Starting with the seminal contributions of Bernanke and Gertler (1989) and Kiyotaki and Moore (1997), a large theoretical literature in macroeconomics has studied the implications of credit market imperfections for investment and output dynamics. At the heart of this literature is the inverse relationship between firms’ financial assets, or equivalently internal funds, and the agency costs of investment. When asymmetric information or moral hazard problems entail agency costs in lending relationships, firms’ debt capacity is constrained by the level of assets that can be pledged to outside lenders.
An adverse shock that worsen financial conditions may therefore generate a negative spiral, where low profits reduce debt capacity and hence investment, which further reduces profit, amplifying the initial negative shock, and so forth. This amplification mechanism, known as the credit multiplier or the financial accelerator, has been extremely influential in explaining how relatively small and temporary exogenous shocks to the economy may be amplified and become persistent.
Economies with imperfect financial market access may experience crises that cause significant economic dislocation. These crises are characterized by the sudden stop of domestic or international credit flows and are associated with large declines in consumption, output, relative prices, and asset prices.
On January 19, 2007, the Payment Cards Center (PCC) of the Federal Reserve Bank of Philadelphia hosted a workshop led by Marc Abbey, the managing partner at First Annapolis Consulting,1 to discuss the merchant-acquiring side of the payment cards industry.
In his role at First Annapolis, Abbey, who has been with the company since its inception in 1991, focuses on the merchant-acquiring, transaction-processing, and card-issuing businesses. The workshop’s purpose was to learn more about merchant acquiring, a relatively less understood section of the payment cards industry. This paper, which is based in large part on Abbey’s remarks, will describe the merchant-acquiring function, the industry structure, and how the business has evolved.
