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Card Acceptance by Small Merchants: An Application of the Tourist Test to Peru

  • Jose Aurazo EMAIL logo and Milton Vega
Published/Copyright: March 15, 2022
Review of Network Economics
From the journal Review of Network Economics Volume 20 Issue 2

Abstract

This paper presents a first estimation of the tourist test threshold for interchange fees that makes Peruvian small merchants indifferent between accepting cash and debit cards at the point of sale. We use the tourist test model (initially proposed by Rochet and Tirole), including tax evasion (Aurazo and Vasquez’s model) as an extra factor in the merchants’ decision between cash and card payments. Also, we revisit the existing empirical approaches and propose a new empirical approach, coined as the cash-flow approach, which assumes that small merchants estimate the overall cost in terms of the average ticket related to cash and card payments. Using a Survey on private costs of payment instruments conducted by the Central Reserve Bank of Peru in 2019, our estimates suggest that the tourist test threshold for debit cards is lower than the current interchange fee until 2019, even if tax evasion is not considered. Also, this study helps policymakers to better understand the factors around the merchants’ decision that may be considered to foster digital payments.

Keywords: card payments; interchange fee; tax evasion; tourist test; payment systems; Peru
Corresponding author: Jose Aurazo, Central Reserve Bank of Peru, Lima, Peru, E-mail:

Acknowledgments

We are grateful to the anonymous referee, Raul Morales, Allen Weinberg, Paul Castillo, Douglas Randall, Santiago Carbó-Valverde, Cyril Monnet, and the participants at the 2021 Seminar on Retail Payments Pricing at the Central Reserve Bank of Peru, and the 9th BCC Annual Conference for their helpful comments. We thank Carlos Pereyra for editorial comments. The views expressed in this paper are those of the authors and should not be interpreted as those of the Central Reserve Bank of Peru. All errors and omissions are our own.

Appendix

A Survey: General Information Across Peruvian Cities and Merchant Sectors

Table A.1:

Merchant payment characteristics across Peruvian cities.

Lima Arequipa Chiclayo Cusco Huancayo Iquitos Trujillo
% of sale, cash 64.92 75.5 72.4 69.15 71.99 69.5 73.8
(21.19) (13.47) (14.61) (17.25) (20.01) (12.74) (9.95)
% of sale, cards 34.94 24.5 27.5 30.85 28.01 30.5 25.85
(21.17) (13.47) (14.66) (17.25) (20.01) (12.74) (9.59)
Cash average ticket, PEN 37.72 52.36 43.25 39.15 37.44 43.43 41.05
(30.75) (34.48) (56.13) (19.76) (24) (54.2) (59.09)
Card average ticket, PEN 56.48 73.09 66.4 58.8 50.32 43.26 62.41
(37.74) (37.07) (74.38) (22.14) (23.32) (42.76) (80.97)
Cash transactions, monthly unit 427.37 425.95 419.76 462.24 508.34 585.24 341
(694.11) (376.08) (445.15) (383.83) (460.95) (516.87) (358.04)
Card transactions, monthly unit 132.99 91.02 122.84 137 118.42 216.72 80
(296.63) (76.98) (122.31) (143.2) (130) (176) (89)
MDR, % 3.68 3.61 3.17 3.84 3.84 4.15 4.17
(0.80) (0.65) (0.55) (0.38) (0.91) (0.81) (0.53)
Total sample 463 100 100 100 100 100 100

  1. Standard deviation in parentheses.

Table A.2:

Merchant payment characteristics across merchant sector.

Footwear and clothing Restaurant Beauty and cosmetic Medical profesional services
% of sale, cash 70.86 59.82 68.48 69.81
(15.57) (19.00) (19.86) (19.85)
% of sale, cards 29.03 40.18 31.42 30.12
(15.48) (19.00) (19.88) (19.89)
Cash average ticket, PEN 44.83 29.71 27.10 48.79
(25.10) (17.29) (17.28) (26.85)
Card average ticket, PEN 58.87 43.23 42.14 65.11
(26.29) (20.21) (23.86) (32.49)
Cash transactions, monthly unit 303.85 472.85 334.53 314.67
(356.96) (439.57) (259.97) (501.73)
Card transactions, monthly unit 86.42 225.62 108.63 78.80
(93.26) (208.60) (115.48) (100.39)
MDR, % 3.90 3.61 3.80 3.63
(0.78) (0.77) (0.78) (0.74)
Total sample 180 120 98 74

  1. Standard deviation in parentheses.

Table A.3:

Cash-flow approach: costs, merchant discount and interchange fee.

Components Cash Cards
Obs Mean Conf. Inter. (95%) Obs Mean Conf. Inter. (95%)
Volume-related – – – – – –
Value-related, % 896 2.46 2.15–2.77 700 2.37 1.89–2.85
Front-office 810 1.58 1.40–1.77 689 0.65 0.60–0.70
Back-office 742 1.03 0.79–1.27 692 1.74 1.26–2.21
Other costs 417 0.28 0.19–0.38 – – –
Taxes (effective VAT), % 1063 1.29 – 1063 1.57 –
Obs Mean Conf. Inter. (95%)
Merchant discount 1*, % 700 0.42 (0.09)–0.94
Merchant discount 2**, % 700 0.14 (0.37)–0.66
Interchange fee***, % 700 0.11 (0.30)–0.53

  1. Mean and confidence intervals are calculated using the expansion factor of the population size. Effective VAT calculated with a mark-up of 10%. (*)Consider the standard components of the convenience costs for cash and cards. (**)Consider the standard components of the convenience costs for cash and cards and the benefit from evading taxes. (***)Calculated as the 80% of the MDR with the benefit from tax evasion.

B Estimating the Interchange Fee for Each Merchant

Following the Cash-flow approach developed in Section 3.4, we use Eq. (6) as follows:

β c , i = α k , i V k , i − α c , i V c , i + β k , i − θ c − θ k t

where sub index i refers to the merchant interviewed and the rest of variables are the same as in Eq. (6).

The merchant discount that meets the tourist test, without taking into consideration tax evasion, is 0.42% of the transaction value; once we include the net benefit from evading taxes in cash payments versus debit card payments, this level lowers to 0.14% and applying the rule that the interchange fee is 80% of the merchant discount, the tourist test threshold is set at 0.11% of the transaction value.

In addition, Figure A.1 shows the tourist test interchange fee estimated by ranges of the daily sale per merchant (0–100 PEN, 5% of the sample, 101–300 PEN, 34%, 301–500 PEN, 18%, and 501–more PEN, 42%). We perform a means test to verify whether the interchange fees are statistically different among the ranges of daily sale; the results show that the interchange fees compatible with the tourist test are not statistically different, i.e., the amount of daily sale does not affect the estimation of the interchange fee.

Figure A.1: Tourist test interchange fee and daily sale.
Figure A.1:

Tourist test interchange fee and daily sale.

References

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Received: 2021-06-22
Revised: 2022-02-18
Accepted: 2022-02-18
Published Online: 2022-03-15
Published in Print: 2021-06-25

© 2022 Walter de Gruyter GmbH, Berlin/Boston

Articles in the same Issue

  1. Frontmatter
  2. Articles
  3. Broadband Internet and Income Inequality
  4. Card Acceptance by Small Merchants: An Application of the Tourist Test to Peru
https://doi.org/10.1515/rne-2021-0024
Keywords for this article
card payments; interchange fee; tax evasion; tourist test; payment systems; Peru

Articles in the same Issue

  1. Frontmatter
  2. Articles
  3. Broadband Internet and Income Inequality
  4. Card Acceptance by Small Merchants: An Application of the Tourist Test to Peru
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