Card acceptance by small merchants: An application of the tourist test to Peru.

In this paper, we present the results obtained using data from small merchants in Peru to estimate the level of the interchange fee that makes them indifferent between accepting cash and debit card payments. We apply an extended version of the tourist test (proposed by Rochet and Tirole) that includes tax evasion as a factor in the merchants’ decision between cash and card payments. Also, we propose a new empirical approach coined as the cash-flow approach that assumes that small merchants estimate the overall cost in terms of the average ticket related to cash and card payments. The data from small merchants suggest that tax evasion is higher in cash payments, reducing considerably the tourist test threshold. Also, the cash-flow approach allows avoiding the “indetermination” issues reported in other empirical studies, associated with the dependence of the interchange fee on the level of the transaction value and how costs are distributed. However, the results obtained depend on the mark-up that small merchants charge above cost price, because it is an input to calculate the benefit from tax evasion.