Reply to: pricing of card payment services in Scandinavian banking: a comment, by Leo Van Hove

Abstract

A comment on the previously published paper ‘Pricing of card payment services in Scandinavian banking’ has been written by Leo Van Hove and published in this issue of The Service Industries Journal; it suggests alternative analytical approaches and other implications of the results. This reply develops the study further, providing new presentations of the empirical data and discussing its conclusions. The suggestions and approaches provided by Van Hove do not change the conclusions drawn in the paper, and in-depth implications of the results in a wider context are outside the scope of the paper. However, this reply proposes further empirical studies regarding the pricing of card payment services.

Keywords:

• payment pricing
• debit card
• banking
• Scandinavia

Notes

Table 4 is incorrectly displayed. Unfortunately, the rows were changed at printing, after the proofreading of the paper. A correctly published table should display FIXED on the first row and TWOPART on the second. Consequently, there should be 11 banks having a fixed pricing method and fixed prices for expected pricing method.

The use of the data, and the double counting, is described on page 390 in the paper.

One bank has operations in more than one Scandinavian country, but is of non-Scandinavian origin. As a consequence, it is impossible to relate to its home-market pricing strategy, and it was therefore deleted from the study.

Because Bank 2 uses an implicit pricing strategy in one country, this bank does not entirely follow the expectations. However, this case was excluded from the analysis in the paper.

Swedbank is a bank with an extensive number of private customers relative to the other banks. This implies that the bank would benefit the most from using transaction fees because the number of transactions probably would be reduced significantly. On the other hand, payments charged by transaction fees will compete against payments for free provided by other banks. If the payment services' cost and revenue were isolated from other customer relationships, this would not be a problem because the revenue then would cover the true cost. However, this is not necessarily the case for payments, for there is a large degree of cross-substitution among services (c.f. Gresvik and Øwre (2003) for a thorough analysis of costs and revenue in Norwegian banks and Guibourg and Segendorff (2007) for Swedish banks).

Van Hove makes comparisons with the introduction of explicit prices on checks. These prices were introduced at a time when alternative payment methods existed as substitute, such as card payments, for free and – as can be followed from the BIS statistics – Sweden has not relied much on checks for payment transactions since the introduction of debit cards.

The latter should be considered as a reply to one of the remarks to the test, where it is assumed to the study adoption process. ‘… one of his main conclusions is that when entering a new country, banks will align themselves with the pricing tradition in that market, rather than applying the pricing strategy they use in their home market’. This is a euphemistic remark to a conclusion, in the paper, that says ‘Internationally operating banks usually adopted a pricing strategy that was dominating in each foreign market’ and refers to the fact that most banks have adopted pricing method according to the expectations. The text should be considered as an illustrative example of a bank's decision making only and certainly not isolated from the text that follows, which states ‘when they operate in a foreign country’. The intuition is that a bank re-evaluates its pricing strategy (as well as price levels) continuously, and the data thus reflect the strategy that is currently most profitable to the bank.

In fact, due to the circumstances in the Scandinavian countries, another approach is impossible to analyse because many of the international banks have a short history of international banking related to consumer payments relative to how long they have operated in their domestic markets. In addition, the strategy to move abroad has varied among the banks, including a number of M&As together with expanding operations abroad as well as going from more business-oriented operations (including no card payments) towards consumer-oriented operations (including card payments).

The latter was a fact when some banks tried to impose a new fee to retailers in 1995 and large retailers responded by transferring the fee to the customers. Since then, such behaviour has generally only been adopted by smaller retailers. However, in 2010, forwarding fees from banks to consumers was prohibited by the Swedish Financial Supervisory Authority.