa Platinum or Visa cards issued by different financial institutions.

° Nosurcharging: Retailers are forbidden to impose extra fees for consumer use

of cards, though some acquirers apparently allow surcharging on debit cards.14

° Non-discrimination: The retailer cannot dissuade a consumer from using his

card in any way. For example, no minimum or maximum purchase amounts can be set by the retailer.

Finally, there are several procedures that a retailer must agree to follow in order to process card transactions at the POS, such as verifying the credit card signature, expiration date and security features, and obtaining PIN authorization for debit cards. Despite the additional costs and constraints imposed by contract rules, the acceptance of debit cards and credit cards, as described earlier, is fairly high in Canada. Consumer demand, loyalty programs, competition and increased sales are the advantages of card payments that help to explain this. Indeed, no less than 86 per cent of the Canadian population owns a debit card and more than twice the population own credit cards. Thus, the probability of a consumer wanting to use his card for payment is sufficiently high to warrant acceptance. This has the compounding effect of increasing the incentive for other retailers to accept cards as a matter of competition.

One of the main advantages of card acceptance is the opportunity for consumers to spend without necessarily having funds at their immediate disposal, allowing for purchases that may not otherwise occur. In fact, according to a survey done by Ernst and Young (1995), 83 per cent of retailers stated that acceptance of credit cards does lead to increased sales. Interestingly, not all respondents claimed that it led to higher profits and 24 per cent felt that profits were lowered because of credit card related expenses. Indeed, the value of additional sales depends on the mark-up on the goods and services sold (Evans and Schmalensee 1999), net of the costs involved. However, Levitin (2006) argues that the

12 _{For an example, see http://www.mastercard.com/ca/wce/PDF/14437_MERCHANT-RULES-Manual.pdf.}

13 _{See also DeGennaro (2006).}

marginal benefits of card acceptance (for merchants in the US) is declining since consumers who use credit cards these days are more likely to be affluent (i.e. not credit constrained) and use them more for the sake of rewards than lack of funds.

In summary, there are several advantages and disadvantages associated with each payment instrument, whether it is cash or cards. The retailer’s decision to accept a particular method of payment reflects a balance between accommodating consumers’ desire to use a particular payment method against the cost implications that are associated with it.

Part II: The Survey

Over 500 retailers across Canada were interviewed by telephone over the period of March-May 2006. The survey sample was stratified by size, region and subsector to reflect the diversity of the true population. More than half the sample consisted of small retail firms of less than ten employees, and three-quarters were independently owned and operated. Franchises and corporate chains were also interviewed at the head office or store level. Although retailers represented a wide variety of subsectors (from gas stations to groceries, restaurants and general merchandise), it should be noted that the

participation criteria for having a physical store presence introduced pre-selection bias. For example, online retailers, who were excluded, are not likely to accept paper-based payments because of the nature of their business. If included, perhaps they would have affected the results on payment shares, preferences, etcetera. Also, the results of the survey, though informative, should be taken with prudence since the margin of error is +/- 4.4 per cent -higher than most surveys- and is even greater if generalizations are made for a particular size, region or subsector. Taking the median figures, the typical retail outlet represented by the survey has only one POS terminal, 8 employees, and processes 53 transactions per day worth $1,667 in gross sales.

The survey revealed that 89 per cent of retailers in the survey accept all major forms of payment. Virtually all retailers accept cash, followed closely by debit cards at 93 per cent and credit cards at 92 per cent. Other payment methods such as cheques and gift cards have lower acceptance levels at 70 per cent and 55 per cent respectively (Figure 4). The smallest of retailers (either measured in terms of number of employees or sales volume) are the least likely to accept electronic payments and the most likely to accept cheques. Credit cards present lower acceptance rates at food, general merchandise, restaurants and personal services15 stores, with the highest acceptance rates (100 per cent) in the furniture, gas stations, health and apparel trades. Debit cards are practically uniform across sectors. Cheques are most likely accepted at furniture, electronics, building and materials, and health stores.

15 _{Personal services include movie theatres, video rentals, dry cleaning, personal care, photofinishing and} repair and maintenance services.

Figure 4. Accepted Means of Payment

Of those that do not accept debit cards, 52 per cent said that set-up and processing costs are the main barriers to acceptance. Of those not accepting credit cards, lack of demand (29 per cent) and costs (16 per cent) were the main barriers. Finally, risk was mentioned as a main barrier by 73 per cent of those not accepting cheques.

In spite of the overwhelming acceptance of cash, debit cards and credit cards, merchants' acceptance levels do not necessarily reflect their relative preference and perceptions as they vary significantly across payment instruments. First, the survey asked merchants to rate from 1 to 5 how much they like consumers to use each payment method at their stores.16 Figure 5 shows that merchants prefer debit cards the most, with 60 per cent responding they like it very much when consumers use it at their stores, followed closely by cash with 42 per cent and credit cards with only 6 per cent.

Figure 5. Merchant Preferences

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Debit (n=472)

Cash (n=503) Credit (n=474)

5 Very much prefered 4 3 2 1 Not at all prefered

16_{Questions on preferences and perceptions were asked to all merchants (both those that accept and those} that do not accept a particular means of payment).

16% 55% 70% 92% 93% 100%

Self-labelled / private label credit cards

Stored-value cards (gift cards ) Cheques

Credit Debit Card Cash

Second, the survey asked all merchants for their perceptions on the ease and

dependability of processing at the point of sale (i.e. reliability), the risk and the costs, by rating each payment method from 1 to 5, where 5 is "totally reliable", "very risky" and "very costly", respectively. As shown in Figure 6, merchants rated cash as the most reliable and least costly of all. While 67 per cent rated cash as “totally reliable”, 56 per cent assigned this top rating to debit cards and 38 per cent to credit cards. Cash was also rated by 63 per cent of the survey participants as "not at all costly", compared to the 19 per cent who gave this rating to debit cards and 3 per cent to credit cards. Overall, credit cards are perceived as the “most costly” and the “least reliable”.

Figure 6. Merchant Perceptions of Reliability, Risk and Costs

Reliability

0% 20% 40% 60% 80% 100% Cash

Debit Credit

1 Completely unreliable 2 3 4 5 Totally Reliable

Risk

0% 20% 40% 60% 80% 100%

Credit Cash Debit

Cost

0% 20% 40% 60% 80% 100%

Credit Debit Cash

5 Very costly 4 3 2 1 Not at all costly

According to the survey results, there is no single payment instrument that dominates total transactions in any significant sense. Table 2 shows that each major payment instrument represents about a third of the median of both value and volume of annual sales. This outcome most likely is the result of consumers’ preferences and attitudes towards different means of payment.

Table 2. Payment Instrument Shares by Median

Value Volume Cash 25% 35% Debit Card 30% 34% Credit Card 30% 25% Cheques 5% 3%

Self labeled Credit

Cards 5% 4%

Note: Calculated as the median of the distribution of _{merchant payment instrument shares in the sample.}

In the third part of this paper, we explore in more detail what factors influence merchant perceptions of reliability, risk and costs since these are the main factors in their decision to accept a payment instrument. Second, we look for the determining factors in merchant preferences for cash, debit and credit card payments. Once we understand how merchant perceptions vary with merchant characteristics, we question whether payment processors consider this heterogeneity in their fee structure. Finally, we test how merchants and consumers shape the market for payments by studying the factors underlying merchant payment instrument shares of annual sales.

Part III: Further Insight into Merchant Perceptions,

Preferences and Payment Instrument Shares

1 Factors Affecting Merchant Perceptions of Reliability,

Risk and Costs

1.1 Merchant perceptions of reliability in terms of ease and

dependability

The main elements of reliability are processing speed at the POS (processing/verification time employed by merchant and consumer) and payment processing failure. In the case of debit and credit cards, failure could be caused by any interruption in communications. In the case of cash, failure may be due to the consumer not having the right denomination (some stores do not accept $100 bills) or because the merchant does not have the right change.

As for the time it takes to process a transaction, different studies have found that in terms of tender time17, cash is the fastest, followed by PIN debit cards and credit cards. This is probably the reason why merchants find cash easier and more dependable than debit and credit cards.18

However, tender time may present substantial variance, especially when using cash in different transactional environments and subject to different demographics. For example, cash procedures may be more cumbersome the higher the transaction value as counting, verification, and change handling might be more time consuming for both cashier and consumer. If this is the case, it is reasonable to think that merchants with higher average transaction values (ATV) would find cash less reliable. Yet cash would be more

appreciated in relatively low ATV stores where authentication and change hassles are less likely to occur. On the other hand, one may expect that high ATV stores would feel more comfortable processing debit and credit card payments than low ATV stores where tender time is more critical.

Merchant size, measured in terms of transaction volume and number of terminals, might also affect perceptions of reliability. Cash might be preferred among merchants in high transaction volume (or high frequency) stores where tender time and network failure is more critical. Number of terminals may also induce different perceptions. For example, in the case of cash, it requires increasing resources to guarantee adequate assortment of cash per POS; in the case of credit cards, cashiers may present different degrees of expertise across POS in handling multiple receipts and verifying signature.

17 _{Tender time is measured from the moment the total amount is displayed on the cash register to the} moment the payment is consummated.

The survey asked merchants to rate cash, debit, and credit card payment methods, in terms of the ease and dependability of the transaction at the cash register, from 1,

“completely unreliable,” to 5, “totally reliable”. We explore whether ATV and merchant size, measured by number of terminals and transaction volume, contribute to merchant perceptions of reliability both in absolute and relative terms. We model merchant

iresponses for payment j, E_ij, as an order probit of the form:

!

!

!

Where g =1,...,5are the five possible scores from 1 being “totally unreliable” to 5 “completely reliable” and:

• Tviis the merchant weighted average transaction value (weighted by payment

instrument share);

• Psiis the number of terminals;

• Yi is the merchant size, as indicated by transaction volume, sales volume or number of employees;

• Chiis a dummy for merchants with stores that belong to a chain (either corporate-

owned or franchised);

• Wim are merchant ipayment shares for each MOP accepted, excluding MOP j payment share;

• Dfiis a dummy for high frequency stores based on transaction volume per POS;

19 • Dsim are m=1,...,Ssector dummies, and

• Drim are m=1,...,Rdummies of provinces of merchant presence. 20

We also explored relative perceptions of reliability between cash and debit, debit and credit, and cash and credit by estimating the ratio of the scores E_i,(j,k) = E_ij/E_ik as the

order probit:

19 i

Df is constructed from total transaction volume and number of terminals. There may be an issue of collinearity among regressors which may affect the parameter estimates. However, the effects of terminals and total transaction volume did not change significantly when the dummy is included or not, nor did the parameter estimates associated with the remaining variables.

20 _{Each province dummy is equal to 1 if the merchant responded they have outlets at least in that province.} Therefore, the group of reference includes those merchants that have operations at the national level.

!

!

!

where g=1,…,5 may have up to ₅2_{possible values for each pair.}

Table a1 in Appendix A shows that both ATV and transaction volume play a significant role in explaining merchant perceptions of reliability. As expected, the lower the ATV, the more likely merchants find cash more reliable to process. This is also the case with those merchants in high frequency stores. In the case of debit and credit cards, it is the opposite as they are found to be more reliable to process by merchants in higher ATV stores.

The results in relative terms (Table a2), shed light on how ATV, transaction volume, and number of terminals may play a role in the scores merchants give to each pair of payment instruments. Cash is perceived as more reliable than credit cards by merchants with operations characterized by lower ATV, higher transaction volume and smaller number of terminals. Regarding cash versus debit cards, we could not isolate the effects of transaction volume and ATV on relative perceptions of reliability; however, we found a significant negative effect from total sales value. This may be seen as indirect evidence that higher transaction volumes and/or higher ATV shift merchant relative perceptions in favour of debit cards as total sales can be seen as the product of transaction volume and ATV. Also, debit cards are more reliable than cash, the larger the number of terminals. Finally, only the number of terminals significantly explains relative perceptions between debit and credit cards, with the latter perceived as less reliable the higher the number of terminals. In summary, debit cards emerge as a dominant instrument in terms of

reliability as ATV and merchant operation size increases.

1.2 Merchant perceptions of risk

In general, merchant risk perceptions are motivated by their degree of risk aversion, the likelihood of a loss and the size of the loss. Both the size of the loss and its likelihood depend on preventative actions, such as training and security measures. We hypothesise that ATV and size should play an important role on risk perceptions as they affect the expected loss.

It could be argued that the larger the merchant’s overall cash operations, the higher the probability of being robbed (for example, by employee theft) and the higher the

probability of counterfeits being passed (especially in high-frequency stores).

Furthermore, larger cash operations obviously increases the potential for economic loss. In the same vein, higher ATV imply higher expected economic losses.

However, the overall effect of ATV and merchant size on merchant risk perceptions of cash may be positive or negative as they reflect not only the expected losses but also the

merchant’s preventive actions. One would expect merchants with higher ATV and larger cash operations to have better procedures in place to handle cash loss due to theft, counterfeiting or fraud.

Debit cards present practically no risk from the merchant’s point of view as the transaction is essentially final. In this sense, there should not be much difference from one merchant to another with respect to risk perceptions related to debit cards except for a potential size effect due to a higher probability of being exposed to fraudulent

behaviour (e.g. replacement of bogus machines for real PIN pads at the POS).

For credit cards, economic losses from chargebacks due to fraudulent behaviour are proportional to the ATV. However, merchants in high ATV stores may be more likely to implement higher security standards to avoid fraudulent credit card transactions.

Therefore, it is not clear whether we should expect a positive or negative effect of ATV on merchant credit card risk perceptions.

We explore how merchant characteristics, such as ATV and size, shape merchant risk perceptions for each payment instrument in terms of risk of counterfeiting, theft, or fraud. We estimate order probit models both in absolute, R_ij, and relative terms R_i(j,k), with the same controls specified in (1) and (2). However, in this case, we explore the effect of each MOP transaction value rather than a weighted average since risk perceptions may be payment-instrument specific (which is clearly the case for credit cards).

Table a3 shows the results in absolute terms. For cash, the main drivers of risk

perceptions are merchant size, as measured by total transaction volume, and province of operation. The bigger the merchant size, the higher the perception of risk. Merchants operating in Ontario perceive cash as more risky and those operating in Alberta perceive it as less risky, compared to merchants operating elsewhere in Canada. Debit cards are perceived as less risky the bigger the total transaction volume. Also, merchants in Ontario and Quebec seem to perceive debit and credit cards as more risky than merchants

operating elsewhere. Finally, the bigger the merchant, in terms of number of terminals, the higher the perception of risk for credit cards. Transaction value is not significant in any of these models.

ATV, however, is significant in explaining relative risk perceptions (Table a4). Cash is perceived as less risky compared to debit as the ATV increases, whereas debit is perceived as more risky compared to credit cards as the ATV increases. Although we were not expecting any sign in either of these relationships, the results deserve further scrutiny. However, assuming these results are robust21, we conjecture that the effect of larger expected losses associated with higher ATV from payments with cash and credit cards is more than offset by the higher security standards that merchants may impose on their high ATV stores.22 Yet, transaction volume and terminals work as expected, the

21 _{We try different specifications but the results did not change and there seem not to be outlier effects} either.

former increasing the risk of cash relative to debit cards, and the latter increasing the risk of credit cards relative to debit cards.

1.3 Merchant perceptions of costs

Not all merchants recognize the full cost of accepting payments. For example, most merchants approached in the pilot study prior to the national survey did not recognize cash processing as an incremental cost to their business. They claim it is part of doing business and part of their overall set-up cost. A majority were not even able to recall the fees involved in cash deposits at their financial institutions. Also, communication costs were not understood as an incremental cost to accepting electronic payments as they have to set up a line to do business any way.

Nonetheless, the national survey asked merchants for their general perceptions on the costs of accepting different payment instruments by asking them to rate each payment method in terms of how much it costs to handle and process it. Cost perceptions are only an approximation of what a merchant actual costs might be. In this sense, there are two caveats to our results: first, although the intent of the question was to capture the merchant perception of per transaction costs, some merchants may think in total costs; second, merchants may also differ in the way they think about costs; those that think of a particular MOP as “part of doing business” would answer differently from those that see it as an incremental cost to their operations.

Most payment studies that look at costs acknowledge the fixed and variable components. But more interestingly, they decompose variable costs into a transaction-volume component and a dollar-value component.23 The cost of cash, for example, increases with transaction volume and value as the number of bank notes and coins that have to be processed increases proportionally. Value also may be important as bigger cash holdings imply higher opportunity costs. The reconciliation and deposit preparation process is more time consuming, the higher the number of terminals. In the case of debit cards, transaction costs should decrease both with ATV, as debit fees are set in cents per-transaction, and also, with transaction volume as the strong fixed cost component should drive significant economies of scale. Finally, credit card cost structure, as in debit, should be driven by merchants’ operation size and transaction value given the discount fee structure used by credit card acquirers.

Given the caveats mentioned above, our empirical approach here is tentative about how merchant characteristics may shape their cost perceptions. For each payment instrument, we estimated cost perception scores,C_ij, as an order probit with the same set of controls as in (1) and relative cost perceptions C_i(j,k) as an order porbit in the same fashion as in (2).

The results in absolute terms in Table a5 confirm that merchants think in per-transaction cost terms when revealing their cost perceptions on debit and credit cards. That is evident

from the negative relationship between transaction volume and debit and credit card cost perceptions, after controlling for the number of terminals. It is also apparent from the significant negative effect of ATV on both debit and credit card cost perceptions. Yet, it is not clear why credit card cost perceptions would decrease with ATV. If credit card fees are constant from one merchant to another, credit card per-transaction costs in dollar terms should increase with ATV as credit card fees are ad- valorem. One plausible reason, which is explored later, is that acquirers may offer lower credit card discount fees to higher ATV merchants.

Cash cost perceptions seem to be constant across transaction volume and ATV. Merchant size, measured by number of employees, is also not significant in explaining cost

perceptions. The only size measure positively and highly correlated with cost perceptions is annual sales. However, this result is driven by the largest merchants in the survey in term of annual sales. The results again suggest that merchants respond in a per-

transaction basis, and may imply that merchants do not perceive any economies of scale in handling cash payments.

Table a6 presents cost perceptions in relative terms. It shows that merchants in high ATV stores perceive cash as relatively more costly than debit cards, compared to merchants in low ATV stores. As expected, the higher the number of terminals, the more likely debit is perceived as more costly than cash. Perhaps this is because merchants’ leasing costs are proportional to the number of terminals. All things equal, merchants with large operations in terms of transaction volume, perceive cash as relatively more costly than debit cards. Interestingly, relative cost perceptions between debit and credit cards are only associated with merchant ATV: The higher the ATV, the lower the relative cost of debit cards compared to credit cards. Neither the transactions volume nor the number of terminals seem to affect relative cost perceptions between debit and credit cards.

2 Merchant Preferences between Cash, Debit Cards

and Credit Cards

Merchant preferences should be dictated by their profit maximizing behaviour. As such, the merchant’s choice to accept a MOP affects their profit function in two ways. First, they add to the overall cost of operating a store. Yet, on the other hand, they affect the demand for goods and services since consumers prefer to have a choice of MOP. Obviously, merchants would prefer MOP that are the least costly, easiest and most dependable, and least risky to process. However, they would be also influenced by their customers’ MOP preferences.

We therefore model merchant iresponses on preference ratings of payment j, P_ij as an order probit: ) ( ) Pr( 1 1 2 4 3 2 1

!

!

!

where g =1,...,5 are the preference ratings; Eij, Vij, Cij are merchant scores of

perceptions of reliability, risk and costs for MOP j respectively, and the other variables are as defined in equation (1).

We also model preferences in relative terms by calculating a preference index based on the ratio: PR_i(j,k) =P_ij /P_ik as an order probit:

) ( ) Pr( 1 , 1 , 2 4 ) , ( 2 ) , ( 3 ) , ( 1 ) , (

!

!

!

where RE_i(j,k), RV_i(j,k), RC_i(j,k) are relative reliability scores, relative risk scores and relative cost scores between MOP j and k.

Table a7 shows that reliability and costs are significant factors in merchant preferences. Risk seems to play a role only in the case of cash as it appears non significant for debit and credit cards. Also, preferences vary by how extensively a payment is used at the store. Merchants in intensive debit/credit card stores tend to rank cash lower in their

preferences -the effect being stronger in debit intensive stores. Likewise, the more cash oriented a merchant’s business is, the lower it will likely rank debit and credit cards. These results are confirmed by Table a8. In relative terms, reliability and costs are significant drivers of merchant preferences among the three instruments. Risk, however, only matters in relative preference between cash and debit cards.

As shown before, perceptions of reliability, costs and risk are significantly associated with merchant type. Therefore, we explore how merchant characteristics influence

relative preferences by estimating:

!

!

Table a9 shows the results in relative terms. Merchants with relatively higher transaction volumes, higher number of terminals and lower transaction frequency at the POS are more likely to prefer electronic payments to cash. Credit card preference relative to debit cards, increases as ATV and transaction volume increase, but decreases with number of terminals.

There are also strong sector-specific effects. Cash is more preferred to debit in gas stations, bar and restaurant, and personal service sectors. Credit cards are preferred to debit cards by merchants in the health, apparel, bar and restaurants, and personal service sectors.

Clearly, perceptions of reliability, risk and costs, and MOP usage at the POS are the main factors influencing merchant preferences. However, it is also shown that merchant

characteristics such as ATV, operation size, transactional frequency, number of terminals, and merchant sector also influence merchant preferences.

3 Costs of Accepting Cash, Debit Cards and Credit

Cards: Beyond Perceptions

One of the main factors affecting cost perceptions of payment instruments are the monthly and marginal fees charged by acquirers to merchants for processing card payments.

The survey asked merchants about the fixed and variable costs charged by financial institutions and payment processors. More than half of the merchants in the survey have their electronic payment services provided by payment processors; the remainder secure them directly from their financial institution. Regarding fixed fees, merchants pay around $30 to $50 for their banking and payment processing services, which usually include terminal leasing.24 Communications may not be added to the fixed costs as 56 per cent of retailers in the survey use dial-up lines which are usually set-up for multiple purposes. For those using high speed dedicated lines (30 per cent of the survey) the bill may add another $100. The majority (72 per cent) require only one communication line (dedicated or shared for multiple purposes) for payment processing.

Merchants were also asked about their per-transaction fees for debit and credit cards. The median of the distribution of merchants in the survey pays 13 cents per-transaction for debit cards (7 cents standard deviation) and a 1.8% discount fee for credit cards (0.8% standard deviation).

Our regression analysis in this section is only descriptive and does not represent a pricing model of payment processing. Table a10 presents conditional median regressions of debit and credit card fees as a function of ATV and transaction volume.25 The results show significant correlation between fees and merchant characteristics as represented by this narrow set of variables. For debit card fees, we found that the per-transaction fee increases with ATV and decreases with debit transaction volume. In the case of credit cards, lower credit card discount fees are associated with higher credit transaction volumes and ATV.

Based on these results, the effect of differences in ATV on debit card fees seems small compared to its effect on credit card fees. In the case of debit cards, a merchant with an ATV of $100 pays 3 per cent more in debit card per-transaction fees than a merchant with

24 _{Among those who accept credit/debit cards approximately half (54%) say they lease most of their POS} equipment. Only 24% say they own the equipment.

25 _{We opted for estimating a conditional median model instead of the conditional mean because of the} strong weight that outliers play in the mean and also because of the rather skewed shapes of card fees.

an ATV of $10. Merchants with an ATV of $100 pay credit card discount rates that are about 4 per cent lower than those for merchants with ATV of $10. However, in absolute dollar terms, a $100 ATV merchant pays about 9 times the amount paid by a $10

merchant for credit card transactions. Even though credit card providers seem to decrease their discount rates to higher ATV merchants, this does not compensate for the increase in dollar value that results from applying the credit card discounts to higher ATV. 26 The regressions also suggest that a merchant with a large operation size, in terms of transaction volumes (i.e. at 500 transactions per day), would pay 7 per cent lower debit card fees and 4.1 per cent lower discount rates than a small merchant (i.e. at 100 transactions per day). These may sound like small differences but, based on per-transaction fees, they represent significant savings to the merchant in aggregate costs.

3.1 Cash, debit and credit: a marginal cost comparison

From follow-up interviews with 35 merchants, it is possible to calculate some of the back-office variable fees associated with handling cash. The participants provided information on the number of transactions by payment method, the number of deposits per week, the value and frequency of coin ordering, the reconciliation and deposit

preparation time, the average cash deposit value and their deposit fees. This information, together with the information on debit and credit card fees, allows us to compare

merchant per-transaction variable costs across payment methods for different transaction values.

Table 3 summarizes our calculations and results where:

 For all payment instruments, the labour cost of tender time is included.

 For cash, we estimate the labour cost of the reconciliation time and deposit preparation time per transaction based on average responses given by 33 retailers in our follow-up interviews.

 We included the value of time spent delivering the cash deposit to the bank, which we assume is 20 minutes. According to anecdotal information, most merchants still make their deposit during business hours, although there are deposit drop-off chutes.

 Bank fees include cash deposit fees and coin ordering fees as reported by Royal Bank of Canada in their public brochure. For debit and credit cards, we take our survey median per transaction fees as a benchmark.

 As for cash theft and counterfeiting, we assume one theft event every 5 years and we calculate the passing probability as the ratio of total counterfeits passed in 2005 to the total bank notes received by merchants as calculated by total cash sales divided by the average cash transaction value.

 Finally, float is the opportunity cost of funds in transit based on short term interest rates. For cash we not only consider the time it takes for the financial institution to

26 _{These results contrast with some of the payment processors packages. For instance, one processor is} advertizing a package where the discount credit card fee actually increases with ATV.

credit the merchant’s account, but also the average time total cash sales remain in the store before being deposited at a financial institution based on deposit

frequency.27

 Results are presented for an average transaction value of $35, which happens to be the median result of the average cash transactions in the survey.

Table 3: Merchant's variable per-transaction costs

Base case for a $ 35 transaction

Cost Item Cash Debit Credit

Tender time 0.051 0.070 0.080

Deposit reconciliation

time 0.032

Deposit preparation time 0.032

Deposit time at the bank 0.025

Bank charges 0.075 0.120 0.613 Coin ordering 0.006 Theft/counterfeit 0.024 Charge backs 0.016 Float 0.009 0.003 0.005 Total $0.25 $0.19 $0.71

The estimations reveal that debit card payments are the least costly at 19 cents, followed by cash at 25 cents and credit cards at 71 cents.

We assume that all cost items except tender time, change with transaction value. For debit cards, only the opportunity cost of funds availability would change with transaction size, whereas for credit cards both the per-transaction fee and the opportunity cost change. Given these assumptions, our sensitivity analysis shows that cash would be the least costly payment instrument for transactions below $12 among merchants in the lower range of debit card fees (7 cents), the least costly for transactions below $22 at stores paying 12 cents debit fees, and the least costly for transactions below $49, among merchants in the higher range. As per debit and credit, ironically, credit card marginal costs are lower than those of debit cards at transactions below $6 where cash is still the cheapest, and probably the most preferred MOP.

Although these are back-of-the-envelope calculations, our estimate of the threshold transaction value between cash and debit seems very reasonable as low ATV stores, like convenience stores and fast food restaurants, are more likely to decide not to accept

27 _{As part of the cash management process merchants differ in the survey by how frequently they deposit} cash at their financial institution. Only 18% of retailers deposit cash on a daily basis while approximately half say they deposit either once per week (27%) or twice per week (22%). We found that the prominent factors in this decision are the merchant operation size and the number of terminals. The bigger the merchant operation size either measured by sales or transaction volume the more frequent cash deposits are made at the bank; however, the more the number of terminals to reconcile and manage, the less frequent cash deposits are made at the bank.

electronic payments all together. More generally, low mark-up stores in the low transaction value/high transaction volume sectors will find the business case for

electronic payments less compelling than other merchants. This may be the reason why debit card processors offer relatively lower per-transaction fees to these segments of the market.

4 Payment Instrument Shares: Merchant Acceptance

and Consumer Choice

As we have seen, merchant characteristics such as size, ATV and sector not only shape merchant preferences and perceptions, but also influence payment processing fees. These are key variables at the acceptance stage. Taken alone, as they vary so much across merchant type, they should account for a much larger dispersion in the degree of acceptance of alternative MOP than what we observe in Canada. Therefore, most of the business case for the overwhelming acceptance of all MOP must come from the revenue side, as MOP acceptance should shift merchants’ demand for their product. As argued earlier, this is evident from the fact that cash, debit and credit compete fairly even in terms of payment instrument shares of total sales at the POS as reported by merchants in the survey.

In this section we exploit the assumption that once a merchant decides whether to accept a payment instrument, it has little influence on payment behaviour, and consumer preferences and attitudes drive most payment instrument outcomes at the point of sale.28 We test this assumption by estimating payment instrument shares as a function of merchant perceptions regarding costs, risk, and reliability. Table a11 shows that neither cost, reliability, nor risk are significant factors (at the 5 per cent significance level) in determining payment shares at the POS after controlling for merchant payment

acceptance. Clearly, most of the explanatory power in these regressions comes from the merchant specific sector where electronic payments are most popular in the furniture, electronics, apparel and building material sectors.

Although we do not observe consumer decisions in the survey, the evidence of merchant irrelevance at the POS, once the MOP acceptance decision is made, allows us to estimate payment instrument shares as a function of variables that reflect consumer choices. For example, even though merchant sector is a merchant’s choice, it would be unrealistic to think that the merchant sector of trade would be chosen on the basis of payment

instruments used by consumers. Also, ATV is an important dimension of the consumer decision.29 Cash tends to be inconvenient for high value payments as risk of loss and opportunity costs increase as transaction value increases. Consumers may find electronic payments more convenient MOP for high ATV stores not only because it avoids the

28 _{In interviews with 35 merchants non of them report on any type of practice to dissuade customers from} paying with any of the payment instruments surveyed.

29 _{Transaction value has a long tradition in the literature as the main variable determining the relative} demand for different payment methods (Whitesell,1989, 19992; Prescott ,1987)