Merchant Card Acceptance: An Extension of the Tourist Test for Developing Countries

Abstract

Abstract The paper extends the tourist test proposed by Rochet and Tirole (2011) to the situation of emerging countries which are characterized by informality (tax evasion through cash payments). We introduce a government which faces a cost associated to cash (resources to fight against crime minus seigniorage) and tax evasion in the base model. The main idea is that merchants benefit from tax evasion since they do not provide a receipt in cash transactions and thus pocket a fraction of the VAT. In the presence of informality, the tax benefit of cash reduces the merchants’ net operating benefit of accepting card sales. The tourist test aims to determine a maximum interchange fee (the fee that the acquirer pays to the issuer whenever a card transaction is done) which makes the merchant indifferent between accepting cash or card. In this new environment, the tourist test threshold now internalizes this tax benefit of accepting cash. We assess the socially optimal interchange fees in this new model setup derived from three different social maximization functions.