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Interchange Fees in Payment Card Systems: A Survey of the Literature
Abstract
This paper surveys the recent literature about interchange fees in payment card systems. Interchange fees are used by payment platforms to allocate the total cost of a payment card transaction between the cardholder's bank, the issuer, and the merchant's bank, the acquirer. Each time a consumer pays by card, its bank receives an interchange fee from the merchants' bank. Banks argue that interchange fees are needed to encourage the use of electronic payment instruments, whereas merchants claim that they artificially inflate the cost of accepting cards. This paper sheds light on the ongoing debate that opposes banks to the regulatory institutions or the competition authorities in various countries, by reviewing the theoretical results of the literature and highlighting some unanswered issues.
... Tanto a Cielo e quanto a Elo têm como acionistas principais o Bradesco e Banco do Brasil. A teoria econômica pode auxiliar a entender o efeito da verticalização (RYSMAN e WRIGHT, 2014, VERDIER 2011, ROCHET, 2003. Com a verticalização, os emissores de cartões tiveram o poder de influenciar as taxas de desconto praticadas, utilizandose da bandeira própria como força competitiva frente aos adquirentes não integrados. ...
... Isto aumenta o poder de mercado do adquirente que se reflete em maiores preços (maior MDR), como visto na literatura (RYSMAN e WRIGHT, 2014). A expansão da bandeira em geral se dá com menores anuidades 22 , financiada com maiores IF, que se aplicam a todos os adquirentes (VERDIER, 2011). No caso brasileiro, este canal de efeito sobre o IF pode não estar ativo dada a expansão no débito, onde anuidades são proibidas. ...
O objetivo deste artigo é verificar como a criação da bandeira de cartão de pagamento ELO, alterou as taxas cobradas pela indústria de meios de pagamento brasileira. Em 2010, intervenção regulatória e de defesa da concorrência resultou no fim da exclusividade entre a bandeira Visa e a adquirente VisaNet, com a expectativa de um aumento na concorrência entre adquirentes e redução das taxas cobradas. Desde 2010, o mercado experimentou uma redução da taxa de desconto, enquanto a taxa de intercâmbio cresceu no mesmo período. Já a bandeira ELO foi introduzida em 2012 pelos controladores da Cielo e passou a operar com exclusividade com esta adquirente, sinalizando um retorno à verticalização no setor. Considerando a entrada da ELO, avaliamos através de uma regressão de diferenças em diferenças o efeito desta nova bandeira de cartão sobre as taxas de intercâmbio e de desconto. As estimativas indicam que na modalidade débito a entrada da ELO mitigou a redução das taxas de desconto.
... As part of the Fintech sector, the companies' main competency is their ability to screen and detect potential risks posed by borrowers, based on big data and algorithm analyses [9]. While it was hoped that these platforms would create a change in the lending market, similar to that of digital banking [18], the P2P sector plays only a minor role in the Israeli finance industry, with less than a 4% market share [28], and approximately 10-12% of the worldwide market [27]. Our motivation in the current study is to explore whether the reason for the small market share is part of a discrepancy that exists between the lenders' preference for low-risk loans, and the P2P companies' preference to encourage riskier loans in order to attract borrowers. ...
... This dimension also had the highest utility for the non-users, indicating that peer loan platforms are considered a high-risk instrument by both lenders and the non-users. Indeed, previous studies [28] found that lenders' willingness to continue using the platforms is due, in part, to the degree of confidence they have that borrowers will meet their obligations, as well as the sense of risk in using the platform. The lower the perceived risk level is, the greater the willingness to reinvest through the platform [6]. ...
In the current study, we examine why peer-to-peer (P2P) lending platforms play only a minor role in the finance industry in Israel, compared to the traditional banking system. We conducted two studies and attempted to discover if a discrepancy exists between the lenders' preferences and the platforms’ incentives. In the first study, we conducted a conjoint analysis to examine the impact of lenders' decisions to invest through P2P platforms. The second study examines the factors in which platforms use to determine the lending interest rate for loans. We found that although lenders wish to decrease their risk and guarantee their investment, P2P companies encourage riskier borrowers. This contradiction between the priorities of the lenders and those of the platforms may explain why the non-users consider P2P lending to be a high risk. We offer several suggestions to increase the attractiveness of the Fintech and lending platforms industry.
... This is a way of further reducing the use of banknotes and coins, which carry relatively high social costs." 2 Market participants in the Netherlands and abroad have tried to stimulate card usage in several ways. Financial incentives such as reward programmes or surcharges on cash withdrawals steer consumers towards higher debit card usage (Bolt et al. 2010;Borzekowski et al. 2008;Carbó-Valverde and Liñares-Zegarra 2011;Verdier 2011). However, even if market participants provide the right incentives to consumers, the latter's payment behaviour changes only gradually, as it is strongly rooted in their daily routines (Cruijsen van der et al. 2016). ...
... Furthermore, next to network externalities, pricing incentives influence consumer and retailer preferences for card payments. Market participants have tried to steer consumers towards card payments using financial incentives; see Verdier (2011) for an overview. Banks work together in a card network by setting transaction fees that will encourage card usage by consumers and card acceptance by retailers. ...
Did consumers change their payment behaviour after being exposed to a public
campaign that encouraged them to use their debit cards more often? We analysed the impact of
such a campaign that started in 2007, using debit card transaction data between 2005 and 2013.
The overall results show positive effects of the national campaign to promote debit card usage,
both in the short and in the long run. The results suggest that high campaign intensity aimed at
consumers had a positive impact, as did a focus on certain large retail chains. Interventions
aimed at increasing debit card acceptance by retailers were effective to some extent. Providing
information to retailers about the benefits of debit card acceptance led to higher card accep-
tance, but no proof was found for the effectiveness of financial incentives for retailers
... Austria ( Czasami argumentuje się, że do wskazanych powyżej kategorii kosztowych należałoby dodać inwestycje ponoszone przez wydawców na rzecz poprawy obsługi posiadaczy kart i sprzedawców (Verdier 2009). ...
... Jednakże zmniejszenie tych korzyści powinno zostać z nawiązką zrekompensowane korzyścią wynikającą ze wzrostu liczby punktów akceptujących karty płatnicze (Börestam i Schmiedel 2011: 34). Wskazuje się, że opłaty interchange mogą być narzędziem wykorzystywania siły rynkowej przez 210 ROZDZIAŁ 4 banki i organizacje płatnicze, przez co następuje sztuczne zawyżenie kosztów kart płatniczych, to zaś budzi reakcję organów antymonopolowych (Verdier 2009). Opisane zjawisko jest tym bardziej szkodliwe dla rynku, jeżeli wzrost opłat interchange nie prowadzi do wzrostu bezpieczeństwa systemu kart płatniczych i wzrostu innowacyjności. ...
... For the seller, a cash payment implies few direct costs (Castro, 2009;Lee, 2010), and the indirect costs, such as the storage costs, risk of loss, or risk of theft tend to be underestimated (Sanches and Williamson, 2010;Robinson and Hammitt, 2011;Singh et al., 2013). On the contrary, a credit or debit card payment is costly because of the terminal cost and transaction fee paid to the network (Verdier, 2011). The seller thus perceives a cash payment as less costly than a card payment (Chatterjee and Rose, 2012;Kamleitner and Erki, 2013). ...
... This setting assumes ex-ante profit maximization before price adjustment. Therefore, it is compatible with any underlying model, for instance a two-sided market model (Verdier, 2011). ...
A transaction between a seller and a buyer incurs a payment cost. The payment cost is borne by the seller, depending on the payment instrument the buyer chooses, cash or card. Card payment is more costly than cash payment, so the seller prefers that the buyer pays cash. In this article, we study the strategy of the seller setting a convenient price, which simplifies transactions and pushes the buyer to pay cash. The theoretical analysis, which models both the seller and the buyer in a game setting, derives two propositions: (1) the seller is more likely to set a more convenient price and (2) the buyer is more likely to pay cash a more convenient price. The empirical analysis supports both propositions. Thus, sellers adopt a convenience pricing strategy - prices for cash - and this strategy pushes buyers to pay cash - cash for prices.
... The Forum represents both providers and users of payment systems, including retailers' and banks' umbrella organisations, the Consumentenbond consumer interest association and elderly and disabled people's organisations. Ahmed, 2008, Carbó-Valverde and Liñares-Zegarra, 2011and Verdier 2011. However, even if market participants provide the right incentives to consumers, the latter's payment behaviour changes only gradually, as it is strongly rooted in their daily routines. ...
... see Verdier (2011) for an overview. In the two-sided market literature, the card payments market is considered to be a market with two groups of end-users, being consumers and retailers. ...
Do consumers change their payment behaviour after being exposed to a public campaign that encourages them to use their debit cards more often? We analyse the impact of such a campaign that started in 2007, using weekly debit card transaction data between 2005 and 2013. The overall results show positive effects of a national campaign to promote debit card usage, both in the short and in the long run. Debit card usage increased by 2%. The effects are the most significant at the early stages of the campaign, while appearing to wear off after a few years of interventions. The results suggest that high campaign intensity had a positive impact, as did a focus on certain large retail chains.
... Pasar dua-sisi adalah pasar di mana dua jenis pengguna atau operator terlibat satu sama lain untuk menghasilkan nilai melalui penggunaan platform tertentu (Lee & Ji, 2018 Lee & Ji, 2018;Mariotto, 2016;Rochet & Tirole, 2003;Shabgard, 2020;Verdier, 2011). ...
Artikel ini bertujuan meneliti respon pasar modal terhadap penerapan Gerbang Pembayaran Nasional Indonesia, untuk membuktikan bahwa interkoneksi dan interoperabilitas transaksi di merchant akan meningkatkan penerimaan kartu debit dan uang elektronik pada sisi permintaan, mendorong lebih banyak transaksi di merchant dan mengurangi biaya pertukaran sehingga akan meningkatkan pendapatan pedagang pada sisi penawaran. Hasil penelitian menunjukkan bahwa pasar modal merespon positif dampaknya terhadap kinerja saham bank penerbit tetapi memberikan respon negatif terhadap saham pengecer. Penelitian ini melengkapi literatur penelitian event-study terdahulu di pasar modal Indonesia serta memberikan literatur baru tentang dampak model pasar dua sisi pembayaran ritel elektronik dari sudut pandang eksternalitas jaringan antara bank penerbit dan pengecer. Penelitian ini dilakukan hanya pada pasar modal Indonesia dan hanya pada implementasi kartu debit GPN.
... Much of the research has focused on investigating interchange fees and the optimal level of fees and regulation of fees, see for example (Bourreau & Verdier, 2019;Rochet & Wright, 2010;Verdier, 2011). Two-sided markets are said to be a case, of which results more generally apply to multi-sided markets (MSPs) (Rochet & Tirole, 2006b). ...
This chapter visits some of the fundamental concepts from platform economics, network effects, and network externalities. Further on, it discusses definitions of two-sided and multi-sided markets, how they are treated as business models. These concepts are further compared to the concept service ecosystem. A case of a payment service provider whose business model contributes to the growth of e-commerce is included. The purpose is to tease out how research on platforms has developed since e-commerce was in its infancy. The fundamental concepts developed in network economics are still valid and have been translated into different fields with a focus on value creation, information, and interaction. How platforms within platforms spur each other's growth is an area that has the potential to reach new insights on the platform economy.
... 9 I omit the role of interchange fees that are paid for interconnection by a bank to its rival in a card payment which allows me to focus on the comparison between pre-SEPA and post-SEPA. The role of interchange fees in the banking industry is studied inShy (2012) andWright (2004); for a survey of recent contributions on this topic seeVerdier (2009). ...
The Single Euro Payment Area (SEPA) project eliminates the incompatibility of domestic payment systems across European countries. It also enforces uniform pricing between national and international transactions. How does this policy affect competition among European banks in the retail payment market? To address this issue, I explore and solve a model of non-linear price competition between two asymmetric banks in terms of capital by considering price discrimination in pre-SEPA and uniform pricing in post-SEPA under the presence of economies of scale. My results show that the transaction pattern has a vital role in the effect of SEPA on competition between banks. Competition is less intense in post-SEPA when the transaction pattern is domestically oriented. Moreover, comparison of pre-and post-SEPA suggests that SEPA intensifies competition when economies of scale are large enough. I further show that consumer surplus improves in post-SEPA.
... The tourist test insures merchants have the same incentive to take cards both ex ante and ex post, and it has been used in European Commission (Verdier (2011) and Wright (2012)). ...
This paper considers competitive issues raised in credit card markets. Among others, the issues are mainly regarding to welfare effects of no surcharge rule (NSR) clause or more general non-discriminatory provisions (NDPs), and the regulation of interchange or merchant fees. This paper develops a theory of platform competition tailored to credit card markets, and finds abundant meaningful results. First of all, we find that the welfare implication of NDPs hinges on relative distortions induced by market power of networks and merchant internalization (MI). When the MI overwhelms market power, the ban is likely to increase social welfare, and vice versa. Another impressive finding is that both cardholder consumers and merchant consumers obtain zero benefit from using a credit card when NDPs is in place. This is because platforms are able to extract all of consumer surplus via an inflated price of product which embodies excessive merchant fees. Lifting the NDPs will unambiguously increases surplus of both cardholders and merchants. We also find that retaining the NSR and applying tourist test regulation will yield the identical results as when surcharges are allowed and optimally capped. Finally, we develop a model of asymmetrical competition between AmEx and Visa (or MasterCard) and are able to obtain some interesting results. For instance, consumers earn positive surplus with the NSR clause due to their asymmetrical business models.
... 9 See, in particular, the surveys by Chakravorti (2010), Verdier (2011), or Rysman and Wright (2014). One reason for this might be that the revenue base of domestic transactions may be larger than that of cross-currency transactions-even though the DCC fee level tends to be much higher than the level of interchange fees. ...
It is a common experience for present-day consumers making an international payment via credit or debit card to be invited to choose the currency in which they wish to have the transaction executed. While this choice, made feasible by a technology known as dynamic currency conversion (DCC), seems to foster competition, we show that the opposite is the case. In fact, the unique pure-strategy Nash equilibrium in a natural fee-setting game turns out to be highly asymmetric, entailing fees for the service provider that always exceed the monopoly level. Although losses in welfare may be substantial, a regulatory solution is unlikely to come about due to a global free-rider problem.
... So, the tourist test is also called avoid-cost test. The tourist test approach had been adopted by MasterCard to compute the level of interchange fees in 2009, and the European Commission viewed this method positively (Verdier (2011)). Wright (2012) also mentions that the European Commission, and among other authorities, have undertaken their own tourist test. ...
This paper provides a theory on how to regulate the level of merchants fees in credit card markets. Previous literature has shown that the regulatory approach of tourist test could improve social welfare in an open payment system. However, few literature provides a theory on how to regulate merchants fees in a closed payment system. This paper fills the gap and finds that the tourist test is not a valid approach to regulate a closed payment system. We provide a model suggesting that the regulation should be based on banking costs and market elasticity.
... al-use prepaid cards. Lacking detailed information pertaining to these small card programs (Federal Reserve System 2013), we do not exploit these exemptions in our analysis.10 Under the language in the statute, the exemption is based on consolidated worldwide assets of a financial institution, including all financial and non-financial affiliates.11Verdier (2011) andRysman and Wright (2012) provide useful surveys of this literature. ...
The Durbin Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 alters the competitive structure of the debit card payment processing industry and caps debit card interchange fees for banks with over $10 billion in assets. Market participants predicted that debit card issuers would offset the reduction in debit interchange revenue by increases in customer account fees. Some participants also predicted that banks would cut costs in response to the law by reducing staff and shutting down branches. Using a difference-in-differences testing strategy, we show that debit interchange fee income fell for treated banks, leading to a fall in noninterest income. We also find that banks only partially offset this loss with deposit fees. We document that treated banks neither reduced costs nor strategically avoided the $10 billion threshold.
... Our results on the relation between the interchange fee and consumer and merchant adoption are consistent, for example, with the empirical findings of Carbo-Valverde et al. (2016), who find evidence that the reduction of interchange fees in Spain had a positive effect on consumer and merchant adoption of payment cards because of network externalities. 24 By contrast, several theoretical papers argue that a lower interchange fee reduces consumer adoption of payment cards (see Verdier 2011). ...
We analyze the impact of interchange fees on consumers’ and merchants’ incentives to adopt an innovative payment instrument, in a setting with adoption externalities between consumers and merchants. We show that consumer adoption decreases with the interchange fee for high degrees of externality, and varies non-monotonically with it for low degrees of externality. The profit-maximizing interchange fee coincides with the social optimum when externalities are strong, whereas it is too high when they are weak. We also compare the issuers’ incentives to innovate when they cooperate and when they make their innovation decisions independently. © 2018 Springer Science+Business Media, LLC, part of Springer Nature
... The platform determines the total price paid for the jointly-bought product and the individual prices paid by these two end-users. The crypto market may be considered as a special case of a two sided market, just like the card payments market, which has been the focus of considerable academic attention, see Verdier (2011) or Jonker (2016 for overviews. ...
Decentralised issued crypto “currencies”, like bitcoin, have the potential to drastically change the existing retail payment system and even the monetary system. Insights into the factors that influence their adoption are therefore crucial. Using a large representative sample of retailers that sell their products online, we find that acceptance of crypto payments is currently modest (2%), but there is substantial interest among retailers to adopt crypto payments in the near future. Consumer demand, net transactional benefits and perceived adoption effort influence adoption intention and actual acceptance by retailers. Regarding non-financial factors, our findings suggest that service providers who act as intermediaries between retailers, their customers, and providers of payment instruments play a crucial role as facilitators of competition and innovation in the online retail payments market by lowering such barriers. The most serious barrier for crypto acceptance seems to be a lack of consumer demand. Information from consumers ndicate that those who possess cryptos, don’t use it for online payments.It seems therefore unlikely that the adoption of cryptos by retailers will increase substantially, making it highly unlikely that cryptos like bitcoin will drastically change the existing retail payment system.
... Beginning with Baxter (1983) and especially following the seminal work of Rochet and Tirole (2002), a substantial theoretical literature, surveyed in Verdier (2011) and Rysman and Wright (2014), has considered the positive and normative implications of interchange fees in payment card markets. In general, these models consider the payment method decisions of consumers and the card acceptance and pricing decisions of merchants given the transaction fees charged by their respective banks. ...
Retail banking is a complex industry in which depository institutions bundle various services and may have market power. We use a recent regulation as a natural experiment to provide broad evidence about competition and the importance of bundling in retail banking. That regulation, which resulted from the Durbin Amendment to the Dodd-Frank Act, capped debit card interchange fees for banks with over $10 billion in assets. Using a difference-in-differences identification strategy, we document and quantify the resulting decline in interchange income for treated banks. We further find that treated banks offset more than 90 percent of the lost interchange income through increases in deposit fees for account holders. We argue that the ability to adjust deposit fees indicates (i) that treated banks have market power with respect to their account holders and (ii) strong complementarity between debit card transactions and deposit accounts. These results are robust when limiting the sample to banks near the asset threshold or using control banks with low direct competition with treated banks. Treated banks neither reduced costs nor strategically avoided the $10 billion threshold.
... This setup means that the only profit obtained by the platform will be that obtained by the issuer. We therefore assume, as is standard in the existing literature (see Bedre-Defolie and Calvano [2013], Rochet and Tirole [2002], [2011], andWright [2012]), that the platform chooses its interchange fees to maximize the profit of its members, in this case the single issuer. ...
We consider the implications of platform price discrimination in the context of card platforms. Despite the platform's ability to price discriminate, we show that it will set fees for card usage that are too low, resulting in excessive usage of cards. We show this bias remains even if card fees (or rewards) can be conditioned on each type of retailer that the cardholder transacts with. We use our model to consider the European Commission's objection to the rules card platforms have used to sustain differential interchange fees across European countries.
... al-use prepaid cards. Lacking detailed information pertaining to these small card programs (Federal Reserve System 2013), we do not exploit these exemptions in our analysis.10 Under the language in the statute, the exemption is based on consolidated worldwide assets of a financial institution, including all financial and non-financial affiliates.11Verdier (2011) andRysman and Wright (2012) provide useful surveys of this literature.Electronic copy available at: https://ssrn.com/abstract=2503652 ...
The Durbin Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 alters the competitive structure of the debit card payment processing industry and caps debit card interchange fees for banks with over $10 billion in assets. Market participants predicted that debit card issuers would offset the reduction in debit interchange revenue by increases in customer account fees. Some participants also predicted that banks would cut costs in response to the law by reducing staff and shutting down branches. Using a difference-in-differences testing strategy, we show that debit interchange fee income fell for treated banks, leading to a fall in noninterest income. We also find that banks only partially offset this loss with deposit fees. We document that treated banks neither reduced costs nor strategically avoided the $10 billion threshold.
... Visa and MasterCard release updated interchange and fee tables semi-annually in April and October. The cost of accepting credit cards as a form of payment for goods and services has increased steadily for merchants since the mid 1970's (Verdier, 2011). Banks normally issue a debit or check card to account holders to enable access to funds, resulting in most consumers possessing a card with a Visa or MasterCard logo on them instead of the antiquated DEBIT VERSUS CREDIT CARD FEE REGULATION 6 automated teller machine (ATM) card. ...
This study focuses on proposed legislation to cap the interchange and processing fees charged to merchants for non-PIN based debit transactions, formerly known as check cards. The Dodd-Frank Wall Street Reform and Consumer Protection Act that gave the Federal Reserve Board authority to limit to the amount of fees that banks can charge on PIN based debit transactions and does not apply to non-PIN based debit transactions (Epstein, 2011). Although well intentioned, debit interchange fees are the lowest of the fees charged to merchants and only travel along the bank networks of the issuing bank. Non-PIN based debit transactions make up over half of all credit card transaction volume. This study analyzes merchant processing data and shows savings amounts under current and three different fee scenarios to regulate fees for non-PIN based debit card transactions.
... The payments market is a so-called two-sided market with two groups of end-users: merchants and consumers (e.g. Baxter 1983or Verdier 2011. In contrast to merchants, consumers hardly face any transaction fees for card usage or cash withdrawals nor do they receive tangible rewards. ...
Using shopping diary survey data we show that changing payment patterns is a challenging task;
even when consumers have fallen in love with the debit card, they find it hard to divorce from
cash. While seven out of ten Dutch consumers report to prefer using the debit card, only seven
out of twenty actually mostly pay by debit card. The likelihood that reported preferences and
actual behaviour do not match increases with income, education and age. Consumers with
payments in cash-intensive sectors, where the wide acceptance of the debit card is a relatively
recent phenomenon, are more likely to overestimate debit card usage than other consumers.
The likelihood of a gap also increases with the amount of cash that consumers carry with them
and decreases with the average transaction size. Our findings indicate that persistent habits are
an important explanation why the substitution of cash by debit cards took place at a slower pace
than was expected.
... The payments market is a so-called two-sided market with two groups of end-users: merchants and consumers (e.g. Baxter 1983or Verdier 2011. In contrast to merchants, consumers hardly face any transaction fees for card usage or cash withdrawals nor do they receive tangible rewards. ...
Using shopping diary survey data we show that changing payment patterns is a challenging task;
even when consumers have fallen in love with the debit card, they find it hard to divorce from
cash. While seven out of ten Dutch consumers report to prefer using the debit card, only seven
out of twenty actually mostly pay by debit card. The likelihood that reported preferences and
actual behaviour do not match increases with income, education and age. Consumers with
payments in cash-intensive sectors, where the wide acceptance of the debit card is a relatively
recent phenomenon, are more likely to overestimate debit card usage than other consumers.
The likelihood of a gap also increases with the amount of cash that consumers carry with them
and decreases with the average transaction size. Our findings indicate that persistent habits are
an important explanation why the substitution of cash by debit cards took place at a slower pace
than was expected.
... Beginning with Baxter (1983) and especially following the seminal work of Rochet and Tirole (2002), a substantial theoretical literature, surveyed in Verdier (2011) and Rysman and Wright (2014), has considered the positive and normative implications of interchange fees in payment card 5 The full text of the Durbin Amendment is available on page 2,068 of Government Printing Office (2010). The Board's press release and text of the final regulation are available in Federal Reserve Board (2011a). ...
The Durbin Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 alters the competitive structure of the debit card payment processing industry and caps debit card interchange fees for banks with over $10 billion in assets. Market participants predicted that debit card issuers would offset the reduction in debit interchange revenue by increases in customer account fees. Some participants also predicted that banks would cut costs in response to the law by reducing staff and shutting down branches. Using a difference-in-differences testing strategy, we show that debit interchange fee income fell for treated banks, leading to a fall in noninterest income. We also find that banks only partially offset this loss with deposit fees. We document that treated banks neither reduced costs nor strategically avoided the $10 billion threshold.
... There is a substantial literature studying interchange fees, such as Rochet and Tirole (2002). See Verdier (2011) and Rysman and Wright (2015) for recent surveys. As we are motivated by regulatory and antitrust interven-5 tion into payment markets, our research is related to a group of papers that observe such interventions directly and estimate the impact. ...
This paper develops and estimates a structural model of adoption and usage of payment instruments by U.S. consumers. We utilize a cross-section from the Survey of Consumer Payment Choice, a new survey of consumer behavior. Our empirical model combines the elements of a discrete-continuous model, where first a consumer picks a product and then chooses how much to use it, with a bundled choice model, in which consumers can choose multiple products that may affect the utility derived from each other. We consider how changes in the costs of adoption and usage may differentially affect substitution patterns. These results are particularly relevant for bank pricing of debit card services in response to the regulation of interchange fees on debit cards enacted by the Durbin Amendment to the Dodd-Frank Act which became effective on October 1, 2011.
Rewards that consumers receive on credit card payments influence their payment choice. They are not taxed but merchants deduct card fees from their taxes. This article analyzes the tax effects in a model where card companies set interchange fees, merchants decide whether to accept card payments, and consumers choose their preferred payment method. I find that card companies raise interchange fees when merchants are allowed to deduct these fees from their taxes. Taxing consumers' card rewards reduces interchange fees. The optimal distribution of cash and card payments cannot be supported without a policy combination of taxes and regulated interchange fees.
This paper presents an empirical analysis of the introduction, in October 2018, of maximum thresholds (“caps”) on debit card interchange fees for domestic payment cards in Brazil. We investigate the behavior of card issuers’ revenues from debit and credit card interchange fees, the merchant discount rate (MDR) of debit transactions, debit and credit card usage, and debit card scheme fees paid by card issuers and acquirers after the cap. We find a gradual and increasing reduction in the MDR, from 6.0% in 2018Q4 to 22.8% in 2020Q1. Additionally, we observe a statistically significant difference between debit and credit card MDR in 2019Q4 and 2020Q1. The cap reduces card issuers’ earnings from the debit card interchange fee proportionally to the cut but does not affect similar revenues from credit cards. Overall, there is no evidence that the regulation of the debit card interchange fee changes the dynamics of debit card usage or that it changes debit card scheme fees.
The literature on interchange fees assumes that consumers and merchants can transact with both cash and payment cards. In contrast, I analyze interchange fees in the presence of cashless stores, cashless consumers, and cash-only consumers. In these cases, some transactions cannot be completed due to a mismatch between the payment methods that a merchant can or is willing to accept and the methods available to the consumer. The gap between the interchange fees set by card organizations and the optimal fee increases with the fraction of cashless consumers and cashless stores. Some transactions cannot be completed under any interchange fee.
To stay within the safe boundaries of global warming, the world now has 30 years to decarbonize its economy. This represents a very significant challenge for tourism as a growth system. Much attention has been paid to different tourism subsectors such as aviation, accommodation, and activities to reduce emissions, mostly on the basis of (future) technology. However, the Paris Agreement demands immediate action and significant year-on-year progress on a zero-carbon trajectory. This article discusses destination management under the new low-carbon imperative. It analyses challenges, including economic viability and resilience, that have also gained importance in light of the COVID-19 pandemic, and explores opportunities for better profitability on the basis of a leakage/spending value dichotomy proposition. The final section highlights the foremost role that destination managers must play in building prosperous and resilient low-carbon tourism destination systems and discusses the key insights for destination managers.
Using a large representative sample of retailers active in e-commerce, we find that acceptance of crypto-payments is modest (2%), but there is substantial interest among online retailers to adopt them. Regression analysis shows that consumer demand, net transactional benefits and perceived accessibility of accepting crypto-payments influence adoption intention and actual acceptance. Our findings also suggest that service providers who act as intermediaries in e-commerce play a crucial role as facilitators of competition and innovation by increasing accessibility. The most serious barrier for crypto-acceptance is a lack of consumer demand. It seems therefore unlikely that crypto adoption by online retailers will increase substantially in the near future.
Górka presents the theory of two-sided markets that create value (indirect network effect) by connecting two distinct groups of agents, e.g. card payers and card payees. This chapter characterises conditions defining two-sided markets and market failures which can arise there. It also deals with economics of interchange fees. Górka explains the modus operandi of four- and three-party card schemes, their business model, inherent fees, and how they are set. He illuminates the role of interchange fees according to Baxter’s model and its later refinements. This chapter includes discussion of the optimal level of interchange fees maximising the joint welfare of consumers and merchants (see the “tourist test” of Rochet and Tirole). Górka develops the conceptual framework for assessing the impact of interchange fee regulation.
When a consumer pays by card, the merchant’s bank pays to the consumer’s bank an interchange fee. In this article, we construct a general model of a card platform that unifies the literature on interchange fees. We enrich the existing frameworks by analyzing the choice of the interchange fee when consumer demand is elastic to retail prices. We show that the difference between the privately set structure of payment card fees and the socially optimal one depends both on banks’ and merchants’ pass-through of their costs to consumers. We argue that the maturity of the payment card market impacts the redistributive effects of interchange fees (i.e. between consumers and merchants, card and cash users) and therefore, their optimal regulation.
This article introduces a novel approach to payment innovations. It t identifies a cross-industry (retail trade and retail banking) and multi-country (USA, some Western European countries and Japan) approach to the interaction between these industries and the new retail payment systems from the 1970s to the mid 1990s. It documents and discusses the different trajectories that have been seen in the different competitive environments, particularly in regard to payment cards. It also analyses the involvement of bankers and retailers in the evolution of card payment systems and their contribution to the global adoption of bank cards. These processes have occurred within a framework in which sectoral boundaries have taken precedence over the payment alternatives associated with cross-industry solutions.
During the last years, the finance industry has experienced a proliferation of innovations which may disrupt traditional financial services. They blur the boundaries between banks and financial start-ups, speed up transactions, democratize the access to credit, revise how we can purchase goods and how merchants can sell their products, while imposing regulators the challenge for a new level playing field which balances the trade-off between financial stability, competition and innovation. In this thesis, I try to answer to three main issues related to the topic of innovation in retail banking. Firstly, how do innovations impact competition in retail banking. One first issue is to understand why some of these innovative services are offered by non-bank platforms and how can banks compete with entrants that do not have the same business model. Secondly, I look at what the drivers of the adoption of innovation by consumers in retail banking are. What determines the diffusion of a new financial technology despite all the financial risks related to it ? To answer to these questions, I will look empirically at the example of the two main peer-to-peer lending platforms in the USA, Prosper and LendingClub. Third, I address the question on whether regulation of innovation is necessary. Is it optimal for the society to regulate the providers of innovative retail banking services? To answer to these questions, I address, in two theoretical models, the well-known debates on the optimal level of interchange fees in payment card systems and the imposition of exclusivity arrangements and price parity clauses in contracts between platforms and merchants.
In recent years, regulators in various parts of the world have capped interchange fees on debit and credit cards. The justification for the caps rests to a large extent on the argument that these cards have, for certain merchants, become must-take cards rather than “wanna-take cards.” That is, there are merchants who accept payment cards not because they bring net convenience benefits but out of fear of losing profitable business to card-accepting competitors. This paper presents an original approach that allows to quantify, for the first time, the relative importance of the two motivations. We find, for the case of France in 2008, that the must-take phenomenon effectively exists, but that it applies to only 5.8–19.8 percent of the card-accepting merchants and to a mere 3.9–13.5 percent of all retailers.
High credit card debt default has been symptomatic for the U.S. and other countries in the last decades. Different explanations for this situation exist in the literature. One explanation is overconfidence, which has become a key concept in behavioural economics for explaining anomalies in financial markets such as excessive trading volume. There is also the idea that overconfidence is to blame for high credit card debt. In this paper, an agent-based model is presented that examines the effects of overconfidence on credit card usage. Overconfidence is used here to explain why people who never intend to borrow on their credit card(s) do so anyway. The model contains consumption, two means of payment (credit card and cash), and a distortion to agents' income expectations via overconfidence. It was found that overconfidence leads to more "accidental" borrowing and higher interest rates. © 2016, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
In this chapter, the authors examine the structure of European payment markets in terms of payment composition, behaviour and cost. Next, the operation of a typical payment network is described, which illustrates the so-called two-sidedness of payment markets. This specific network structure underlies many aspects of the economics of payments. Payment pricing, incentives, competition and cooperation are analysed within this two-sided markets framework. A discussion of payment innovations, the growing importance of “non-banks” in all segments of the payment chain and the European regulatory framework affecting the future of retail payments complete this overview.
In this paper we show the notional development of the level of the multilateral interchange fee (MIF) for debit card payments, based on the Tourist Test methodology. The attraction of this methodology in the short run is that card acceptance will not increase merchants' operating costs. However, using Dutch cost data for 2002 and 2009 we show that in the long run this method may lead to rising costs for merchants. The outcomes show that this notional MIF would increase from 0.2% to 0.5% of the transaction size of an average debit card payment. If card acquirers would pass such an increase on by raising acquiring fees then merchants will face a considerable increase in operating costs. Our results indicate that application of the Tourist Test methodology may not lead to a suitable benchmark tool for regulation, at least for countries such as the Netherlands, with rising costs for cash and declining costs for debit card payments.
The European retail payments market is fragmented. It used to consist of twenty-eight nationally operating payment markets served by national schemes, which were separated from each other by legal and technical barriers. With the unification of the European retail payments market, most of the legal and technical barriers between countries have been removed. National payment instruments for credit transfers and direct debit payments have gradually been replaced by European payment instruments, and since 1 August 2014 there are, in theory, no differences between making payments with these payment instruments within one’s own country or to another European country. However, this does not hold yet for card payments, which ‘have not reached the same level of harmonisation and integration as credit transfers and direct debits’ (European Central Bank (ECB), 2014).1 According to the ECB, ‘substantial efforts are still required in order to achieve a single card payment area’, as the card payment market is very complex.
We investigate the effects of entry of financial technology (FinTech) based firms on competition in the retail payments market. With a model of two-sided market with vertical restraints, we derive the following results. When only the entry of a vertically integrated (or end-to-end service) provider is allowed, either all merchants opt for multi-homing or no entry occurs, regardless of the regulatory requirement. On the other hand, if the entry of a downstream-only (or front-end service) provider is allowed, a partial multi-homing equilibrium could emerge under certain conditions, in which the entry of an end-to-end service provider does not occur. Without regulation, however, the vertically integrated incumbent does not voluntarily provide the back-end service to the entrant in general. This suggests the need for proper regulatory measures to reach a socially desirable outcome from the new entry in the retail payments market.
This article presents an overview of the literature on platform markets. Several recent papers have extended the pioneer works of Rochet and Tirole [2003] or Armstrong [2006] by addressing unexplored issues such as the measure of market power in the presence of crossed-externalities, or the impact of bundling on social welfare. These new results can help policy makers to achieve a better understanding of these markets. Classification JEL : E42, G21, L96.
Using a search theoretic model of money, we examine an optimal allocation of the resource cost of electronic transaction. A transaction using cash incurs a buyer its carrying cost, while an electronic transaction incurs data-processing cost to the payment platform which then raises the resource cost from buyers or sellers using the electronic payment system. An equilibrium allocation of the resource cost implies the seller-take-all-burden scheme by which the payment platform can maximize the volume of electronic transactions by raising the resource cost only from sellers. However, the socially optimal allocation of the resource cost implies the buyer-take-all-burden scheme by which the resource cost should be raised only from buyers in order to maximize welfare.
This article examines the divergence between the profit maximizing and the welfare maximizing interchange fees when two issuing banks, which compete for deposits, share a debit card platform and their ATM networks. It suggests some guidelines for regulatory intervention to reduce inefficiencies in the substitution between debit cards and cash. For instance, when banks make profit on ATM transactions, if the volume of foreign withdrawals is high and if the opportunity cost of being paid in cash for merchants who accept cards is low, social welfare can be increased by reducing the interchange fee on withdrawals. If the value of the expenses paid by card is high, and if merchant demand is not very sensitive to the interchange fee on card payments, social welfare can be increased by reducing the interchange fee on card payments.
Lecture slides on Competition and Regulation in Two-Sided Markets
In many jurisdictions, competition authorities and market regulators question the principle of interchange fees. Such fees exist on almost all interbank card payment platforms. It would seem, however, that the European commission would like to go as far as to completely abolish these fees, not just on existing platforms (such as GIE CB, Visa and MasterCard) but also in platforms that could be developed within the framework of the new European payment system (SEPA). A close examination of regulations that exist in a number of countries (Australia, Spain, the United States) and the logically predictable effects of the abolition or the reduction of the fees paid by the merchants’ banks to the customers’ banks, shade some doubt on the validity of such an attack on interchange fees. The economic model of the development of interbank payment platforms based on interchange has proved its worth, and continues to evolve under the natural pressure of the markets and advances in technology. Nothing suggests that the abolition or reduction of interchange fees would lead to any greater general well-being. If it is reasonable to assume that certain categories of merchants would benefit from them, it is just as reasonable to imagine that consumers, be they cardholders or not, would lose out. The arguments put forwards to justify the setting of the interchange by regulators, or even the abolition of an economic development model are far from convincing.
The paper analyzes the issuing side of the credit card industry. It shows that the equilibrium interchange fee is increasing with competition, under the no-surcharge rule that restricts merchants to set the same price for cash and card purchases,. This occurs because issuers compensate losses from competing in the issuing side by collectively increasing the interchange fee. Therefore, limiting competition may improve social welfare when the interchange fee is higher than the social optimal level. In the absence of the no-surcharge rule, competition improves social welfare, but a fee policy must be required since the platform can still serve a barrier for entry and set the interchange fee collectively.
Payment card market is characterised by its two-sidedness. This fact implies that the demand of the market is jointly determined by participants on both sides of the payment platform. In this article, we employ copula functions to capture the complex relationship between the marginal demands from cardholders and merchants in payment card market. Moreover, we estimate the distribution function of the joint demand in Chinese payment card market, and find that the t copula function fits the demand relationship between the issuing market and the acquiring market well. Our findings show that the joint demand in Chinese payment card market increases with the demand from issuing market, while it is not influenced by the demand from acquiring market. This pattern is due to the distorted profit distribution system in Chinese payment card market. We argue that the pattern of overvaluing issuing market but undervaluing acquiring market is unsustainable, and a further reform in Chinese payment card market is definitely necessary.
The No Surcharge Rule (NSR) prevents merchants from charging more to consumers who pay by card versus other means ("cash"). We consider a payment network facing local monopolist merchants that serve two consumer groups, card users and cash users. Unlike in prior work, transaction quantities are variable. The NSR raises network profit and harms cash users and merchants; overall welfare rises if and only if the ratio of cash to card users is sufficiently large. With the NSR, the network will grant rebates to card users whenever feasible. If rebates are not feasible, the NSR can harm even card users.
In this article, we construct a model to study competing payment networks, where networks offer differentiated products in terms of benefits to consumers and merchants. We study market equilibria for a variety of market structures: duopolistic competition and cartel, symmetric and asymmetric networks, and alternative assumptions about consumer preferences. We find that competition unambiguously increases consumer and merchant welfare. We extend this analysis to competition among payment networks providing different payment instruments and find similar results.
We synthesize the results of the recent theoretical literature on the determination of interchange fees by payment card associations. We analyze in particular the conditions under which these interchange fees are excessively high, as compared with social optimum. These conditions involve several parameters: the intensity of competition between banks and between merchants; the elasticities of demand on both sides of the market, as well as the degrees of heterogeneity among merchants and among cardholders. A crucial element is the competitive edge that merchants can gain by accepting cards.
Open payment card networks typically coordinate the activities of thousands of financial institutions that issue cards, millions of retail locations that accept them, and several hundred million consumers that use them. This coordination can include the collective setting of certain prices and other controversial network rules. Such practices have recently come under the scrutiny of antitrust authorities in the U.S. and abroad. This article provides a brief overview of the economics of the payment card industry, explaining some of the differences from the textbook model of competitive markets. Such differences are important factors for the antitrust analysis of payment card networks.
The paper investigates, in a non-technical fashion, the economic determinants of interchange fees in payment card systems and the potential need for their regulation. Among other things, it demonstrates that the proposal for a cost-based regulation of interchange fees relies on an erroneous, vertically organized, model of the payment card industry.
We analyze platforms in two-sided markets with network externalities, using the specific context of a payment card association. We study the cooperative determination of the interchange fee by member banks. The interchange fee is the ``access charge'' paid by the merchants' banks (the acquirers) to cardholders' banks (the issuers). We develop a framework in which banks and merchants may have market power and consumers and merchants decide rationally on whether to buy or accept a payment card. After drawing the welfare implications of a cooperative determination of the interchange fee, we describe in detail the factors affecting merchant resistance, compare cooperative and for-profit business models, and make a first cut in the analysis of system competition.
In a typical bank credit card transaction, the merchant's bank pays an interchange fee, collectively determined by all participating banks, to the cardholder's bank. This paper shows how the interchange fee balances charges between cardholders and merchants under imperfect competition. The privately optimal fee depends mainly on differences between cardholders' and merchants' banks, not their collective market power. In a non-extreme case, the profit-maximizing interchange fee also maximizes total output and producers' plus consumers' surplus. There is no economic basis for favoring proprietary payment systems, which do not need interchange fees to balance charges, over the cooperative bank card systems. Copyright 2002 by Blackwell Publishing Ltd
Total costs of the payments system to society are considerable. These costs can be higher or lower depending on the use of payment instruments that are less or more cost efficient. Empirical evidence is provided by a survey on the costs of POS payment instruments in the Netherlands. The overall costs involved in POS payments amount to 0.65% of gdp or, equivalently EUR 0.35 per transaction. The e-purse is most cost-efficient, irrespective of the size of a transaction, while if the choice is between cash and the debit card, the former is most economical for purchases below EUR 11.63 and the debit card is to be preferred for larges purchases. From a cost perspective, credit cards should not be used at all. The distorting effects caused by the use of public resources to finance the expenses made by central bank to maintain the cash circulation is found to be limited. It is argued that a less-cash society has better chances of success than a cashless one, at least in the medium term.
I exploit a unique data set on the payment card industry to study issues associated with network effects and two-sided markets. I show that consumers concentrate their spending on a single payment network (single-homing), although many maintain unused cards that allow the ability to use multiple networks (multi-homing). Further, I establish a regional correlation between consumer usage and merchant acceptance within the four major networks (Visa, Mastercard, American Express and Discover). This correlation is suggestive of the existence of a positive feedback loop between consumer usage and merchant acceptance.
This paper summarizes the key contributions to the literature on the economics of interchange fees. The older literature tries to address the issue without rigorous modeling. Thus, it was possible even after Baxter's seminal contribution to suggest, as did Carlton and Frankel, that society might be better off mandating a zero interchange fee. The more recent literature still leaves many theoretical and empirical questions unanswered. However, several conclusions can be drawn from the efforts to model interchange fees formally by Rochet and Tirole, Schmalensee, and Wright. The cost and demand factors driving private fee-setting are closely related to those that determine socially optimal fees. Moreover, any deviation from social optimality will be the result of subtle differences between the two sides of the market - not from market power leading to excess profits for association members. No rigorous analysis supports the idea that a zero interchange fee or a fee set by regulators based on cost would generally raise welfare. Furthermore, while there is no guarantee that interchange fees set by associations will maximize social welfare, this does not imply that collective rate-setting is appropriate grist for antitrust scrutiny. The hallmark of anticompetitive pricing is excess profits and less-than-optimal output. Yet, there is no reason to believe that private setting of interchange fees generates excess profits for the colluding parties since competition in acquiring and issuing activities can be expected to dissipate any surplus revenue. The interchange fee has the effect of lowering costs on one side of the market and raising them on the other. Nor will interchange fees set above the socially optimal level generally restrict output.
Antitrust authorities often argue that merchants cannot reasonably turn down payment cards and therefore must accept excessively high merchant discounts. The paper attempts to shed light on this must-take cards view from two angles. First, the paper gives some operational content to the notion of must-take card through the avoided-cost test or tourist test: would the merchant want to refuse a card payment when a non-repeat customer with enough cash in her pocket is about to pay at the cash register? It analyzes its relevance as an indicator of excessive interchange fees. Second, it identifies four key sources of potential social biases in the payment card systems' determination of interchange fees and compares the industry and social optima both in the short term (fixed number of issuers) and the long term (in which issuer offerings and entry respond to profitability).
We provide a roadmap to the burgeoning literature on two-sided markets and present new results. We identify two-sided markets with markets in which the structure, and not only the level of prices charged by platforms, matters. The failure of the Coase theorem is necessary but not sufficient for two-sidedness. We build a model integrating usage and membership externalities that unifies two hitherto disparate strands of the literature emphasizing either form of externality, and obtain new results on the mix of membership and usage charges when price setting or bargaining determine payments between end-users.
This paper presents a model of a card payment system to address the pricing and rules that govern such systems. It evaluates the social optimality of privately set interchange fees and the adoption of a rule by payment systems to prevent merchants surcharging for card transactions using two extremes of merchant pricing—monopolistic pricing and perfect competition. Both types of merchant pricing constrain the ability of card schemes to use interchange fees and the no-surcharge rule in anticompetitive ways, although for quite different reasons. The positive role of the no-surcharge rule in preventing excessive merchant surcharging is also highlighted.
This paper presents a model of a debit or credit card payment scheme, providing a simple determination of the socially optimal structure of fees between those charged to cardholders and those charged to merchants.
In card payment systems, no-surcharge rules prohibit merchants from charging consumers extra for card payments. However, such rules are prohibited in the Netherlands. Dutch retailers are allowed to surcharge consumers for debit card use. This setting permits an empirical analysis of the impact of surcharging card payments on merchant acceptance and consumer payment choice. Based on consumer and retailer survey data, our analysis shows that surcharging steers consumers away from using debit cards towards cash. Half of the observed difference in debit card payment shares across retailers can be explained by this surcharge effect. Removing debit card surcharges may induce cost savings of more than EUR 50 million in the long run.
Many if not most markets with network externalities are two-sided. To succeed, platforms in industries such as software, portals and media, payment systems and the Internet, must "get both sides of the market on board." Accordingly, platforms devote much attention to their business model, that is, to how they court each side while making money overall. This paper builds a model of platform competition with two-sided markets. It unveils the determinants of price allocation and end-user surplus for different governance structures (profit-maximiz-ing platforms and not-for-profit joint undertakings), and compares the outcomes with those under an integrated monopolist and a Ramsey planner. (JEL: L5, L82, L86, L96) Copyright (c) 2003 The European Economic Association.
Interchange fees and related issues in payment card markets have been the focus of considerable attention recently. The academic community and public officials have begun to scrutinize these markets. Meanwhile, these markets continue to experience dynamic change as card payments account for an ever-growing share of overall payments. This paper provides an overview of interchange fee developments and issues, and also presents a preliminary analysis of some possible contributing factors. The principal conclusion of the paper is that interchange arrangements vary considerably across countries, and while existing economic theory provides some insight into this market, much remains to be explained.
Credit cards provide benefits to consumers and merchants not provided by other payment instruments as evidenced by their explosive growth in the number and value of transactions over the last 20 years. Recently, credit card networks have come under scrutiny from regulators and antitrust authorities around the world. The costs and benefits of credit cards to network participants are discussed. Focusing on interrelated bilateral transactions, several theoretical models have been constructed to study the implications of several business practices of credit card networks. The results and implications of these economic models along with future research topics are discussed.
Payment card associations offer both debit and credit cards and sometimes engage in a tie-in on the merchant side through the so-called honor-all-cards (HAC) rule. This article analyzes the impact of the HAC rule, using a simple model with two types of transactions subject to different competitive pressures. In the no-HAC-rule benchmark model, the interchange fee (IF, the transfer from the merchant's bank to the cardholder's bank) on the card subject to platform competition is socially too low, and the IF on the card protected from competition is either optimal or too high. In either case, the HAC rule not only benefits the multi-card platform but also raises social welfare, due to a rebalancing effect. The paper then investigates a number of extensions of the benchmark model, including varying degrees of substitutability between the two cards; merchant heterogeneity; and platform differentiation. While the HAC rule may no longer raise social welfare under all values of the parameters, the basic and socially beneficial rebalancing effect unveiled in the benchmark model is robust.
Despite the central role of payments in theoretical and policy oriented economics, there is surprisingly little known about the costs of different payment instruments. We estimate social and private costs of cash, debit and credit card payments in Sweden in 2002. The combined social cost of providing these payment services is approximately 0.4 per cent of GDP. Debit and credit cards are socially less costly than cash for payments above EURO 8 and EURO 18, respectively. Corresponding thresholds for consumers’ private costs are somewhat higher. Data indicate a too extensive use of cash relative to card payments in terms of both private and social costs.
This paper seeks to provide a bridge between the theoretical and empirical literatures on interchange fees. Specifically, the paper confronts theory with practice by asking, to what extent do existing models of interchange fees match up with actual interchange fee practices in various countries? For each of four countries—Australia, the Netherlands, the UK, and the United States—models that “best” fit the competitive and institutional features of that country’s payment card market are identified, and the implications of those model are compared to actual practices. Along what competitive dimensions is there alignment? Along what competitive dimensions is there not alignment? What country-specific factors appear to be important in explaining deviations from theoretical predictions? The results suggest that a theory applicable in one country may not be applicable in another, and that similar interchange fee arrangements and regulations may well have different implications in different countries.
There has been considerable public debate over the effect of interchange fees on credit card transactions. Regulators in Australia and Europe have argued that these fees can be set by banks to have an anticompetitive effect. In the US, it has been argued that these fees, together with a rule that prevents a surcharge for credit purchases, might create a cross subsidy between cash and credit customers. Academics have noted that, in particular circumstances, interchange fees have no real effects in the absence of such a no-surcharge rule. This paper demonstrates that the potential neutrality of interchange fees is a general result. We show that in the absence of a no surcharge rule or, alternatively, if there is perfect competition at the merchant level, interchange fees can be changed without leading to any real effects. This result does not depend on the degree or nature of competition at either the bank or the merchant level. We conclude that the elimination of no surcharge rules may provide practical policy solutions for authorities concerned about the level of interchange fees.
This paper presents a model of competing payment schemes. Unlike previous work on generic two-sided markets, the model allows for the fact that in a payment system, users on one side of the market (merchants) compete to attract users on the other side (consumers, who may use cards for purchases). It analyzes how competition between card associations and between merchants affects the choice of interchange fees, and thus the structure of fees charged to cardholders and merchants. Implications for other two-sided markets are discussed. Copyright 2007 Blackwell Publishing Ltd..
This paper presents a model of a card payment system as a two-sided market that allows for partial participation by heterogeneous consumers and merchants. Taking into account the strategic effects arising from competition between merchants, the model is used to characterize the optimal structure of fees between those charged to cardholders and those charged to merchants and, more specifically, the level of the interchange fee that banks charge each other. The results modify the existing characterizations of the interchange fee, and explain the source of potential deviations between the privately and socially optimal level of the fee. Copyright Blackwell Publishing Ltd. 2004.
The costs of paying – private and
- M Bergman
- G Guibourg
- B Segendorff
Bergman, M., Guibourg, G. and Segendorff, B. (2007) The costs of paying – private and
Public policy and the invisible price: competition law, regulation and the interchange fee Proceedings of a Conference on Interchange Fees in Credit and Debit Card Industries
- J Vickers