67
Payments Regulation in Asia
Merchant Pass-Through to Consumers Typically, in competitive industries, characterized by those with low profit margins, cost reductions may be passed on to the end users in the form of lower prices. In general retail, which averages a 3% profit margin 186 , cost reductions may be passed to consumers. Two independent studies indicate that consumers receive over 70% of the cost reductions incurred by merchants. In 2020, the European Commission released a report on the efficacy of the implementation of the Interchange Fee Reduction act of 2015 which capped debit and credit interchange at 0.2% and 0.3%, respectively. The report, performed by Ernst & Young 187 , aggregated estimates of cost pass-through from over 25 studies (covering 20 EU member states) to estimate the extent to which a reduction in direct costs in the food retail sector was passed on to consumers. The final estimate of merchant to consumer pass-through was 72%, implying that a reduction in cost faced by a particular merchant of $1 would result in a reduction of $0.72 in the price of the goods sold by the merchant. The report, however, acknowledged that interchange costs are indirect costs incurred by the merchant while the estimates of merchant to consumer pass-through are based on reductions in direct costs (e.g. cost of input prices). It is therefore possible that merchants would not pass indirect costs in the same manner as direct costs, making the estimate of merchant pass-through biased. However, given that estimating the actual impact on pricing as a result of interchange fee reduction would require granular pricing data, the pass-through rates estimated from direct cost decreases have been used as a proxy. Furthermore, a 2013 study by researcher Robert Shapiro used a similar merchant to consumer pass-through rate of 69% to estimate the proportion of interchange savings passed on to consumers. 188 The estimate was taken from a study that analyzed 23,147 cases of cost reductions for over 1,000 retail grocery and drug stores in more than 30 states in the U.S. The Shapiro study also focused on direct cost reductions and so the same caveat applies. However, what these two studies can illustrate is that the extent of pass-through is estimated to be broadly similar in both the U.S. and Europe. Therefore, assuming that there is not a significant bias in the use of direct cost decreases to estimate pass-through, merchants are estimated to have passed on 71% of interchange savings to consumers.
186
https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/margin.html
187
https://op.europa.eu/en/publication-detail/-/publication/79f1072d-d6c2-11ea-adf7-01aa75ed71a1
188
https://www.sonecon.com/docs/studies/Report_on_Interchange_Fees-RShapiro-October_2013.pdf
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