Do Transaction Costs of Payment Systems Differ Across Customers in E-commerce?

Cost-efficient processing and low working capital requirements are highly important for online retailers’ competitiveness and profitability. Therein, a sound understanding of transaction costs of respective payment instruments is extremely relevant when deciding which payment method to offer in ecommerce. Using a unique dataset with more than 14 million actual sales transactions from a leading European online retailer, this paper investigates the effect of customers’ characteristics on retailers’ transaction costs. In order to evaluate the payment choice of online retailers, the authors empirically derive cost schedules of the payment instruments invoice, credit card, PayPal and prepayment as a function of the transaction size. The results reveal extensive differences in the transaction costs and the collection time of accounts receivables across payment methods and customers. From a managerial perspective, this study illustrates how retailers can develop an efficient payment provision strategy on a customized basis with regard to low transaction costs and capital requirements.