Do we need a numeraire for the internet?

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The UK Office of Fair Trade (OFT) is proposing new laws to stop internet surcharging for debit cards. The OFT is planning to allow on-line retailers to continue to surcharge for credit card transactions.

The OFT says that companies will still be able to surcharge for credit cards, but not for debit cards, which it points out is the online equivalent to cash.

One factor behind this appears to be non-transparent surcharging.

[T]he OFT found considerable evidence of companies using “drip pricing” practices, whereby charges are added only after consumers have filled in a number of web pages during their purchase.

But this is really an issue for consumer protection laws, as I note here.

The more interesting idea is that debit cards are like on-line cash. In other words, the OFT is making debit cards the on-line ‘numeraire’ payment instrument. All prices will be expressed relative to the price of paying by debit card.

This looks like a clever idea (and better than the surcharging cap being considered by our Payment System Board). Setting a numeraire should be neutral (even though the ‘cost’ that a merchant faces is set by its bank) so long as both surcharging and discounting is allowed for other payment instruments when used on the internet. If so, requiring debit cards to be the ‘numeraire’ will lead to a re-balancing of prices for internet transactions but will not lead to any change in relative prices. Further, it helps make pricing clearer for consumers – who know that the posted price is available via a debit card with no surcharge.

The OFT report is available here. The OFT focus on debit cards as they are the most commonly held card in the UK. This may not be the case in Australia where (scheme) debit cards is not as popular and EFTPOS debit can’t be used on the internet (but BPay can be used). So the numeraire for Australia could be different.

In summary, an interesting idea worth further investigation, both in the UK and here.

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